John Bogle, founder of Vanguard Group, has a pessimistic prediction for markets over the next decade. He says that he divides his expected return forecast into two segments: investment return and speculative return. For the first, he combines 2% dividend yield with estimated earnings growth of 6% to reach a total of 8%. However, his speculative return number then incorporates predictions about the price-to-earnings ratio, which he expects to fall from an estimated 20 times underlying value to about 15 times, yielding a speculative return of about 4%. For bonds, Bogle suggests that investors may be able to realize about a 3% return by buying longer-term bonds. He also notes that mutual fund fees, and investor behavior (such as buying high and selling low) are likely to reduce returns even further, perhaps as low as 1.5% or even to negative returns. At the same time, however, he notes that he has “always taken the conservative line” so returns may be significantly better than his estimate.
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Jack Bogle, founder of Vanguard Group, has maintained a very simple personal investment strategy for many years: 60% U.S. stocks, 40% U.S. bonds. Now age 84, he has recently shifted to a 50/50 portfolio mix, explaining “I just like the idea of having an anchor to the windward,” and, “I’m not so much worried about having my portfolio grow.”
Bogle’s approach is based on a few broad principles. Research tends to support his view that a passive strategy to mirror the market is better for an investor over the long term (a controversial idea when he advanced it over 40 years ago). Bogle’s other principles are more controversial. He doesn’t believe in rebalancing — “If you want to do it,” he says, “once a year is probably enough.” He doesn’t invest overseas because “we have the best investor protections and legal institutions,” even though U.S. companies derive at least 50%of their revenue from outside the U.S., and even though Bogle’s firm, Vanguard Group, has produced research suggests allocating 20% of a portfolio overseas. Third, Bogle diversifies exclusively through bonds and has increased the allocation to bonds as he ages to protect against risks from a short-term drop in stocks. Research suggests that stocks are the best long-term investment vehicle, but that bonds protect against stock market losses that might coincide with times when the investor needs the money. Finally, Bogle recommends taking an approach that is “simple” because it reduces the investor’s worry and protects against emotion-based decision-making.
Legendary Vanguard Founder Jack Bogle says that the stock market’s gains over the past decade look reasonable — if you trust the accuracy of corporate earnings. And he doesn’t appear to.
Legendary Vanguard Founder Jack Bogle says not to worry about short-term issues like the recent emerging market turmoil. Over the long haul, it’s the performance of companies that will drive stocks, he says, and he thinks corporate growth is indicating stocks should grow 6% to 7% annually.
“In the long-term … all value [is] created by corporations, which means, in an odd way, stocks are derivatives,” Bogle tells CNBC. “They’re derivatives of the value created by our corporations.” He said he expects corporate earnings to grow by 4% to 5% going forward. Adding in current dividend yields of about 2%, he says that makes for projected returns for stocks in the 6% to 7% range over the long term. Bogle also said that valuations are “high, but not extremely high.”
Bogle also said that strong growth in dividends was an overlooked part of last year’s market surge. In fact, he says investors in general “don’t pay nearly enough attention” to dividends. And he talks about why earnings don’t mean as much as they used to when it comes to valuing stocks.
Rebalancing the assets in your portfolio back to a target weight is an often-cited common sense tenet of investing. But legendary Vanguard Founder Jack Bogle says you might want to think twice about doing so.
Boggle tells Money magazine that “If you can ignore market fluctuations along the way, it’s better not to rebalance, since you’re likely to get higher returns.” In a recent study, he looked at how a portfolio with 70% in stocks and 30% in bonds performed when rebalanced annually vs. when left alone. “Over the 187 25-year periods ending between 1826 and 2012, the rebalanced portfolio earned a sliver less on average,” Money reports. “In 55% of the periods, rebalancing beat doing nothing, by an annualized 0.23%, adjusted for inflation. When rebalancing hurt returns, the penalty was larger — 0.43%.”
The problem, however, is that most investors don’t have the stomach to sit tight. So Bogle does support a modest rebalancing plan. “For behavioral reasons,” he says, “most investors are happier if they rebalance, and that’s worth something too.”
Vanguard Founder Jack Bogle has some simple advice for investors: Invest — and don’t peek.
“Nothing,” Bogle tells Canada’s Globe and Mail when asked what keeps him awake at night. “Just invest, and don’t peek. Don’t open your retirement plan contribution statements every quarter. Put in money regularly, and when you retire 40 or 50 years later, and open the statement for the first time, you run the high risk of heart failure — you’ll be stunned at how much money you have accumulated.”
Bogle says investors should ignore the volatility of the stock market, which could be higher than usual in the coming years “given the mess that we have in our financial system.” He says the true value of stocks isn’t their price in the market, but the amount of earnings and dividends they produce. “The secret of making money is to own corporations that grow,” he says.
Bogle says he has all of his money invested in the U.S. markets, where he thinks stocks will significantly outperform bonds over the next decade. He also says he’s “very optimistic” on Canada, which has “many of the characteristics of the U.S. — strong capital markets and solid governments that are not going to be overthrown tomorrow.”