The Bogle Interview: Big Picture, Big Challenges

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Taylor Larimore
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The Bogle Interview: Big Picture, Big Challenges

Post by Taylor Larimore » Mon Mar 19, 2012 12:55 pm

Hi Bogleheads:

Our mentor, Jack Bogle, gave a long interview with the editors of the Journal of Indexes. It is full of interesting and valuable quotes like these:

Anyone that's buying stocks thinking about what's going to happen next year is a fool, to be quite blunt about it. Buying stocks—owning stocks—is a lifetime endeavor. And as Mr. Buffett says—and I feel particularly strongly about this in the context of an index fund—my favorite holding period is "forever."

I love the Total Bond Market Index Fund. I started it. But it's not the answer to all things for everybody. If people are pinched for yield, I'd recommend they have a higher weighting in a corporate bond index fund.

I think for the typical investor, (international bonds) are not necessary. If you look back at the record of international bonds, I for one don't see much to write home about. I don't like the risk. I don't like the currency risk.

And let me say this about a better diversifier: "Better diversification" is the last refuge of the scoundrel. -- Anything that's done well recently is considered a great diversifier.

The three largest countries, accounting for almost half of the international index, are countries that have significant problems. But when you put them in a single package of international, you don't think about that. You ought to think about that.

There's nothing the matter with certain ETFs, properly used.

It's quite clear in the record that we used to be an industry that sold what we made, and now we're an industry that makes what will sell. And there is no finer example of this than the exchange-traded fund business.

The ETF is certainly the greatest marketing innovation so far in the 21st century. Whether it's the greatest investment innovation or best innovation for shareholders is totally in doubt.

The average mutual fund manager lasts for about six years. And 50 percent of mutual funds themselves go out of business every decade. How the heck do you invest for the long term if your fund doesn't live for the long term?

We have to get marketing out and put management in. I call it the wisdom of long-term investing versus the folly of short-term speculation. That's in the math—that is not my opinion.

We gave substance to the no-load market. All these steps—Vanguard, the index funds, the no-load decision, the multi-tiered bond funds—I'll put in one lump and say we created a better world for investors.


Although most of Mr. Bogle's remarks were about personal investing, he also speaks about government and tax policy which are topics prohibited on this forum. Please do not comment on these prohibited topics.

The Bogle Interview: Big Picture, Big Challenges

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

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bob90245
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Re: The Bogle Interview: Big Picture, Big Challenges

Post by bob90245 » Mon Mar 19, 2012 4:48 pm

From this quote, we see that Bogle rejects the Efficient Market Hypothesis (prices already reflect information that is known to market participants):

Taylor Larimore wrote:Our mentor, Jack Bogle, gave a long interview with the editors of the Journal of Indexes. It is full of interesting and valuable quotes like these:

The three largest countries, accounting for almost half of the international index, are countries that have significant problems. But when you put them in a single package of international, you don't think about that. You ought to think about that.

Think about it and then what?
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: The Bogle Interview: Big Picture, Big Challenges

Post by elgob.bogle » Mon Mar 19, 2012 5:17 pm

I seem to recall that Rick Ferri holds 10% corporates, Larry Swedroe holds short term corporates, and now Mr Bogle recommends corporates above and beyond TBM. What would be an appropriate percentage of FI/portfolio and the appropriate duration?

elgob

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Re: The Bogle Interview: Big Picture, Big Challenges

Post by jginseattle » Mon Mar 19, 2012 7:43 pm

elgob.bogle wrote:I seem to recall that Rick Ferri holds 10% corporates, Larry Swedroe holds short term corporates, and now Mr Bogle recommends corporates above and beyond TBM. What would be an appropriate percentage of FI/portfolio and the appropriate duration?

elgob


That would depend on your allocation to equities. Corporate bonds have equity-like risks that many investors believe is more efficiently managed by holding equities.

In the past, high-quality, short-dated credits in particular have been well rewarded, as well as corporates in the category just below investment grade.

But one solution is to use Total Bond and just not worry about it.

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Re: The Bogle Interview: Big Picture, Big Challenges

Post by peppers » Mon Mar 19, 2012 8:26 pm

Mr. Jack Bogle does not disappoint. Candid and brutally honest. Thanks for sharing Mr. Larimore.
"..the cavalry ain't comin' kid, you're on your own..."

