A visit with John Bogle
At 80, he says he doesn't get enough done. And while ever more money is moved around the world by legions of finance Ph.D.s, he offers this assessment of investing:
"It's not rocket science."
Meet John Bogle. He's the crusty founder and retired chairman of Vanguard, now the largest mutual-fund firm in America, but I prefer to think of him as the Jedi knight of investing. And the force is with him.
I've called him to talk about the 10th-anniversary edition of his classic book, "Common Sense on Mutual Funds" ($30, Wiley & Sons). Now 600 pages, up from 450 in the first edition, this is the definitive book on index-fund investing. It explains why index-fund investing is the best way — no, the only way — for people to invest their savings.
You bet. But he does something few in the investing world would dare to do. He stands by what he said 10 years ago. The original text is presented unchanged. New data is added to reveal what happened over the past 10 years. Although the '90s and the '00s were diametrical opposites for investing, the results still show that:
• Costs matter.
• Low-cost index funds are the surest way to achieve market returns.
• Spending money to achieve high returns rarely works.
The difference over time, he points out, is enormous. In the 40-year period ending in 2008, for instance, a $10,000 investment in a low-cost S&P 500 index fund would have grown to $346,117.
During the same period, the average managed domestic equity fund grew to $201,513.
In a telephone interview, I asked him what he thought was the biggest problem in investing.
"It's that people are focused on short-term performance. And there are always some funds that will beat an index. It's the willingness to project the immediate past into the future," he said.
I asked how he felt about the rising tide of international investing. "People forget that large U.S. companies have substantial revenue and profits from other countries. Today most large U.S. companies are diversified internationally, so you're already an international investor when you buy the U.S. market," he said.
"People chase performance. So they are leaving domestic stocks and going into international stocks at a rate that is frightening. I think you should limit international stocks to 20 percent of your equity exposure. Put half in developed markets and half in emerging markets.
"The clear proof is the difference between the return a fund earns and the investor return on the same fund. There are some really big gaps."
The investor return depends on when the investor commits to a fund. These returns, now calculated by Morningstar, show that investors tend to buy after large increases in value and before large decreases in value. Basically, the "hot money" gets a lower return than the fund, and the managed fund earns less than an index.