Remarks by John C. Bogle
Founder, The Vanguard Group and
President, Bogle Financial Markets Research Center
Arizona Republic Investment Strategies
April 27, 2001
the 15% stock market rally of the past month, a nice rebound from
the early April lows, the bear market in stocks that began nearly
14 months ago may yet have some life remaining. But at that scary
low point, even if you were a prudent investor, and even if you
had seen the decline coming, you may well have had at least two
second thoughts: "Why didn’t I cut back—or even eliminate!—my
equity holdings a year ago?" And "What on earth should
I do now?"
As to the
first question, I struggle with that one myself. I have been gradually
reducing my equity percentage for years, reflecting first my fight
for an uncertain survival from congenital heart disease and my desire
to assure my wife’s financial security, and, second, reflecting
my increasing age and declining earning power. With some 75% of
my retirement plan and personal account in equities throughout most
of my career, I had gradually reduced the ratio to below 45% by
last summer. Still, deeply concerned about the NASDAQ bubble and
cautious about the outlook for future stock returns, I even wondered
aloud at the Morningstar Conference last June why I held any equities
at all. But—"physician heal thyself," writ large!—I took
no further action.
inertia was part of it. But even more important was the fact that
my own asset allocation was already fully consistent with the sensibly
conservative strategy that I’ve reiterated over the latter part
of a half-century. What is more, my lifelong conviction is that
while experienced investment professionals may have a pretty good
idea of what is going to happen in the market, we have no
idea of when. As I wrote in Bogle on Mutual Funds
nearly a decade ago, "In an uncertain world, tactical change
should be made sparingly, and only if you are prepared to take the
risk of being wrong."
my book, I presented a basic asset allocation model that recommended
that older investors, no longer adding to their assets with additional
investments and becoming increasingly dependent on income, should
focus on a 50/50 stock/bond allocation, reduced to 35% for investors
over the age of 75. (No, I’m not there yet, even using my non-heart-transplant
portfolios recommended that the equity position be composed of value
funds and equity-income funds, to the exclusion of growth funds,
although I have not followed this strategy myself. Instead, I’ve
relied largely on broad-based index funds which weight value and
growth equally. In any event, both the 50/50 and 35/65 equity-income
and value-based portfolios actually rose 14% during 2000
and are now actually up another two percentage points so far this
year. (Both had about the same returns.) We should all have been
I have no
way of knowing how many of you followed my conservative advice,
nor how many of you, lured by the boxcar gains turned in by growth
funds and tech funds as the stock market reached its high a year
ago, abandoned it at just the wrong time. But I believe that if
you were guided by the "Twelve Pillars of Wisdom" that
was the epilogue of my first book, you’ve done just fine. In preparation
for these remarks, I read them once again, and I found virtually
nothing I would change today.
these twelve sensible guidelines to successful investing are lessons
that investors should have learned before the bear market arrived,
but that many are only learning now. Bull markets come and bull
markets go, inevitably followed by bear markets, which too come
and go. But these pillars of wisdom are timeless, and should serve
us well in all seasons. I’d like to review them with you
1. Investing Is Not Nearly as Difficult as It Looks.
The intelligent investor in mutual funds,
using common sense and without extraordinary financial acumen, can
perform with the pros. In a world where financial markets are highly
efficient, there is absolutely no reason that careful and disciplined
novices—those who know the rudiments but lack the experience—cannot
hold their own or even surpass the long-term returns earned by professional
investors as a group. Successful investing involves doing just a
few things right and avoiding serious mistakes.
"Doing a few things right," as I stressed
in my book, included focusing on broad-based mainstream equity funds
with wide diversification; evaluating funds relative to peers with
similar objectives; ignoring short-term performance in favor of
performance over at least a decade; carefully considering the drag
of high expense ratios and sales charges; paying careful attention
to portfolio quality, in stock funds, bond funds, and money market
funds alike; and focusing on an asset allocation that is consistent
with your own risk tolerance.
