BACK TO BASICS WITH JACK BOGLE - PILLAR 5

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
pkcrafter
Posts: 13067
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

BACK TO BASICS WITH JACK BOGLE - PILLAR 5

Post by pkcrafter » Thu Aug 09, 2007 10:50 am

PILLAR 5

The Vanguard Diehards forum has a well-earned reputation as one of the best investment resources on the internet because of its long history of attracting and helping newer, inexperienced investors. The seeds of success have grown from the fundamental teachings of our mentor, Jack Bogle. I feel our mission has been, and continues to be, to pass along the wisdom of Mr. Bogle.

In recent years, the forum has also attracted more knowledgeable investors who enjoy discussing sophisticated ways to reduce risk and/or increase investing returns. This is interesting and educational for knowledgeable and experienced investors. However, our advanced discussions are sometimes confusing and possibly even overwhelming for newbies and less-experienced investors. As a result of these more sophisticated conversations (about which experts often disagree), it is not unusual to see new investors with a few thousand dollars trying to start with complicated slice-and-dice portfolios.

I discussed this problem with Mel and Taylor with the idea that the best way to help new and less sophisticated investors would be to post a series of conversations that will bring us back to Jack Bogle's common sense, easy-to-understand ways to invest successfully. Mel and Taylor agreed and suggested I review each of Jack's "12 Pillars of Wisdom."

The 12 Pillars were originally published in 1994 as an Epilogue in Mr. Bogle's first book, Bogle on Mutual Funds. I will post a series of conversations featuring each of Mr. Bogle's "Twelve Pillars of Wisdom" for the benefit of our new and less-experienced investors. Replies are encouraged, but please keep on topic.

Pillar 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 are compounded.

Link to Pillar 4

http://www.diehards.org/forum/viewtopic.php?t=4686


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

User avatar
ddb
Posts: 5509
Joined: Mon Feb 26, 2007 12:37 pm
Location: American Gardens Building, West 81st St.

Post by ddb » Thu Aug 09, 2007 11:03 am

I must admit that I'm not quite sure of the meaning of the bolded portion of pillar 5.

"This risk is reflected in the volatility of your portfolio and should take care of itself over time as returns are compounded."

What should "take care of itself"? What does that mean?

User avatar
G12
Posts: 1431
Joined: Mon Apr 16, 2007 2:35 pm

Post by G12 » Thu Aug 09, 2007 11:38 am

....also that specific security risk is reduced instead of eliminated, one could still have numerous securities impacted when held in a diversified portfolio. As my DW recently said upon learning her IRA was down 7%, "It is not in individual stocks, it can't go down like that." She failed to understand that we look at all our assets globally and diversify accordingly with the results being she is 100% equity in the one account. I am still concerned about her if something happens to me, she does not want to handle finances or investing at all.

User avatar
Taylor Larimore
Advisory Board
Posts: 27433
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Diversification and Risk

Post by Taylor Larimore » Thu Aug 09, 2007 11:47 am

"I must admit that I'm not quite sure of the meaning of the bolded portion of pillar 5.

"This risk is reflected in the volatility of your portfolio and should take care of itself over time as returns are compounded."

What should "take care of itself"? What does that mean?"
----------------------------------------------------------------------

From "Bogle on Mutual Funds":
"If you can afford the luxury of reinvesting dividends and you have a truly long-term horizon, the total return risk of common stocks is quite tolerable. Not only does the magnitude of the disparity in returns diminish as the holding period lengthens, but the possibility of achieving a negative return decreases as well.

What is more, if you also add new capital to your stock holidngs regularly (or even spasmodically), in good times and bad alike, total return risk should be negligible."
Best wishes.
Taylor

User avatar
ddb
Posts: 5509
Joined: Mon Feb 26, 2007 12:37 pm
Location: American Gardens Building, West 81st St.

Re: Diversification and Risk

Post by ddb » Thu Aug 09, 2007 12:11 pm

From "Bogle on Mutual Funds":
"If you can afford the luxury of reinvesting dividends and you have a truly long-term horizon, the total return risk of common stocks is quite tolerable. Not only does the magnitude of the disparity in returns diminish as the holding period lengthens, but the possibility of achieving a negative return decreases as well.

What is more, if you also add new capital to your stock holidngs regularly (or even spasmodically), in good times and bad alike, total return risk should be negligible."
Those are generalizations, but they should not be preached by Bogle (or anybody else) as certainties. In other words, the sentence should read "...the total return risk of common stocks should be quite tolerable." "...the possibility of achieving a negative return should decrease as well." These generalization follow from the assumption that greater risk leads to greater reward. While this is largely true, it is far from certain!

Would Bogle call 25 years "long-term". Witness the total return of Japanese stocks over the past 25 years.

- DDB

User avatar
bob90245
Posts: 6511
Joined: Mon Feb 19, 2007 8:51 pm

Re: Diversification and Risk

Post by bob90245 » Thu Aug 09, 2007 1:06 pm

ddb wrote:Would Bogle call 25 years "long-term". Witness the total return of Japanese stocks over the past 25 years.
The lesson for both Japanese and American investors is Diversify, Diversify, Diversify. Taken to it's logical conclusion all investors, no matter their country of origin, should include equity asset classes from around the globe.

unclemick
Posts: 1318
Joined: Tue Feb 20, 2007 10:18 am
Location: greater Kansas City

Post by unclemick » Thu Aug 09, 2007 7:01 pm

Hmmm - one nephew, age 22, one copy of Bogle on Mutual Funds - my 'long lecture' - don't read books, buy the TSP closest to 500Index and dollar cost average as much as you can. circa 1994/5

Later circa 96 - not listening to my own advice switched from a 60/40 mish mash of Vanguard funds to Lifestrategy moderate for ten years or so. Now Target Retirement as of 2006.

heh heh heh - I'm not Japanese and I'll let Bernstein's pal Angus Maddison do the international worrying/write the informative books. :wink:

Post Reply