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Re: The Bogle Interview: Big Picture, Big Challenges

Post by joe8d » Mon Mar 19, 2012 8:37 pm

I
I love the Total Bond Market Index Fund. I started it. But it's not the answer to all things for everybody. If people are pinched for yield, I'd recommend they have a higher weighting in a corporate bond index fund.


I like the combo of TBM / Short-Term Investment Grade for a bond fund allocation. i wish VG would have used it in the revised Life Strategy Fund Series.
All the Best, | Joe

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Re: The Bogle Interview: Big Picture, Big Challenges

Post by RJB » Wed Mar 21, 2012 9:07 am

And let me say this about a better diversifier: "Better diversification" is the last refuge of the scoundrel. What were we talking about five years ago as a good diversifier? Well, I can't remember, but it wasn't gold. And when gold does well, as it certainly has, then someone says it's a great diversifier. And when international bonds get a little ahead of U.S. bonds—not before, but after—then someone says it's a great diversifier. Anything that's done well recently is considered a great diversifier.


Sounds like excellent advice to me.

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Re: The Bogle Interview: Big Picture, Big Challenges

Post by StoneReader » Thu Mar 22, 2012 8:53 am

Bogle seems to be backtracking to his much earlier view of foreign investments. My memory may be faulty but I recall that he saw no need for foreign stocks or bonds a decade or so ago. Then, in more recent years, he allowed that foreign stocks would be good diversifiers up to some point, say ~20%.

http://www.npr.org/templates/story/story.php?storyId=95924779
For those investors who want some exposure to foreign stocks, Bogle recommends an investment of no more than 20 percent of your total stock allocation, divided equally, into two Vanguard funds: Developed Markets Index Fund and Emerging Markets Index Fund.


This time, he warns against many foreign bond markets and then adds that we should also be very cautious about foreign stock indexes because the three largest components are in descending order the UK (14.6%), Japan (13.5%) and France(6.8% ) = Total 35%, all of which he believes have serious economic problems (note, the corresponding percentages quoted in the interview were for developed markets only and are UK (22.6%), Japan (21.4%) and France (9.2%) = Total 54%).

Throw in the currency exchange risk and he seems to be implying that we should stay away completely from foreign assets partly because their prices are arbitraged against the USA prices fairly efficiently anyhow.

Investing then would be very simple with just one equity fund, the Total USA Stock Market.



This is another one of my pet peeves. If you go through developed international nations your largest investment is Britain. And I think they're in deep trouble. Everybody knows they're putting on heavy austerity. They've got terrible financial problems. I think Keynes was right—economies around the world ought to be stimulating, rather than cutting back. So if you want 23 percent of your money in Britain, just understand that's what you're getting.

The next one is Japan, at 18 percent of your portfolio. What's so good about Japan? They've got a structured society. They've had a lot of innovation in the past. Will that continue? I don't know.

And then you go to France, who's next in size, believe it or not. And I don't know … they don't work very hard over there.

Next are Switzerland, Australia and Germany. They all look pretty good.

The three largest countries, accounting for almost half of the international index, are countries that have significant problems. But when you put them in a single package of international, you don't think about that. You ought to think about that.

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Re: The Bogle Interview: Big Picture, Big Challenges

Post by ResNullius » Thu Mar 22, 2012 9:17 am

All of my fixed assets are divided between Vanguard MM, short-term investment grade fund, and intermediate investment grade fund. I prefer to get little or nothing, as opposed to nothing, which is why I go the investment grade route. Also, neither of these funds has ever had a default, and I think they might even be safer over time than Treasuries. Just my two cents.

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Re: The Bogle Interview: Big Picture, Big Challenges

Post by SunDevil » Thu Mar 22, 2012 1:00 pm

bob90245 wrote:From this quote, we see that Bogle rejects the Efficient Market Hypothesis (prices already reflect information that is known to market participants):

Taylor Larimore wrote:Our mentor, Jack Bogle, gave a long interview with the editors of the Journal of Indexes. It is full of interesting and valuable quotes like these:

The three largest countries, accounting for almost half of the international index, are countries that have significant problems. But when you put them in a single package of international, you don't think about that. You ought to think about that.

Think about it and then what?


I can't decide what Bogle believes about EMH. On one hand, he mentions the above quote regarding fears about international companies. But regarding the bond market he says:

"But what's the point of guessing? The yields probably take all that into account. The markets are very good, or have in the past been—and I believe in the future will be—very good arbitrageurs between the present and the future."

