Vanguard's Bogle: Buy and Hold Is Alive and Well

Vanguard Group founder Jack Bogle has not changed his tune as a result of the economic downturn. At the ripe age of 80, he is still preaching buying-and-holding domestic stocks and bonds, cheaply, in an asset allocation that’s appropriate for your age. Below are some key excerpts from a recent Market Watch article.

On including bonds in your asset allocation:

I have been saying for more years than I care to count not to forget bonds. And start to think about it as a rule of thumb, having your bond holdings equal your age.

Investors come to me and generally say one of two things, either ‘Thank God I followed your advice,’ or ‘I really feel stupid for not having followed your advice.’

On the economy:

We can’t fix our economy now, today. We can move in a direction of fixing it, but when you think about what is happening it’s very obvious: We have to save more.

The old 3% real growth which is the rate the economy has grown at, well I think that is too aggressive. We’re looking at much slower economic times.

On what a slower economy means for investors:

We have had a stock market crash of the largest proportions probably of the last century, with the possible exception of 1929 to 1933. We have had a big stock market crash. Do we have to have another one? I don’t think so.

I would guess the market probably has it about right. I would guess that we have seen the low for the year and maybe the low for this cycle.

On having an international allocation:

Decide where you want to put your money. I would say U.S. stocks, because international will do well and then it will do badly, and the same thing for emerging markets, which will do well for a while and then do badly and then do well again. I just think you don’t need to go beyond U.S. stocks.

On the reported death of asset allocation and buy-and-hold investing:

I am really concerned when I hear people say buy-and-hold is over. Investors, as a group, are buy-and-holders. We own the stock market, all of us together, we buy and hold it. As a group, we all have the same asset allocation. So when you hear someone say ‘It’s a stockpicker’s market,’ well if you picked well, then I picked ill, and as a group it’s the same.’

You can read the entire article here. I don’t agree with everything Mr. Bogle says, but I do think there is a lot we can learn from him. So what can we do to put some of the above in practice?

First, don’t forget about bonds. As recently noted, treasuries and bonds tend to be less risky than equity investments, but have historically under-performed equities. When the market is climbing by double digits, it is easy to question why you are including bonds in your asset allocation. However, when the market turns down, the importance of bonds becomes very evident. I currently hold some old savings bonds (U.S.) and several funds/ETFs in my 401(k) and taxable accounts. My two favorite ETFs are Vanguard Long-Term Bond ETF (BLV) currently yielding 5.6% and iShares Barclays Aggregate Bond (AGG) currently yielding 4.7%.

Unlike Mr. Bogle, I think international investments play an important role in your asset allocation. Due to the complexities in this arena, I prefer to use indexed ETFs to meet my allocation here. In addition to a fund in my 401(k), I currently hold iShares MSCI EAFE Index (EFA) and Vanguard Emerging Markets Stock ETF (VWO). In addition, I am currently evaluating Vanguard FTSE All-World ex-US ETF (VEU).

As Mr. Bogle alluded to in the article, there are many excellent U.S. stocks to invest in. In this area I prefer to focus on great Dividend Stocks like Johnson & Johnson (JNJ) [analysis], Procter & Gamble Co. (PG) [analysis], The Coca-Cola Company (KO) [analysis] and 3M Co. (MMM) [analysis].

It seems that ever so many years the market turns down and someone declares the death of buy and hold. Even some go as far to say that Warren Buffett has lost his touch. The buy and hold investors and Mr. Buffett always seem to make a spectacular rebound, and they will once again. In the mean time, we need to focus on acquiring value and maintaining our asset allocation.

Full Disclosure: Long BLV, AGG, EFA, VWO, JNJ, PG, KO, MMM. See a list of all my income holdings here.

Comments

[richjoy403:]

I have great respect for Sir Jack, but I ain't buy'in his every word...especially on buy 'n hold. Those of us who stay close to the markets and know more of what is happening and why, can do better than those who buy 'n hold through all circumstances. If the average return is zero for the last X number of years, there will be those who have made an average of 5 and 10%, and those who have lost as much. I intend to work hard to beat the average return.

Jun 17 05:33 AM

[Brad Castro:]

I actually agree with buy and hold as long as we're talking about long term investments in the best individual companies you can identify - I wish someone had bought me shares of MCD, JNJ, and PG when I was growing up. Who cares about valuation and capital appreciation - I'd be generating a significant cash flow from the dividends.

But when John Bogle promotes the idea of buying and holding the ENTIRE stock market through index funds and ETFs - I'm sorry, but that's not only absurd, it's also an incredible disservice.

