Buy Like Bogle: 7 Essential Lessons from the Founder of Vanguard

Few individuals have had a bigger impact on the financial industry — or on my personal investing strategy — than Jack Bogle.

Mr. Bogle is the founder of The Vanguard Group, and was the original pioneer of low cost index investing. In my opinion, no one in this industry has been a better friend to “the little guy” than Jack. His unrelenting crusade against greedy fee structures is a thorn in the industry’s side… in a good way!

The truth is, Jack’s mission at Vanguard has inspired my own mission at Fund Reference. I don’t claim to be the holder of secret financial wisdom… I just hope to carry the torch a bit further.

You can get a free PDF version of this report, Buy Like Bogle: 7 Essential Lessons from the Founder of Vanguard: Download it here.

Jack Bogle has produced a number of “teachable moments” over the years; below are seven of the many lessons that I’ve learned following his career. Enjoy!

–Andy Hagans, Founder of Fund Reference

1. Less Exciting = Better Performing.

Jack Bogle has dedicated his career to convincing investors and advisors that simplicity is a virtue when it comes to portfolio construction. In an editorial for Financial Times, Bogle reiterated his preference for the cheap and vanilla over the expensive and flashy:

Avoiding hot new products is unlikely to impair the returns investors earn. Far more likely the reverse is true. Staying the course with less exciting, inexpensive, broad-market traditional index funds should enhance investor returns.

There are now more than 25,000 mutual funds available to investors. Many of the products launched in recent years strive to implement complex, confusing strategies.

Some monitor indications from proprietary algorithms to move between stocks and cash. Others layer in futures contracts in an attempt to generate some extra income or enhance total return potential.

The list of complexities added to the mutual fund structure goes on and on.

Despite all these additions of thousands of new funds and countless new strategies, the best option for most investors remains unchanged. A simple one-fund portfolio consisting of a Vanguard Target Retirement Date fund will be the ideal approach for most investors.

For those who want a bit more control, a portfolio consisting of three of four index funds should be sufficient. There’s just no need for the other 28,000 or so mutual funds out there.

2. Beware Brilliant Marketing.

Exchange-traded funds (ETFs) have been one of the hottest investment trends of the past several years. The number of products has multiplied, and ETF assets now top $2 trillion.

Though Vanguard is one the largest ETF providers, Jack Bogle has been a vocal criticof ETFs. He’s called them “the greatest marketing innovation of the 21st century.”

Bogle’s beef with ETFs lies in the fact that they encourage active trading and emotional responses to short-term market conditions. Unlike mutual funds, ETFs can be traded throughout the day. So when an investor sees the Dow down 500 points, it’s easy for them to panic and sell all their stocks.

There’s a ton of evidence to justify Bogle’s concern on this topic. Investors tend to put money into stocks after the market has been hot, and pull it out after big declines.

The following chart, showing flows to stock funds and the market’s performance, illustrates the problem:

In 2008, investors pulled money out of stock funds en masse (as shown by the bars below the x-axis). When stocks finally rallied off their lows (as shown by the line topping 50 percent), many sat in cash.

Another study found that the “average investor” lags behind most benchmarks because he is a terrible market timer — he panics and sells right before stocks post big gains and then buys after the rally is almost complete:

Now, mutual funds don’t solve this problem entirely. After all, investors can still sell their holdings at the end of the day and miss out on subsequent returns. But the inability to day trade removes a huge temptation that has been demonstrated over and over to hurt investors.

3. Quit the Constant Monitoring.

The temptation to tinker with a portfolio or actively trade within your account has perhaps never been greater. The number of 24-hour financial news networks has grown, as has the number of “gurus” looking to sell you their hot stock picks online.

Bogle proposes mounting a strong defense to these trends, believing that the best strategy is to pay as little attention to the markets as possible:

Don’t even peek at your account; don’t open those 401(k) statements. If you don’t look at your 401(k) statement–this sounds outrageous, but it’s true–for 45 years … you start when you’re 20 and you don’t open a single statement for the next 45 years, when you open that statement the day you retire, you are going to go into a dead faint of amazement about how much money you’ve accumulated.

I bet a lot of folks see this quote and assume that the “dead faint” occurs after seeing that an investment has doubled or perhaps even tripled. But take a look at what would have happened to $10,000 invested in 1970:

A one-time investment of $10,000 in 1970 would have grown to about $850,000 by 2015 if it had simply been invested in the S&P 500 (this assumes tax deferral and no expenses). A more conservative 60/40 split between stocks and Treasurys would have grown to $650,000. Even an investment in 10-year Treasurys would be worth 25x the initial investment.

Now, I don’t actually follow this advice to the extreme that Bogle suggests. There’s value in checking in on your investments every once in awhile; I like to make sure the asset allocation is appropriate and rebalance if necessary.

You can get a free PDF version of this report, Buy Like Bogle: 7 Essential Lessons from the Founder of Vanguard: Download it here.

But I do limit my check-ins on my portfolio. I used to log in 10 or 20 times each day to see how the value had changed. This is not only a waste of time, but it is counterproductive to accumulating wealth.

Ideally, you’ll check in on your portfolio every few months. If you go an entire year, even better.