"Serious mistakes," I indicated, included
such errors as investing in funds with spectacular records ("no
investor ever went broke by failing to invest in a hot new product"),
as well as those persistently at the bottom of the deck; excessive
reliance on narrowly-based funds (say, emerging market funds); and
using mutual funds for short-term trading. As the stock market bubble
inflated, some of these dos and don’ts didn’t seem especially necessary.
Now, after the fall, their validity has been reaffirmed.
2. When All Else Fails, Fall Back on Simplicity.
There are an infinite number of strategies
worse than this one: Commit, over a period of a few years, half
of your assets to a stock index fund and half to a bond index fund.
Ignore interim fluctuations in their net asset values. Hold your
positions for as long as you live, subject only to infrequent and
marginal adjustments as your circumstances change. When there are
multiple solutions to a problem, choose the simplest one.
the stock market’s wild and wooly odyssey since I wrote them makes
those words seem an eon away, I believe more than ever in that basic
principle: Rely heavily on index funds, and begin with the idea
of a 50/50 bond/stock ratio, adjusting the ratio in accordance with
your own financial profile. In my book, I noted that this approach
was consistent with the philosophy of Benjamin Graham, author of
The Intelligent Investor.1 This simplicity
surely has continued to prove itself. During the past decade, the
annualized return on a low-cost index fund modeled on the Standard
& Poor’s 500 Stock Index has been 14.4%, while the average general
equity fund has earned +12.3%. The low-cost bond fund modeled on
the Lehman Aggregate Bond Index has earned +8.0% annually, while
the average taxable bond fund has earned +6.8%.
margins in returns—2.1% per year for the stock index fund and 1.2%
per year for the bond index fund—were highly predictable, for they
largely reflect the cost advantage index funds hold over actively-managed
funds. Once again, the majesty of simplicity—the broadest possible
diversification at the lowest possible cost—has proved itself.
Pillar 3. Time Marches On.
dramatically enhances capital accumulation as the magic of compounding
accelerates. At an annual return of +10%, the total value of the
initial $10,000 investment is $108,000, at the end of 25 years,
nearly a tenfold increase in value. Give yourself the benefit of
all the time you can possibly afford.
course, time has marched on since I wrote those words. Even taking
into account the sharp market decline during the dismal past year,
the decade-long 14.4% return on the S&P 500 index fund has already
carried the value of an initial $10,000 investment in the index
fund to $38,400. While the 25-year period that I noted in the book
is not yet half over, Pillar of Wisdom #3 is looking pretty good.
Even a modest return of 7.2% on stocks during the next 15
years—one-half the rate of the past decade—would result in the realization
of that 10% target and the accumulation of the resultant $108,000
of capital over 25 years.
example of the march of time bears out the words of the poet Maya
Angelou: "Since time is the one immaterial object which
we cannot influence, neither speed up nor slow down, add to nor
diminish, it is an imponderably valuable gift." And so
it is that time provides among the most valuable of all gifts in
investing. Do your best to ignore the short-term events that, day
after day, seem to overwhelm our thinking, and follow the very first
principle for managing your money: Give yourself all the time
that you possibly can.
4. Nothing Ventured, Nothing Gained.
It pays to take reasonable interim risks
in the search for higher long-term rates of return. The magic of
compounding accelerates sharply with even modest increases in annual
rate of return. While an investment of $10,000 earning an annual
return of +10% grows to a value of $108,000 over 25 years, at +12%
the final value is $170,000. The difference of $62,000 is more than
six times the initial investment itself.
the past decade, that a two-percentage-point differential I chose
in my book characterized almost exactly the spread between
a low-cost S&P 500 index fund (+14.4% per year) and the average
U.S. stock mutual fund (+12.3%). Final value of an initial investment
of $10,000: Index mutual fund $38,400; Managed mutual
fund $31,900. And, I should note, that substantial increase in reward
came hand-in-hand with no increase whatsoever in risk. In
fact, the index fund was some 15% less volatile than the
average equity fund.