Jun 17 08:23 AM

[wassercom:]

Is the SEC doing anything, anything at all, to encourage 'buy and hold' investing? Until we see concrete moves, such as reinstating the uptick rule and shutting down the market manipulators, conservative long-term investors will shun the market.

Jun 17 08:28 AM

[Emerald:]

You repeat a commonly held error that equties always outperform bonds over the long term. Recent studies have refuted this so-called fact. Bogle is correct in that bonds should make up an age-related percentage of the average investors portfolio. Given the prospect of rising interest rates in the next few years, I would stick to average durations of six years or less. Note: Long bond mutual funds in GNMA, AGG and Vanguard short term bond with a little TIP in an IRA.

Jun 17 11:24 AM

[donzelion:]

With respect to bonds, I suspect investors avoid bonds in part due to tax structures (bonds other than munis = ordinary income, which taxed less favorably than dividends or capital gains in most cases).

With respect to international diversification...I split the difference between you and Mr. Bogle. U.S. (and European) companies will exploit many of the best opportunities, but in a few contexts, local companies have the advantage (e.g., utilities/infrastructure, telecoms, and other sectors involving close government ties). As a dividend growth investor, I'd think DEM would warrant consideration as an alternative to VWO (higher fees, but much higher payout ratio, and their selection process seems prudent in bubble-riddled emerging markets).

Jun 17 11:50 AM

[Vaun:]

A related article:

www.fool.com/investing...

Jun 17 12:29 PM

[searcher:]

"Buy and Hold" even when more popularly held was more honored in its breach than otherwise. Its absolute contravention presumes to require the investor's paramount attention. If such concentration is not possible, then he needs a proxy via professional management or, at least, advice. No doubt this sense of the matter is congenial to those who presume to make these divinations on the hapless investor's behalf; thus the current paradigm.

Jun 17 12:32 PM

[dirty_dirty:]

Human nature always clouds the situation. Like lemmings, most people only see what's in front of them. The turmoil we're experiencing will some day pass. And the most important aspect of buying and holding is consistent buying. I don't care who you are, you can not time the market consistently. Just look at the articles right here on SA. One day a professional says, "buy gold". The next day, another analyst is crying "short gold". It's unending and highly subjective.

Buy and hold is a great tool to bring some consistency to your investments, while minimizing fees. BUT, it's not the only tool. You need asset allocation and the occasional reorganization of assets, among other things.

This turbulent market will some day return to its glory. Don't get caught with your pants down.

Jun 17 03:37 PM

[Crashnburn:]

I agree with Ric Edelmann. Buy a diverse set of asset classes with low correlations in the form of index funds. On occaision, rebalance your portfolio so you buy low and sell high. Takes a lot of guesswork out of investing, and exploits market peaks and troughs.

Jun 17 06:39 PM

[untrusting ...:]

Yes, that's true that buy and hold works if you pick the right stocks such as JNJ, PG, etc. However how does that work when you pick GM, Enron, Worldcom, Citi, or hundreds of similar once high quality stocks? Picking all the exact right stocks is easier said than done. For example ask some of the GM bondholders who invested most of their retirement savings into GM bonds 5-10 years ago for the great yield (when GM looked fairly solid) how they like it now.

Personally I think you would do a lot better following major trend changes, such as dshort.com shows on his site. Thus getting out of stocks when major trends change and getting back in when the major trend changes again. Of course you will never catch the exact highs nor the exact lows, but you will be in the market for the majority of the up move which is what really counts. And just as important, be out of the market for the majority of the down move.

And probably just as important is Jeremy Grantham's work which shows that it is important to buy stocks when you can get a "great value" on them. Such is Buffett's approach as well.

Finally, in my view, if you really want to develop better performance, you need to use options as well. Primarily, covered calls and selling put options. The premiums you receive can contribute even more than dividends to your return.

A simplistic pure buy and hold strategy is thus not all it is cracked up to be. If an investor is willing to learn and use other tools as well, then they should be able to do much better than just buy and hold. But it is time consuming and hard work, so most investors probably can't or won't do it. Which is also why most investors really don't do very well in the market either.


On Jun 17 08:23 AM Brad Castro wrote:

> I actually agree with buy and hold as long as we're talking about
> long term investments in the best individual companies you can identify
> - I wish someone had bought me shares of MCD, JNJ, and PG when I
> was growing up. Who cares about valuation and capital appreciation
> - I'd be generating a significant cash flow from the dividends.<br/>
>
> But when John Bogle promotes the idea of buying and holding the ENTIRE
> stock market through index funds and ETFs - I'm sorry, but that's
> not only absurd, it's also an incredible disservice.