4. Doing Nothing is Expensive.

Bogle has been refreshingly honest about the challenges facing investors, and the fact that the journey is never easy. This might not be what investors want to hear, but it is some valuable perspective:

There’s no escaping risk. I’ve long searched for high returns without risk; despite the many claims that such investments exist, however, I haven’t found it. And a money market may be the ultimate risk because it will likely lag inflation.

This is an incredibly important concept that many investors prefer to ignore.

Those who allow extreme risk aversion to dominate their portfolios will avoid the heartache on days when the market tanks. But they’ll likely finish dead last in the long run, well behind those who rode out the ups and downs.

Earlier, I showed how a $10,000 investment would have grown over 45 years. During that period, investors would have experienced:

  • 5,475 losing days, including…
  • 315 one-day declines of 2 percent of more and…
  • 21 one-day declines of 5 percent of more…as well as
  • 10 losing years.

Despite these bumps in the road, the total return would have been about 8,400 percent — an 84x growth in assets.

5. Sell-Offs are Your Best Friend.

One of Bogle’s trademarks is his calm and rational approach to investing as a long-term pursuit. But actually following through on his advice to stick with the plan is often easier said than done. This quote, from a gathering in 2008 as markets were undergoing huge swings, is worth remembering the next time stocks plunge:

You may say, how can I keep investing the day that the market goes down 600 points? Well, that’s the greatest time in the world to invest. It’s certainly better than doing it the day before it goes down 600 points.

I used to get sick to my stomach when the markets tanked. I always assumed that everyone else must know something I didn’t, and wonder if I would be a fool to stay invested in stocks.

We tend to focus on the potential for more immediate pain when the markets decline. But a better perspective is summarized in the table below; it shows how the S&P has performed if we look a month or a year out from a big single-day decline.

Sometimes, a decline of 2 percent or more in the S&P 500 is followed immediately by more pain. But if you extend the time horizon, the results become increasingly positive.

Sell-offs are nothing to worry much about. If you’re a younger investor, they can actually be your best friend.

6. Index Funds Win.

Over the last several years, indexing strategies have put a considerable dent into actively-managed assets. My guess is that the rise of assets in index funds makes Mr. Bogle tremendously proud.

Bogle’s case for indexing is straightforward — and now supported by boatloads of hard evidence.

One of my favorites is the annual SPIVA Report put out by S&P Dow Jones. It shows the percentage of stock funds that have been beaten by their benchmark over various periods of time.

The most recent report was a blowout in favor of indexing. Over the last 10 years, just 18 percent of large cap funds have beaten their benchmark. For mid cap funds, the number is even smaller:

In Bogle’s The Little Book of Common Sense Investing, he examines the fates of the 355 equity mutual funds that were around in 1970. By the time Bogle was writing his book, most of those funds were no longer in existence.

Among those that were, only a few had managed to beat the market:

Only two stock mutual funds that were around in 1970 have managed to outperform the S&P 500 by more than 4 percent annually. You were much more likely to end up in a fund that has since shut down or that has continually lagged behind its benchmark.

There will always be mutual funds that beat the market. But your odds of picking those out of the thousands of option aren’t very good.

7. Perseverance Pays Off.

The final lesson I’ve learned from Jack Bogle has nothing to do with fees or indexing. It relates to his impressive business acumen and his perseverance in a long battle against much of the financial services industry.

Bogle is a hero to millions of investors today, but his career has been full of tremendous challenges. The reaction from his peers to his ideas in the 1970s weren’t exactly encouraging — the original S&P 500 fund was derisively called “Bogle’s Folly” after it failed to garner much initial interest.

His commitment to the principles on which Vanguard was founded are remarkable — he truly believed in his mission, and didn’t let the criticism of his approach derail what would become one of the most important companies in the world.

Building a Boglehead Portfolio

The quotes above provided some general observations about Bogle’s investing strategy. You may be interested in exactly how to apply these principles when it’s time to get down to business — and actually start building a portfolio.

The exact circumstances will differ for each investor, so it’s hard to give universally applicable advice here. But there are certainly some useful suggestions.

Super Simple Portfolios

The easiest way to build a low-cost portfolio that removes much of the emotion from the process is to buy a single mutual fund. Vanguard offers a lineup of “target retirement date” funds that evolve over time to give investors risk exposure consistent with their retirement timeline. For example, a the 2060 target date fund would initially have a large allocation to stocks. As the retirement date approached, bonds would receive a bigger weight (by 2055, most of the portfolio would be in bonds with a small allocation to stocks).

Below is a list of target date funds from Vanguard, all of which are very low cost. For many investors, these will be the best way to build a simple, low maintenance portfolio:

Bogle Building Blocks

For investors looking to build a more customized portfolio, a slightly more sophisticated strategy will be required. Still, there are several “building block” mutual funds that should be at the core of most long-term, buy-and-hold portfolios. These include:

Many of these funds are used in the premium model portfolios we’ve constructed (including the Ultimate Buy and Hold Portfolio).

Further Reading

If you’re a fan of Bogle’s take on investing, you might appreciate our Boglehead Hall of Fame. We’ve also assembled a collection of quotes from Rick Ferri, one of the biggest advocates of low cost investing. And of course our mutual fund database provides a handy way to compare index funds (as well as actively-managed products) to find the best fit for your portfolio.

You can get a free PDF version of this report, Buy Like Bogle: 7 Essential Lessons from the Founder of Vanguard: Download it here.
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