YOU WOULD THINK
by now that John Bogle would be preaching to the choir. After all, it's been 30 years since the founder of Vanguard launched the industry's first index fund. He endured criticism and skeptics back then. But now dozens of academic papers and testimonials from his contemporaries prove that Bogle was right: The only way the average investor can continuously match the returns of the market is to invest in the low-cost, no frills offerings he championed. Much to his chagrin, though, many investors haven't listened. Every year they continue to pile into overpriced or speculative funds. Indeed, only 10% of the industry's $10 trillion in assets are sitting in the coffers of classic passive investments.
That's one of the reasons why Bogle, a living legend in the mutual-fund world, continues to sound off on his favorite topic, a stance recently punctuated by the publication of his sixth book, "The Little Book of Common Sense Investing." (It will be in wide release on Monday.) Like his previous writings, including 2005's "The Battle for the Soul of Capitalism," Bogle uses a combination of acerbic opinion and smart advice to rail on what he thinks is wrong with the industry, including greedy fund companies, flavor-of-the-month products that will almost certainly lose money over the long haul and hidden fees that eventually erode investors' returns. Mixed in are words of wisdom on investing that have been honed over 50 years of following the industry. Beginners should memorize these pearls; savvy investors should revisit them.
Bogle's new book arrives on shelves at a critical time for the indexing business. Bogle devotes an entire chapter and some of the book's sharpest venom to ETFs, a niche that started off as an alternative to index funds but one that seems to be becoming something else entirely. Indeed, there are now 400 ETFs that slice and dice every part of the stock market and some charge big fees, too. While Bogle thinks some broad-based ETFs are fine, the rest, he says, are just disasters waiting to happen. "Investors are performance-chasing," says Bogle.
Bogle has been accused of sounding like a broken record. However, he is still in demand across the investing world. He retired from the day to day running of Vanguard in 1996 and now spends most of his time at the Bogle Financial Markets Research Center in Valley Forge, Pa. From that perch he writes his books in addition to the many papers and op-eds he publishes in industry journals and newspapers. He also gives dozens of speeches a year. Indeed, when we caught up with him he was on his way to speak to a group of students at Pepperdine University. Here's what he had to say:
You launched the Vanguard S&P 500 Index fund in 1976. Did you think that 30 years later you would still be making some of the same arguments you did back then?
I didn't expect that I would still be fighting the same battle over and over again. Let's call this the Battle for the Soul of Indexing, to be derivative of my last book. It is so clear that the more you speculate as a mutual fund investor the worse you do. It's a mathematical certainty that long-term investing is better.
So why do you think investors are still making the same mistakes?
There is a reality that sets in when you use an investment advisor. If he does nothing except put his clients 100% in the S&P 500 eventually his clients will say "What am I paying you for?" The easy answer should be that his clients are paying him to keep them from doing something stupid. That doesn't always happen. Advisors feel compelled to do something. Activity becomes the enemy of returns. Think about it this way: The market has half long-term investors and half short-term investors. The long-term investors don't trade any of their stocks so they get the market return. The short-term investors trade back and forth. They will have to lose. They may get the market return but it's less $400 billion [in trading costs].
In the book you reserve some pretty choice words for ETFs. But some of these products like the ETF that tracks the S&P 500, the so-called Spiders seem to have some merit. Do you think every investor should steer clear of these products?
If you want to buy a Spider and hold it the rest of your life and own it instead of a Vanguard index fund it's probably a flip of a coin which one will be better for you. I can't find it in my heart to say that the Spider would be bad. The problem is that the Spiders are now what the ETF industry is about.
So what's your problem with the industry?
Classic indexing has stopped growing in market penetration. Indexing was 10% of assets in 1999 and now it's around 16%. All that growth, though, is from what I call this indexing nouveau. I'm not saying there is no merit to them. But the fees have been great for financial entrepreneurs like Barclays and PowerShares and WisdomTree. It's great for brokers since there are a staggering amount of commissions. And it's great for advisors because it allows them to do something with their clients' portfolios. But is it too much to ask that these products be good for investors? I think they will prove not to be.
Do you think one of the reasons why the average investor is chasing big returns is because he/she is worried about having enough money to retire on?
I think we are poorer off for having offered all these highly complex mathematical models [on our web sites], which most investors aren't going to sit still for. They are too much work. You throw all these numbers into a blender and see what permutations come up. So one guy may say "Wow! I put my numbers in and 6% returns doesn't do it for me." So he thinks he has to earn more. It's like going to the race track and losing in the first race. And then losing in the second race. And the third and the fourth, too. Finally in the eighth race he says "I can't go home without any money so I'll just bet everything on the biggest long shot." It's ridiculous.
Congress passed sweeping pension reform legislation last year that should lead to automatic enrollment in many 401(k) plans. It may also cause so-called target-date funds to become the default option. What do you think?
Automatic enrollment should be much tougher than it is. People should be forced to be in the plan. And they should not be able to borrow from it. Can you imagine how many people would retire broke if they could borrow from Social Security? I just think the 401(k) is not working to my satisfaction so automatic enrollment would help.
The target-date fund is the single best alternative to indexing. But target-date funds are all over the lot in terms of the ways they do things. In no case do they fail to reduce equities as age goes on, which is clearly the best strategy, but there are big gaps between the funds that are conservative, like the Vanguard ones, and others. You are protecting against foolish behavior. But a target retirement fund assumes you will be investing for 20 to 30 years and the more time you allot the more indexing proves itself. So target funds with very aggressive managers are going to be anathema and funds with high costs are going to be anathema.
You include a lot of anecdotes from historical figures like Tom Paine in your book. Have you been influenced by these personalities?
It's not so much an investing issue when you talk about these historical figures. I just get inspiration from people who have faced these types of problems in different areas before and have been in the terrible minority. I find it inspiring enough to get me out of bed every morning raring to go.
You are approaching 80. Do you have any plans to slow down?
I'm afraid that when people slow down they start to get old. It becomes a self-fulfilling prophecy. I still have a lot of energy. And I think the message is still important.