Meet the Street: Jack Bogle, Man on a Mission

Just because Vanguard founder Jack Bogle has retired, doesn't mean he's stopped championing the causes of individual investors.

For the past two years, he's been heading up the Bogle Financial Markets Research Center, which does research for and lobbies the financial industry on behalf of mutual fund investors. Bogle founded the center after retiring as Vanguard's chairman at the end of 1999.

Here the longtime advocate of low-cost index investing describes what he expects from the market in coming years and what he believes investors should be doing, as well as what issues in the mutual fund world he's working on at the Bogle Center.

TSC: What do you think is important for investors to think about as they reach the end of the year?

Bogle: Well, the most important thing is for investors to have a realistic idea of what future returns they can look forward to in the stock and bond markets, and not in a day or a week or a month, which is idle and futile, but looking ahead to the next decade and seriously considering what rational expectations might be for market returns.

My own view is that we will be looking ahead to a much more moderate level of returns than we had in the decades of the 1980s and '90s when stock returns averaged something like 16% or even 17% annually. Something in the range of 6% to 9% is probably a realistic and maybe even an optimistic outlook for stock prices in the coming decade.

Jack Bogle, Founder and Ex-Chairman, Vanguard

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TSC: What would that mean for somebody that is about to retire or maybe has just retired? How do they cope?

Bogle: Well, I hope they have done one thing, and that is not just rely on stocks, but on bonds as part of their investment program, too. My own view is that one always looks at the simplistic way, and at least begins one's thoughts about asset allocation by thinking about putting half of the money in stocks and half of the money in bonds. I've said that in my books, and Benjamin Graham has written the same thing. That number in stocks can go up -- you can have more and more stocks if you're younger, if you have less money at stake, or you're just starting, for example, in a 401(k) plan, and you're reasonably aggressive as an investor.

On the other hand, that 50% should go down in the case you've described, because someone who's at retirement isn't going to be adding to their investment. They've got a lot of money at stake, not just a little. They do need income, and they're probably going to be and should be more conservative. So something in that range of 50% or downward as investors get older is the right way to think about allocation. Of course, each person is different, but that's a good way to begin.

The fact is that today the stock market yields something in the area of 1.3% and the bond market has now come back to where the overall level of bond yields is something like 6.25%. Let me convert it to mutual fund terms. The average mutual equity fund yields about seven-tenths of 1%, and the average mutual bond fund -- well, you could buy a package of corporate bonds and earn probably 6.5% on it. So, if you are lucky enough to have a million dollars, you'd make $7,000 a year in income from your dividends in a mutual fund, and you'd make $65,000 from bonds.

The reason people don't worry about that is that they think they can make up for the lack of income on stocks by capital growth, but capital growth is notoriously volatile. Sometimes the market giveth and sometimes the market taketh away, and it's been taketh-ing away in the last two years and giveth-ing in the previous 15. So I don't think people should count on that. I think it's a time for some caution, but not a time to abandon stocks. None of us are wise enough to do that at the right time. We don't know anything about timing. I really think that's the way the investor should be looking at it -- creating rational expectations for the market.

TSC: It's been a year since we last spoke with you about your book John Bogle on Investing: The First 50 Years, and what an incredible year it's been. What's your take on what happened in 2001?

Bogle: Well, this has been a very remarkable year. The Nasdaq dropped over the last year and a half, from March of last year through Sept. 19 or 20, whenever the low was reached, more than 70%. The total market dropped almost 40%. That's at the low, following the fear that was in the air then. That fear seems to me to have completely dissipated, and even caution seems to have been thrown to the wind. Optimism, I believe, is back in the market driver's seat at the moment. So, I think the psychology and the emotions of the market, which have gone from greed and optimism to fear and pessimism, are now back to at least optimism, if not greed.

