Bogle: 'Hope Will Return'
BusinessWeek Associate Editor Emily Thornton asked that very question of John Bogle, founder of the Vanguard Group and a pioneer of index investing. The fund-industry veteran, who recently wrote The Little Book of Common Sense Investing, recommends at least two pieces of sage advice: First, be sure to keep an adequate portion of your portfolio in bonds. Second, try to remain calm: Bogle says it's possible the stock market could slide by another 15-20%.
Edited excerpts from their conversation follow:
We're seeing such problematic credit and stock markets. What do you think individual investors should do?
I would divide individual investors into two classes. If they're speculators, they will be scared and it may get worse and they should probably get out. But I don't feel confident in that advice because I don't give speculators advice!
We clearly have a problem with confidence in the market. Equally clearly, as all market cycles go, we have gone from hope, to greed, and now we're going to fear. Eventually hope will return. And very eventually greed will return. But I think it's going to be a while before we have the kind of greed that we have witnessed in this recent era reappear.
On the other hand, if I was going to give advice to an individual investor -- and I make a very important distinction here -- if they have come into this market and have invested the way people should invest, and that means they have a little bond position if they're young, and an average bond position if they're in their middle years, and a substantial bond position in their retirement years, then I would do absolutely nothing. They will be protected by the fact that bonds are going up and bonds generate income. No one will take that income from them. They should just hang in there and do nothing.
Even if I was pretty confident that the decline will continue -- and I think it's more likely than not -- you've not only got to get out right, you've also got to get in right. You must be right twice. So if you get out now, and the market goes way down another 15 or 20%, which is quite possible, they will be so scared they won't get in. So I'm a stay-the-course person. Personally, I'm about 60% bonds and 40% stocks. I haven't changed a single thing in my portfolio. I'm largely indexed on both sides. I haven't made a significant change in my portfolio in six or seven years. On a day like today, I may be worth as much at the end of the day as I was at the beginning because the bonds are up 1% and the stocks are off 2%-3%.
I'm very comfortable when these things happen. I don't much like them. But on the other hand, we have a system where there has been much too much easy credit and aberrant behavior, with rating agencies giving unbelievably casual high ratings to these mortgage-backed bonds. People are apparently able to collect all the poor bonds that don't have great chances of repayment, put them in a portfolio, and by fooling around, nobody knows exactly how, with the order in which they pay off, they're able to create a portfolio that is 90% triple-A bonds out of a portfolio that is in fact 99% C bonds or mortgages.
You pay a price for all this and we're paying the price now.
Why shouldn't I take all of my money out of all of these bond and stock indexes and just put it in cash or a CD?
First of all, you'll probably end up paying a lot of capital gains taxes. And you might be right. But on the other hand, what are you going to do next? A good bit of this decline has occurred. If you could get out and get into CDs when the market was 10% higher than it is now, that would have been a nice thing to have done. But people weren't thinking that way then. You're always bullish at the highs and bearish on the way down. So you're buying at the highs and selling at the lows. What sense does that make? I would say never do 100% of anything. An intelligent investor might take 20% out of his stock position, wait a week, and see what happens. But with these wholesale changes, you're going to get whipsawed. You're going to be in cash and the market is going to come back, and then you'll pay a higher price to get in than you got out today.
It's not a good idea to time the market. In the long run, investing is not about markets at all. Investing is about enjoying the returns earned by businesses. And the stock market is nothing but a giant distraction in that quest to acquire returns that business earns. It overmagnifies everything. Investors get scared. Their advisors get scared. And you get exactly what we're having -- a bit of a mess.
How would you compare today's troubles, which are more credit-driven than stock market-driven?
You know the old saying that all happy families are alike, but all unhappy families are unhappy in their own way? The same conditions never prevail from one market to another one. This is rather serious. We know we have a world that operates on credit. Too much credit and too loose credit. So we have a price to pay for getting too irrationally exuberant.
Why wouldn't you be surprised if the stock market dropped another 15%?
The market takes on a certain momentum and it could happen. I didn't say it would happen. I said it could happen. In a stock market, believe me, anything can happen! Confidence changes. You measure confidence by the price-to-earnings multiple and it's probably gone from 18 to 16 here, down about 10%. The long-term average is around 15.
I'm an observer of this. I don't know what to do myself. But I don't feel any need. I doubt I will change my stock-bond ratio for the rest of my days.
Some people are saying we could see a repeat of what happened to the stock market in 1987. Do you think that's the case?
1987 was nothing, really. Think about it. In a short period -- one day -- it was pretty much all over. The market went down a little less than 25%. But by the end of the year, it was up 3%. 1987 was an up year in the market. I don't think this one will be. But if people are saying that it could be like 1987, they should pray that it is!
Are you surprised that even money-market mutual funds have been affected by this credit mess?
Not the money-market mutual funds as such. It's the ones that offer you a higher yield. Money-market funds, as far as I know, every one is still valued at a dollar. But in this business, everybody is always trying to sell you something. If money-market yields are low, then (they say) here's a money-market fund where you have a yield that's more. How do you have more? You buy lower quality paper. This is not complicated. And you pay a price. When people are gambling in their money-market fund, they've got to be very foolish.
I'm an indexer. I own the market. And I'm happy. Markets come and go. In my book, I use a quotation that I stole from Shakespeare. A day in movements of the market are like "a tale told by an idiot -- full of sound and fury, signifying nothing." I'll say this seems to be signifying a final, at long last, reversal of the easy credit, and the sloppy credit analysis, that has characterized the recent era.
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