????

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Re: The Bogle Interview: Big Picture, Big Challenges

Post by Random Musings » Thu Mar 22, 2012 1:12 pm

bob90245 wrote:From this quote, we see that Bogle rejects the Efficient Market Hypothesis (prices already reflect information that is known to market participants):

Taylor Larimore wrote:Our mentor, Jack Bogle, gave a long interview with the editors of the Journal of Indexes. It is full of interesting and valuable quotes like these:

The three largest countries, accounting for almost half of the international index, are countries that have significant problems. But when you put them in a single package of international, you don't think about that. You ought to think about that.

Think about it and then what?


I'm also a little bit disturbed about his line of reasoning here. Especially when he states in the next section that the U.S. could be in big trouble unless they do something about it. Is he implying that the U.S. will solve there problems better than internationals?

Since I don't know, I'll diversify around the world at my need of risk.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

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Re: The Bogle Interview: Big Picture, Big Challenges

Post by Noobvestor » Thu Mar 22, 2012 1:33 pm

First: some great gems, as usual, but of course one jumped out at me in particular too ...

I'm glad I'm not the only one who feels flabbergasted whenever I witness Jack's cognitive dissonance surrounding international investing.

On the one hand, markets are efficient and broad-market indexing takes the guesswork out of investing, helps us stay the course and ensures we do not underperform market averages.

On the other hand, here are some nuanced views on which countries within the market are good and bad bets, and how you should gamble based on these single-sided views and market-predicting opinions.

Really, he doesn't buy into tilting or timing, but says that *right now* is a great time to *tilt toward the US*?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: The Bogle Interview: Big Picture, Big Challenges

Post by umfundi » Fri Mar 23, 2012 12:16 am

RJB wrote:
And let me say this about a better diversifier: "Better diversification" is the last refuge of the scoundrel. What were we talking about five years ago as a good diversifier? Well, I can't remember, but it wasn't gold. And when gold does well, as it certainly has, then someone says it's a great diversifier. And when international bonds get a little ahead of U.S. bonds—not before, but after—then someone says it's a great diversifier. Anything that's done well recently is considered a great diversifier.


Sounds like excellent advice to me.


I don't think so. Flip that coin over. My portfolio was down 3% last year, because of my exposure to international equities. I'm OK with that. Mr. Bogle seems to also want to believe that anything that's not done well recently is not a diversifier.

Keith
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Re: The Bogle Interview: Big Picture, Big Challenges

Post by ofcmetz » Fri Mar 23, 2012 11:20 am

umfundi wrote:
RJB wrote:
And let me say this about a better diversifier: "Better diversification" is the last refuge of the scoundrel. What were we talking about five years ago as a good diversifier? Well, I can't remember, but it wasn't gold. And when gold does well, as it certainly has, then someone says it's a great diversifier. And when international bonds get a little ahead of U.S. bonds—not before, but after—then someone says it's a great diversifier. Anything that's done well recently is considered a great diversifier.


Sounds like excellent advice to me.


I don't think so. Flip that coin over. My portfolio was down 3% last year, because of my exposure to international equities. I'm OK with that. Mr. Bogle seems to also want to believe that anything that's not done well recently is not a diversifier.

Keith


I think his point was more that people use the word diversifier as an excuse to jump into recent hot investment trends. Kind of a way to justifying something new.

Overall I really enjoyed the interview. I found his comments about the total bond market and yields interesting. It is interesting that his response to the current financial repression is to hod more corporate bonds vs Makiel's response of holding more dividend stocks. I like Mr. Bogle's idea much better.

What I take from Mr. Bogle's interview in regards to the individual investors portfolio is:

1. Maintain your allocation to fixed income but be willing to hold more corporate bonds than the TBM fund does.

2. Beware of international equities and understand that they may not be necessary.

3. Be willing to hold your US funds forever and understand that the returns to be had from equities are for the long term investor.

I don't think stay the course means the same thing for Mr. Bogle as it does for some people here. He seems to keep his eyes open to the world and financial situations and makes small adjustments to his investing advice as he sees fit.
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Re: The Bogle Interview: Big Picture, Big Challenges

Post by NoRoboGuy » Fri Mar 23, 2012 11:53 am

ofcmetz wrote:
umfundi wrote:
RJB wrote:
And let me say this about a better diversifier: "Better diversification" is the last refuge of the scoundrel. What were we talking about five years ago as a good diversifier? Well, I can't remember, but it wasn't gold. And when gold does well, as it certainly has, then someone says it's a great diversifier. And when international bonds get a little ahead of U.S. bonds—not before, but after—then someone says it's a great diversifier. Anything that's done well recently is considered a great diversifier.