Stocks are not cheap; the Nasdaq is up, I saw somewhere the other day, something like 40% from its low. It went from 5000 to 1400, and it's now back to 2000. That's a huge recovery, and the total stock market is probably up 25% from its low. So we had a big comeback, which is surprising because I don't think America is stronger economically than it was on Sept. 10. We're clearly going to have to pour tens of billions of dollars, not just on the rebuilding of New York, but on airport security, disease control and corporations securing their buildings. All those things are just a dead weight to the economy; they're not productive at all. We're fighting a war that I don't think is going to be a short war. The great budget surpluses have, in the blink of an eye, been turned into massive budget deficits.

TSC: Turning to 2002, what do you expect to see next year?

Bogle: Well, I think the economy's going to be slow to recover. It will recover, but I don't expect it to recover in a flourish. Corporate earnings will begin to recover in the latter part of the year. I don't look for it to be a boom year in any respect. 'I'm trying to get more money to the gamblers and away from the croupiers.'

Now when you look at the financial markets, it's not wise to predict one-year returns for the markets because market returns all through human history are based on two factors. One is economic, the earnings and dividends for stocks, and the other is emotions, how much people will pay for a dollar of earnings. In the long run, investing is virtually 100% about economics, but in the short run, it seems it's virtually 100% about emotions.

I happen to believe that wise people in this business have a very good idea about what stocks are going to do, but they have absolutely no idea when. That's why most of us are not market timers. None of us are market timers. So, one doesn't forecast the market return for the year. I don't think there's much point in saying "well, the S&P will be 1600 at the end of the year," because what I'm really saying is that I think the P/E is going to be 28 times, or whatever it takes to get you to 1600. How would I know if it's going to be 28 times or 27 times? It's just idle speculation.

TSC: What kinds of things are you working on now at the Bogle Center?

Bogle: Well, what I'm doing working here is trying to spread across the nation the mission that this industry owes it, to its shareholders, to stand up for them and give them their fair share of stock market and bond market returns. That means investing as a profession and with stewardship, and de-emphasizing marketing, bringing costs down and bringing portfolio turnover down -- basically working on mutual funds to manage the managers' money the same way they'd manage their own money.

This industry has been notoriously tax-inefficient, notoriously expensive, had notoriously high turnover and been notoriously marketing driven. We brought out hundreds of technology stocks and hundreds of aggressive growth stocks largely invested in technology right before the great high, and investors, as you probably know, in the four quarters prior to the market's high, put $238 billion into these new aggressive funds and took out $29 billion from value funds. That's from the first quarter of '99 through the first quarter of '00, and investors got slapped in the face. Those are the funds that were advertised, and those were the funds that were formed and [hyped].

We hurt investors by doing that. We've got to get back to basics in this industry and give the mutual fund shareholder a fair shake.

So I've spoken at a Minneapolis [newspaper], I speak to large groups of investment advisers and I'm speaking down in Newport, Va. I recently gave the keynote address at the Super Bowl of indexing. I'm just trying to explain to people in realistic terms the economics of investing and the emotions. Remind them that very few investors ever capture the returns the markets deliver because, as we all know, the costs of the financial system are such that investors receive the market returns only after deducting the cost of the financial system, which is huge. I'm trying to get more money to the gamblers and away from the croupiers.

TSC: Whose ear, if anybody's, do you have in Washington?

Bogle: Well, there are a lot of vested interests in this industry, and I'm a lonely soul. Don Phillips of Morningstar wrote an editorial last summer castigating the industry for ignoring me, but nobody in the industry pays attention to what I have to say, I don't think.

TSC: But investors certainly do.

Bogle: The investors are paying attention, and they like what I'm saying because I'm telling them the truth. No one in the industry has ever argued that these things aren't factually correct that I'm saying. So, I enjoy doing that. I may not be popular in the industry, but that's all right, too.

TSC: Is there any other advice you'd like to give our readers?

Bogle: Yes, don't engage in market timing. Get your asset allocation right. Think about how much you want to change that 50/50 ratio up or down depending on your risk tolerance, your income needs, your wealth and your time. Then, for God's sake, stay the course. There's no good that can come from timing. You want to get your emotions out of the market equation, not put them into it.