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The events of 2008 and early 2009 shattered investor confidence
in how the markets work. Much of what we knew to be “true” was
revealed as faulty thinking. Assets we thought were uncorrelated
began trading in lock step; 1-in-100,000 events became commonplace;
the unthinkable became frighteningly real.
As we turn toward 2010, the Journal of Indexes editorial staff
gathered six exemplary thinkers to ask whether, as many claim,
buy-and-hold investing is “dead,” and how the events of the past
year should shape how investors approach the future.
John Bogle, Founder, Vanguard
Journal of Indexes (JOI): Is buy-and-hold investing
dead?
John Bogle (Bogle): I would just say very
simply, of all the stupid ideas, the idea that
buy-and-hold investing is dead is [the most]
ridiculous. I would just ask “Buy and hold what?”
Buying and holding an individual stock has been dead
forever, and buying and holding a managed portfolio is probably
dying. And buying and holding the entire stock market
is the way to invest in success. Then the question becomes,
“Buy and hold what kind of portfolio?” I would say buy the
bond market portfolio and the stock market portfolio and
hold them both as long as you live, with one caveat. And that
is, take into account your risk tolerance and your age. So
adjust that equation—more in bonds when you’re older and
more in stocks when you’re young. That idea will never die.
Even worse, when someone says buy-and-hold is dead, they
have lost sight of one simple elemental fact: As a group, we
are all buy-and-hold investors—we buy and hold the market
portfolio, all of us, together. As a group, we are definitely,
irrevocably, unarguably buy-and-holders; individually we are
not. So we trade with one another, and who is enriched
by that? Clearly the people trading aren’t enriched by that,
because one loses and one wins. The only enrichment is to our
financial system —the croupiers of America—Wall Street and
mutual fund managers. To fail to observe the simple fact that
we all own the buy-and-hold portfolio, but we try and trade
against it, is consigning ourselves to a shortfall, of some substantial
portion, to whatever returns the markets are generous
enough to give to us or mean enough to take away from us.
JOI: Should investors be concerned about inflation during the
near term? If so, how can they protect themselves against it?
Bogle: There is one guarantee of inflation protection—the only
and closest thing we have to a guarantee against inflation—the
Treasury inflation indexed bond. Right now it has a very small
yield because the market is looking for about 2.5 percent inflation.
If it turns out to be higher than that, the government will
pay you more money to protect you against it. If it’s lower than
that, you’ve made a bad bet. It’s the only form of true inflation
protection on a very short-term basis that I know of.
Now you have to worry about whether that market projection
of inflation is right, and I think one could say [there is]
a high probability that inflation will come back to 2 percent
or 2.5 percent over the next couple years, but could easily in
the years beyond that get to 3 or 4 or 5 percent. So while a
1 percent yield looks very shabby at the moment—and it will
be shabby this year—you’ve got to be willing to accept that.
Like everything else in investment, if you want to eliminate
a risk, you’ve got to give up some return. That’s the way the
inflation-hedged bond works.
JOI: Have you adjusted your investment philosophy during the
last two years?
Bogle: No. I have a very, very conservative investment philosophy.
I’m in about 70-75 percent bonds—in my retirement
bond account, largely taxable bond index funds; and in my
personal account, largely limited-term to intermediate-term
municipal bonds. I was very well protected when the market
went down, and obviously I’ve had a much smaller share of
the gains this year, because I’m only about 20-25 percent in
our stock funds, largely index funds. But on balance for the
two years, I’m still well ahead of the game.
Because we’ve had a stock market that went down 57
percent and then went up 57 percent, any investor who
thinks that means they’re even at the end of the period is
really naive. In fact, they’ve lost 32 percent of their capital.
With a big plunge and a big recovery, you should never lose
sight of the mathematics of the marketplace, and that is it
takes essentially a 100 percent market increase to offset a 50
percent market decline. We call that, after Justice Brandeis’
formulation, the “relentless rules of humble arithmetic.” So
I’m perfectly comfortable where I am—I missed some of the
rise, but avoided potentially all of the fall.
I don’t know how to do market timing, by the way. I’m
not smart enough to do that. I’m comfortable enough not
trying to outguess the market—not trading saves me a lot of
money. I’m also not subject to taxes on those trades, which
saves me a lot of money, and so on.
JOI: What’s the biggest danger/opportunity that you see ahead
for investors during the next five years?
Bogle: I would say the greatest danger is that this financial
recovery is going to be aborted. I worry about the economy
and the global system. I would caution investors to be conservative,
though maybe not as conservative as I am because
I’m older and I’ve accumulated a certain amount of assets.
I must confess to being amazed that as each piece of bad
news comes in, the market goes up. That can’t go on forever.
In any event, there is plenty to be concerned about, as I say
in my new book, a fully updated 10th anniversary edition of
“Common Sense on Mutual Funds.” I’ve updated all the data
from 10 years ago, and my, how different it looks. But we
have to deal—as Donald Rumsfeld put it, though it might
not have been original with him—“not only with the known
unknowns, but the unknown unknowns,” and there are plenty
of them out there too. We have an uncertain world; [we
have] great global competition; we’re a high-priced country;
we don’t make anything very much anymore; and we have a
financial system that’s run amok and shows very, very few
signs of straightening itself out.
To capture what’s in my most recent article in the Journal
of Portfolio Management, we need to develop [a solution to]
this failed agency society we have—because most stocks are
www.journalofindexes.com
January/February 2010
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