Sounds like excellent advice to me.


I don't think so. Flip that coin over. My portfolio was down 3% last year, because of my exposure to international equities. I'm OK with that. Mr. Bogle seems to also want to believe that anything that's not done well recently is not a diversifier.

Keith


I think his point was more that people use the word diversifier as an excuse to jump into recent hot investment trends. Kind of a way to justifying something new.

Overall I really enjoyed the interview. I found his comments about the total bond market and yields interesting. It is interesting that his response to the current financial repression is to hod more corporate bonds vs Makiel's response of holding more dividend stocks. I like Mr. Bogle's idea much better.

What I take from Mr. Bogle's interview in regards to the individual investors portfolio is:

1. Maintain your allocation to fixed income but be willing to hold more corporate bonds than the TBM fund does.

2. Beware of international equities and understand that they may not be necessary.

3. Be willing to hold your US funds forever and understand that the returns to be had from equities are for the long term investor.

I don't think stay the course means the same thing for Mr. Bogle as it does for some people here. He seems to keep his eyes open to the world and financial situations and makes small adjustments to his investing advice as he sees fit.


I appreciate the gentle interpretation because if anyone deserves the benefit of the the doubt, it is Jack Bogle. Having said that, I have to agree with others here that the stock markets - international or otherwise - are efficient and have for the most part discounted known risks. For me "stay the course" means "own everything," buy, hold, rebalance, rinse, repeat...
There is no free lunch.

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Re: The Bogle Interview: Big Picture, Big Challenges

Post by hazlitt777 » Fri Mar 23, 2012 12:52 pm

I will always respect and be grateful toward Mr. Bogle because of the impact his book, Common Sense of Mutual Funds, had upon me.

I can see he is struggling though to make sense out of this strange market and what is going on just like us all. For example, he talks of wieghing your bond portfolio more toward corporate bonds. That is fine, but not all of us can do that. It is mathematically impossible as he would say. Just something to think about. So if we start trying to do this, there will tend to develop a premium on those bonds which will tend to remove the benefit of holding them.

With International stocks, I agree there are countries out there worse than us...but can we know for sure? So I am wieghted more along the lines of the world stock market index.

I agree that international bonds aren't that helpful. I think other currencies are even less stable than ours. Even if I am wrong on this, I hope my stocks and gold exposure protects me there.

That brings me to gold, where I have moved away from Mr. Bogle's position not long after reading his book back in 2003. Here is how he puts it in the above linked article:

And let me say this about a better diversifier: "Better diversification" is the last refuge of the scoundrel. What were we talking about five years ago as a good diversifier? Well, I can't remember, but it wasn't gold. And when gold does well, as it certainly has, then someone says it's a great diversifier. And when international bonds get a little ahead of U.S. bonds—not before, but after—then someone says it's a great diversifier. Anything that's done well recently is considered a great diversifier.

What people don't get about gold and commodities in general is that they have no internal rate of return....When I buy gold, I'm buying gold because I think I can sell it to somebody else at a higher price. If that isn't the ultimate in speculation, I would not know what is. It may be a good speculation—I don't make that argument—but I would full well doubt it.



I know there is no internal rate of return and that seems to be a real problem for Mr. Bogle. I would just say though that one must remember that the internal rate of return for bonds and stocks, whether interest or dividends, is the return of the post 1971 dollar...something that has been depreciating significantly since its creation, i.e. since it stopped being defined as 1/35th an ounce of gold. (In other words, even with its internal rate of return, bonds can underperform gold.)

I wish I could loan out my gold and get a return in gold. But that isn't a possibility right now. But I still justify gold ownership as a real diversification away from the dollar, not just a "speculation." I like its simplicity too. I don't need to mess with complicated baskets of commodities to which I only have a paper claim. That also explains why I take physical possession. All my other investments are via paper and legal claims. My gold of which I have physical possession, is therefore also another type of diversification.

I think it is a difficult environment we invest in, but the secret still is striving for simplicity, low costs, and proper diversification combined with buy, hold and rebalance, as preached by Mr. Bogle. My disagreement is along the lines of what are the bare basics for real diversification.

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