might as well enjoy that moderation in risk, for the stock market
is a risky place. Even the value of the index fund fell 28% from
the March 2000 high to the recent low. The $10,000 investment in
the S&P Index had grown to $48,700 by March, 2000, only to tumble
to $38,400 a year later.
if you will, the risk of not being willing to assume market
risk. $10,000 invested in a money market fund a decade ago would
be worth but $15,500 today—a $5,500 profit that was less than one-fifth
of the $28,400 appreciation in the index fund, even after
the sharp market decline. These numbers reinforce the reputation
of equities both as productive investments and as risky ones—a reminder
that is both valuable and long overdue.
expectations suggest to me that we might see stock returns in the
6% to 10% range during the coming decade. If that seems too modest
an expectation for common stocks based on past history, don’t forget
that a possible 8% return on stocks would take each dollar to $2.16
by 2011, while a possible 4% future return on savings would take
each dollar to $1.48, less than half the gain. Eschewing the risk
of stocks, therefore, carries a risk of its own. Yes, "nothing
ventured, nothing gained."
5. Diversify, Diversify, Diversify.
By owning a broadly diversified portfolio
of stocks and bonds, specific security risk is eliminated. Only
market risk remains. This risk is reflected in the volatility of
your portfolio and should take care of itself over time as returns
As the bear
market of the past year makes clear, investing in stocks is risky:
there is individual stock risk. We have seen some stocks soar
and some plummet, with little means of knowing which stock will
do which, and when. Who would have expected that Cisco, whose
$500 billion market capitalization a year ago made it the largest
stock in the world, would soon plummet by 80%, erasing $410 billion
there is style risk. Growth funds trumped value funds during
the first nine years of the decade, rising an amazing 609% through
last March, more than double the 281% increase for value funds.
Since then, growth funds have fallen 38% on average, while value
funds have actually risen 5%, erasing nearly the entire growth
fund and their cumulative records are now virtually identical.
Who among us is wise enough to know how to "time" those
and every one of these three risks can be easily eliminated.
For when you own the entire stock market through an index fund, there
is neither individual stock risk, nor style risk, nor manager risk.
Only market risk remains. If the past year, demonstrates nothing
else, it surely demonstrates that stock market risk, standing alone,
is quite substantial enough, thank you. So if you can’t be certain
about the future—and who among us can?—"diversify, diversify,
diversify" remains the essence of wisdom.
- Third, there is manager risk. A growth fund
manager, for example, may outpace his peers, or may fall short,
and the difference is apt to be enormous. Consider that
in the past decade, the top decile of growth fund managers produced
an average annual return of 17%, almost three times the
6½% return for the bottom decile. How would you go about
picking the winners in advance?
6. The Eternal Triangle.
Never forget that risk, return, and
cost are the three sides of the eternal triangle of investing. Remember
also that the cost penalty may sharply erode the risk premium to
which an investor is entitled. You should understand unequivocally
that investing in a fund with a relatively high expense ratio—more
than 0.50% per year for a money market fund, 0.75% for a bond fund,
1.00% for a regular equity fund—bears careful examination. Unless
you are confident that the higher costs you incur are justified
by higher expected returns, select your investments from among the
lower-cost no-load funds.
minute evidence reaffirms exactly what I demonstrated in my book.
During the past decade, the lowest-cost decile of money market funds
provided an average annual return of 5.1%, 11% above the return
of 4.6% for the highest-cost decile. For the lowest-cost decile
of intermediate-term bond funds, the return was 7.8%, 24% above
the return of 6.3% for the highest-cost quartile. And for the lowest-cost
decile of large-cap equity funds (excluding index funds), the average
return was 13.1%, fully 18% above the return of 11.1% for the highest-cost
decile. (Low-cost bond index funds and low-cost stock index
funds, I should note, provided even higher returns than their low-cost
counterparts that were actively managed.) The eternal triangle
of risk, return, and cost is too powerful to ignore.
7. The Powerful Magnetism of the Mean
In the world of investing, the mean is a powerful
magnet that pulls financial market returns toward it, causing returns
to deteriorate after they exceed historical norms by substantial
margins and to improve after they fall short. Reversion to the mean
is a manifestation of the immutable law of averages that prevails,
sooner or later, in the financial jungle.