Jun 17 11:37 PM

[The Kansan:]

Is Webster's offering an IPO?


On Jun 17 12:32 PM searcher wrote:

> "Buy and Hold" even when more popularly held was more honored in
> its breach than otherwise. Its absolute contravention presumes to
> require the investor's paramount attention. If such concentration
> is not possible, then he needs a proxy via professional management
> or, at least, advice. No doubt this sense of the matter is congenial
> to those who presume to make these divinations on the hapless investor's
> behalf; thus the current paradigm.

Jun 18 08:51 PM

[bricki:]

Nobody is saying buy and hold just one company like the poor souls who put all their savings in GM bonds did.

Good approaches should recognize when stocks are expensive and when they are cheap and adjust holdings accordingly. I don't think pure asset allocation goes far enough in this regard.

Trend following can be dangerous because it can suck you into bubbles.

On Jun 17 11:37 PM untrusting investor wrote:

> Yes, that's true that buy and hold works if you pick the right ondstocks
> such as JNJ, PG, etc. However how does that work when you pick GM,
> Enron, Worldcom, Citi, or hundreds of similar once high quality stocks?
> Picking all the exact right stocks is easier said than done. For
> example ask some of the GM bondholders who invested most of their
> retirement savings into GM bonds 5-10 years ago for the great yield
> (when GM looked fairly solid) how they like it now.
>
> Personally I think you would do a lot better following major trend
> changes, such as dshort.com shows on his site. Thus getting out of
> stocks when major trends change and getting back in when the major
> trend changes again. Of course you will never catch the exact highs
> nor the exact lows, but you will be in the market for the majority
> of the up move which is what really counts. And just as important,
> be out of the market for the majority of the down move.
>
> And probably just as important is Jeremy Grantham's work which shows
> that it is important to buy stocks when you can get a "great value"
> on them. Such is Buffett's approach as well.
>
> Finally, in my view, if you really want to develop better performance,
> you need to use options as well. Primarily, covered calls and selling
> put options. The premiums you receive can contribute even more than
> dividends to your return.
>
> A simplistic pure buy and hold strategy is thus not all it is cracked
> up to be. If an investor is willing to learn and use other tools
> as well, then they should be able to do much better than just buy
> and hold. But it is time consuming and hard work, so most investors
> probably can't or won't do it. Which is also why most investors really
> don't do very well in the market either.

Jun 18 09:25 PM

[Dean M:]

Abandoning buy and hold is like rejecting consumerism and increasing savings, it makes sense on an individual level but if we all do it then we're all probably screwed.

Jun 18 11:01 PM

[Tranquilmed...:]

"There is an appointed time for everything. And there is a time for every event under heaven. A time to give birth, and a time to die; A time to plant, and a time to uproot what is planted."
- Ecclesiastes 3:1-2

The "Buy and Hold" koolaid is for the historically challenged. It blew up in the 1930's, it blew up in the 1970's and it is blowing up now. You just cannot be invested in stocks during secular bear markets which we are in now.

The time to get back into equities will be when the collective mass psychology believe that stocks are an inappropriate investment for serious money (maximum pessimism) i.e. Business Week Magazine "The Death of Equities". Other telltale signs will be high dividend yields and low p/e's. We are years away from that and still have a nasty rising credit rate cycle in front of us.

When one door is closed another is open. Investing in precious metals, energy, agriculture, clean water, selective forex and materials will serve you well.

That being said, I pay my respects to Saint Jack. He is a great man and has done more for the individual investor than anyone I know. He is right on the money concerning indexing and low costs. Many kudos to him.

Jun 19 12:35 PM

[Asset Rotation:]

Buy and Hold is a terrible strategy! In up years it does fairly well. However, the downside risks are severe, even if one has bonds and an overall good asset allocation. There are multitudes of strategies that substantially outperform, such as the "Slice and Dice" formula. If one divides of the equity markets (Large Value, Small International Growth, etc) and then only invest in the top 6 areas, substantial improved returns can be obtained. Adding classes of bonds (short term, International, GNMA) then one shifts to bonds when the market goes down. Very simple. Works objectively. My returns have been 17% over the past 10 years. I am up utd 20% and annually 14%.

Buy and Hold is for suckers!

Equity Style

Jul 20 01:57 PM