Jack of Hearts

Jonathan Clements

ON WEDNESDAY, Vanguard Group’s 89-year-old founder John C. Bogle was in hospital to receive treatment for his latest health scare—an irregular rhythm in his transplanted heart. On Thursday and again today, he was at the Bogleheads’ 17th conference in Philadelphia, as feisty as ever.

The Bogleheads are, of course, the online community who congregate at They’re renowned as fans of frugality—especially frugally priced index funds. And Jack Bogle—even though it’s been more than two decades since he was Vanguard’s Chief Executive Officer—remains their guiding light. He has a new book, Stay the Course, which should be out next month.

Near the beginning of his remarks on Thursday, he quoted the Ancient Greek playwright Sophocles: “One must wait until the evening to see how splendid the day has been.” He then added, “I think my evening is here, and I don’t much like that.”

Jack’s long day has included launching the first index mutual fund in 1976. He was talking about evidence-based investing decades before it was a thing—and even now he’s quick to back his remarks with a timely statistic. Here are just some of his comments from this week’s conference:

1. He points out that today traditional index mutual funds and exchange-traded index funds together account for 37.8% of stock and bond fund assets, up from 9.1% in 2000 and 21.2% in 2010. ETFs now hold slightly more assets than traditional index mutual funds.

Jack’s not entirely happy about that—he notes that investors are too quick to buy and sell ETFs—but admits to mellowing somewhat. “I don’t want to be too tough on ETFs, because there are good uses for them,” he allows.

2. Why buy index funds? Again, Jack goes to the numbers. If you look across the nine U.S. stock market style boxes—large-cap growth, small-cap value, mid-cap blended style funds and so on—just 7% of actively managed funds have outperformed their benchmark index over the past 15 years, according to data from S&P Global.

Advocates of active management often contend that stock pickers are more likely to shine in less efficient markets, such as those for smaller-company stocks. But Jack notes that, over the past 15 years, actively managed large-cap funds have trailed their benchmark index by an average 1.54 percentage points, mid-cap funds by 2.01 and small-cap funds by 2.24. He attributes small-cap funds’ larger shortfall to their higher trading costs and higher annual expenses.

3. Many investors—including me—tilt their portfolios toward value stocks. But Jack points out that, while value has indeed outpaced growth stocks over the past 90 years, the performance advantage has disappeared in recent decades.

“If you think something will be better forever, it’s highly unlikely it will be better forever,” he quips. One piece of evidence cited by Jack: Since Vanguard launched its first value and growth index funds in 1992, the average annual returns have been almost identical.

4. Since year-end 2014, Vanguard has captured 80% of the net new cash flowing into funds. It now manages almost a quarter of stock and bond fund assets, more than twice as much as Fidelity Investments, the next largest fund manager.

In response, Fidelity has rolled out four index funds with zero annual expenses. “They’re clearly making an effort to make a big show in the indexing business,” Jack says. “It’s what I would do if I were Fidelity. I think it’s going to draw a lot of business.”

He says that, for Vanguard, there isn’t a good competitive response. It doesn’t overcharge on some funds in order to subsidize others—which is what Fidelity and other fund companies are clearly doing. “We’re in a kind of a box,” he concedes.

Still, he notes that investors with funds in taxable accounts would be crazy to sell their current funds to buy Fidelity’s new zero-cost index funds. The resulting capital-gains tax bill would likely swamp the potential cost savings.

5. Over the next 10 years, Jack sees nominal corporate profits growing at an average 4% a year, while investors also collect 2% in dividends, giving them a potential total return of 6% a year. But he says, “It would probably take a 25% drop [for the stock market] to get to its normalized value.”

He sees investors surrendering two percentages points a year to falling price-earnings ratios over the next decade, leaving them with a nominal annual return of 4%—which shrinks to just 2%, once you factor in inflation. Meanwhile, over the next 10 years, he expects bond investors to earn a nominal 3½% a year, or 1½% after inflation.

“Everything that’s happening today is great for the short term and terrible for the long term,” Jack cautions. “We’re on dangerous ground and yet the [stock] market goes blithely on.”

Faced with low expected returns, what’s his advice? “You better save more money,” Jack counsels. “You better get more costs out of the equation.”

What about lightening up on stocks? “It all depends on your financial ability and emotional ability to withstand a market decline,” he says. “It’s probably wise to sell to the sleeping point.”

Jack suggests “you might do a five or 10 percentage point reduction” in your stock exposure. But he adds: “There’s no certainty in this, so you never want to do anything too big.”

What did Jack Bogle say at last year’s Bogleheads’ conference? Check out our summary of 2017’s meeting.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His new book, From Here to Financial Happiness, can now be ordered from Amazon and Barnes & Noble. Jonathan’s most recent articles include Budget BustingAll Better, Archie Is Scum and My Favorite Questions.

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