In the boom-and-bust bubble we have just witnessed
in the NASDAQ Index, we have a wonderful example of reversion to
the mean (RTM). After closely tracking the NYSE Index of all listed
stocks from the mid-1970s through the end of 1997, the unlisted
stocks in the NASDAQ Index took off in 1998, rising 230% (!) though
the first quarter of 2000, eleven times the 20% gain in the
NYSE Index. Then, reversion to the mean promptly wreaked its havoc,
and with a vengeance. Since then, the NASDAQ has tumbled 67%, compared
to a loss of but 7% for the NYSE Index. At the high last March,
a dollar invested in NASDAQ Index in 1972 had soared to $1.35 for
each dollar in the NYSE Index. But it has now fallen by one-half,
to just 65 cents. RTM strikes again, and, I’m confident, not for
the last time.
8. Do Not Overestimate Your Ability to Pick Superior Equity Mutual
Funds, nor Underestimate Your Ability to Pick Superior Bond and
Money Market Funds.
In selecting equity funds, no analysis of
the past, no matter how painstaking, assures future superiority.
In general, you should settle for a solid mainstream equity fund
in which the action of the stock market itself explains about 85%
or more of the fund’s return, or an low-cost index fund (100% explained
by the market). But do not approach the selection of bond and money
market funds with the same skepticism. Selecting the better funds
in these categories on the basis of their comparative costs holds
remarkably favorable prospects for success.
While I’ve shown you earlier the near-causal relationship
between costs and returns among fixed-income funds, the futility
of picking stock funds based on their past returns has seldom been
more forcefully demonstrated than in the past two years. Among the
twenty top-performing equity funds for the year ending March 31,
2000, 15 of the Top-20 tumbled to ranks ranging from #3453 to #3891
among 3896 funds during the year that followed. Only one fund even
ranked higher than #1000. Picking equity funds on the basis of past
performance is not a good idea!
too many mutual fund investors did exactly that, pouring a staggering
$242 billion into growth and technology funds during the twelve
months ended March 31, 2000, and actually withdrawing $42
billion from the lagging value funds. Yet as the earlier chart on
style diversification showed, that was exactly the period
when investors should have been moving out of growth and
technology funds and into value funds. What folly! When it
jumps on the bandwagon of past performance, the crowd is always
9. You May Have a Stable Principal Value or a Stable Income Stream,
But You May Not Have Both.
Contrast a money market
fund—with its volatile income stream and fixed value—and a long-term
government bond fund—with its relatively fixed income stream and
extraordinarily volatile market value. Intelligent investing involves
choices, compromises, and trade-offs, and your own financial position
should determine the most suitable combination for your portfolio.2
As 1991 began, the yield of the average money market
mutual fund was about 6%, and the yield on a long-term U.S. Treasury
bond fund was just over 7½%. During the ensuing decade, the value
of a $1,000 investment in the money market fund never varied, while
$1,000 invested the bond fund fell to as low as $900 (in 1992) and
rose to as high as $1,300 in 1998. Stable principal vs. variable
But the annual income on the $1,000 money market fund
investment was not to reach $60 again, though it did touch $5.50
in 2000. Indeed, with declining interest rates, annual income is
now on the way to the $40 level. The annual income stream on the
$1,000 initial investment in the long-term bond fund, on the other
hand, began at $78 in 1991, and has remained above $71 each year.
It should be about $72 in 2001. Variable income vs. stable income.
Is stable income or stable principal the higher priority for you?
Or some of each? Be clear on what you plan to achieve in your defensive
holdings, and invest accordingly.
10. Beware of "Fighting the Last War."
Too many investors—individuals and institutions
alike—are constantly making investment decisions based on the lessons
of the recent, or even the extended, past. They seek stocks after
stocks have emerged victorious from the last war, bonds after bonds
have won. They worry about the impact of inflation after inflation,
having turned high real returns into so-so nominal returns, has
become the accepted bogeyman. You should not ignore the past, but
neither should you assume that a particular cyclical trend will
last forever. None does.
