Jack Bogle's advice for a rocky market...

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Howard Donnelly
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Jack Bogle's advice for a rocky market...

Post by Howard Donnelly »

New Jack Bogle commentary:

Jack Bogle's advice for a rocky market: Follow Ben Franklin


Jack Bogle's Advice
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nisiprius
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Re: Jack Bogle's advice for a rocky market...

Post by nisiprius »

1) It appears to be the headline writer, not Bogle, who calls this a "rocky market." That's a good thing, because if this is the "rockiest" market I see in my retirement I will count myself fortunate in my sequence of returns. As I write this, and of course everything could change quickly, this is no "rocky" market.

2) Actually I think Bogle's comparison between Franklin's expected and actual returns is very interesting and I'm sorry he didn't explore that further.
Franklin assumed that the funds would accrue interest at the annual rate of 5 percent, bringing each original 1,000 pounds to 131,000 pounds ($232,000 at today's exchange rate) after 100 years, and 17,300,000 pounds ($31,000,000) in 200 years. For a variety of practical financial reasons and complex legal reasons, when Franklin's trusts expired 200 years later, in 1994, those totals were not nearly reached. (Boston's funds were worth almost $5 million and Philadelphia's about $2.25 million.)
It's not relevant to his point, but I think it's an interesting measure of the "stuff happens" factor. In my opinion, it's misleading to make very long term projections of things on the assumption that it is possible to "stay the course." Over a long period of time, sooner or later a "variety of practical financial reasons and complex legal reasons" are going to come in and bite you. The Morningstar chart that shows a hypothetical stay-the-course investor's $10,000 invested at inception growing to $8 million today is... let me say it... thrilling:
Image
But it may not show that, in John Jakob Raskob's words of 1929, "everybody ought to be right." It may just show that it is practically impossible to stay the course for 84 years.

Now, in reality, Franklin's two funds did extremely well. The Boston fund achieved 5/31 = 16% of plan, the Philadelphia fund 7%. The temptation to make some comment about the homes of Fidelity and Vanguard must be resisted. Anyway, if you annualize that, Boston's 84% shortfall over 200 years is only a shortfall of 0.9% per year; Philadelphia's only 1.3%. Actually I suspect that these are exceptionally good results, and that Franklin was amazingly fortunate in the integrity and competence of the future management of the fund. By the way, who paid the managers?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Jack Bogle's advice for a rocky market...

Post by shawcroft »

Nisi:
Nicely researched and presented. Thanks
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JoMoney
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Re: Jack Bogle's advice for a rocky market...

Post by JoMoney »

If anyone else is interested in the "variety of practical financial reasons and complex legal reasons" Ben Franklin's bequest was unable to "stay the course over a long period of time", there's some history on what happened to the money here: http://articles.philly.com/1987-10-25/n ... rest-loans
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Jack Bogle's advice for a rocky market...

Post by goodenyou »

I think his advice is "don't do something.....stand there!"
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Re: Jack Bogle's advice for a rocky market...

Post by berntson »

I really liked this article. It's another way of putting Bogleheadism: smart compounding beats smart trading. That being said, I thought one of the things Jack said was slightly misleading.
When our financial system—essentially our money managers, marketers of investment products and stockbrokers—put up zero percent of the capital and assume zero percent of the risk yet receive fully 80 percent of the return, something has gone terribly wrong in our financial system.
Suppose that with no fees, an investor will get $100 of the compounding period. If she pays 2.5% annual fees, she has $20 instead of $80. And those fees go to the financial industry. It does not follow, though, that the financial industry gets $80 without taking on risk. In order for the investor to make an extra $80, she needs to take the fees she would be paying and put them back in the market where they can compound, taking on market risk with the money she's saying. The same is true for the financial industry. If they are going to make the full $80 off of the investor's fees, that money has to be put in the market where it can compound. So the financial industry needs to take on risk to get Jack's 80%.

One last gripe about the 80% goes to the financial industry claim. Underperforming the market by 2.5% annually almost certainly requires some combination of bad investor behavior (performance chasing, panic selling, too much cash), manager underperformance, and tax drag. But the financial industry doesn't make money on those things. They don't make any extra money, over and above fees, when a fund manager underperforms relative to the market.

The 80% number is just for dramatic effect though. The point is, the financial industry rakes in huge profits for running a marketing machine that gets investors to pay high fees and church their portfolios.
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Re: Jack Bogle's advice for a rocky market...

Post by sschullo »

goodenyou wrote:I think his advice is "don't do something.....stand there!"
+1
Never in the history of market day-traders’ has the obsession with so much massive, sophisticated, & powerful statistical machinery used by the brightest people on earth with such useless results.
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Taylor Larimore
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"Stay the course" and "Simplicity"

Post by Taylor Larimore »

sschullo wrote:
goodenyou wrote:I think his advice is "don't do something.....stand there!"
+1
Jack also offered this advice: "We have ignored the crucial lesson: Simplicity trumps complexity."

"Stay-the-course" and "Simplicity," A winning combo!

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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