I wrote my book, inflation was at the forefront of investors’ minds.
But, ever the contrarian, I raised a caveat emptor suggesting
that "it would be foolish to assume that inflation would be
an eternal fact of life." Sure enough, inflation, having averaged
5.7% during the fifteen previous years, has run at less than one-half
that rate (2.6%) since then. "The last war," it turned
out, was over.
stocks in high-tech companies soared during the late 1990s, and
large-cap tech stocks came to dominate the portfolios of growth
funds. The belief that technology companies would continue
to soar captured the mind of many inexperienced investors. One fund
manager even wrote a book describing why he had cast his
vote with the crowd, assuring his readers that his funds had jumped
aboard the fast-moving large-cap, high-growth, high-tech bandwagon.
his new strategy to the equity funds he managed, and his aggressive
growth fund leaped by 82% during the two years through the first
quarter of 2000. His moderate growth equity fund rose 51% during
the same period. That performance was nonetheless insufficient to
give him a victory in a bet I’d made with him that an index fund
would do better during the five years ended March 31, 2000. (The
index fund won by an imposing 70 percentage points--+226% vs. +156%.)
When I wrote to thank him for sending me the $25 to settle our bet
(huge for me!) I expressed my opinion that his new strategy was
"fighting the last war".
And so it
quickly proved to be. In the year since then, the manager’s two
growth funds have plummeted by 45% and 55% respectively, more than
double the 22% decline for the index fund. But just because some
investors insist on "fighting the last war," you don’t
need to do so yourself. It doesn’t work for very long.
11. You Rarely, If Ever, Know Something The Market Does Not.
If you are worried about the coming bear market,
excited about the coming bull market, fearful about the prospect of
war, or concerned about the economy, the election, or indeed the state
of mankind, in all probability your opinions are already reflected
in the market. The financial markets reflect the knowledge, the hopes,
the fears, even the greed, of all investors everywhere. It is nearly
always unwise to act on insights that you think are your own but are
in fact shared by millions of others.
here we are again, in the grip of a bear market, and worried about
whether it will get worse. No one knows when it will be over.
Maybe it is over. Nonetheless, provided only that your asset
allocation going into the bear market last March had been
set in accordance with (a) your risk tolerance, (b) the years you
have remaining to build your investment, (c) your wealth level,
and (d) your income needs, you shouldn’t change the allocation.
Times of market duress are almost always terrible times to change
investment strategies. The market, however fickle, has usually
taken into account almost every eventuality.
12. Think Long-Term.
Do not let transitory changes in stock prices
alter your investment program. There is a lot of noise in the daily
volatility of the stock market, which too often is "a tale
told by an idiot, full of sound and fury, signifying nothing."
Stocks may remain overvalued, or undervalued, for years. Patience
and consistency are valuable assets for the intelligent investor.
The best rule: Stay the Course.
past two years, the stock market’s noise has been the loudest in
history as volatility has reached record highs. Millions of speculators
are scared half to death, as they should be. But long-term investors
must realize that, as greed turns to fear, much of the worry is
already reflected in the lower level of stock prices. And even if
it turns out we should be reducing our stock position until
the decline is over, where on earth would we ever get the insight
that tells us the right time to get back in? One correct
decision is tough enough. Two sequential correct decisions—both
made at the right moment—are nigh on impossible. Impulse is your
enemy, and patience and consistency are your friends. Of my twelfth
pillar of wisdom—Think Long-Term—I can only say, "Amen!"
these Twelve Pillars of Wisdom in mind. I’m confident that they
will serve investors every bit as well in the years ahead as they
have since I set them down nearly a decade ago. Good Luck, and Happy
Benjamin Graham's "standard division" was 50-50, an equal
investment in stocks and bonds. Since his classic book was published
in 1949, this allocation has far more patina than mine. Back
2. In my book, I compared a 90-day U.S. Treasury
bill with a 30-year Treasury bond. Back
to Speeches in the Bogle Research Center.