Jack Bogle is a living hero to many of us who want more and better investment opportunities for all investors. Of course, he founded the Vanguard family of mutual funds, but he has also been a tireless advocate of mutual funds since he stopped working full time. The last time I spoke with him was for an interview I did for a book on mutual funds. At that point, he was pacing around in a hospital room waiting to go in for heart transplant surgery. He is still alive and well over a decade later, so his surgeon must have done an incredible job.
Jack is still positive on bonds, as this column from Chuck Jaffe indicates. But there is also a surprising statement from him when it comes to returns on stocks.
Bogle’s not afraid of bonds (MarketWatch.com, June 6, 2010, Chuck Jaffe)
…Asked to forecast returns for stocks and bonds, Bogle said that over the next decade — the shortest time period he ever cares to discuss — stocks should carry their weight, though not without stumbles.
Effectively, Bogle said he believes an annualized average gain of 7% is reasonable in stocks over the next decade, while he expects bonds — a mix of corporates and Treasurys — to yield about 4.5%.
“Stocks should get the nod, but only if you can afford to fight your way through the turbulence that you will see in the coming decade,” Bogle said.
…”I do not believe that we should rethink the old principles of asset allocation,” Bogle said in the Morningstar interview. “You know, it’s fine to say, ‘Be opportunistic,’ and expand the list of your diversification options into commodities or gold or private equity or whatever else it might be. I don’t happen to buy that.
That’s an interesting perspective from Jack Bogle. Essentially, he is arguing for a fairly simple asset mix allocated to stocks and bonds. He also suggests someone consider an age-based asset allocation with the commitment to stocks going down as the investor ages. He goes on to fine tune that point a bit though.
“I would emphasize an asset allocation that begins with this crude rule of thumb of having your bond position equal to something relating to your age,” Bogle said. “So if you’re 60 — 60% bonds.”…Bogle did have his caveats on how to properly calculate the asset allocation, even using his simple age-based formula.
“You’ve got to take all of your assets into account when you figure that asset allocation,” he explained, “because for example, your Social Security investment, when you’re say 60 or 65, has a capitalized value of something like $300,000, and it’s going to continue to pay. It may pay a little bit less. I hope we can solve that problem, but it’s not going to go away.
What he means by this comment on Social Security is that it functions like an income investment worth a fair amount for most Social Security recipients.
“And so, if you have $100,000 to invest, I don’t see why you would not put it all in stocks at that stage of your life. That would be 25% then in equities and 75% in effect fixed income with an inflation hedge [via Social Security]. It’s a good investment.”…
In this example, Bogle is using the stream of income one receives from Social Security as an income investment with a value of $300,000. So, for an investor with an additional $100,000 to invest outside of Social Security, he is suggesting that would all go to stocks, giving a 75% income weighting and a 25% equity weighting.
Even though he does not say this in the quoted excerpt, knowing Jack, I’m sure he means that this $100,000 would have to be money that is for long-term investing. This would be separate from any cash holdings such as a ‘rainy day’ fund you might have for short-term needs.
Update: Just read a transcript of an interview Jack Bogle did with Jason Stipp of Morningstar (see here). In it, he fleshed out his thoughts on the fixed income markets. Here is what he said:
…Well, first let me observe, there are not a lot of places to hide. If you don’t like fixed-income investments like bond funds, or municipal, corporate bond funds, government bond funds, U.S. Treasury bond funds, or municipal bond funds, that leaves money market funds. And the yield on money market funds today is probably something like a tenth of one percent, or maybe two tenths of one percent. So, following the old rule, it will take 360 years to double your money at that rate. That’s a long time.
So you have to do something, and you have to do something that will be more or less durable. So my response would be, first, I’m nervous about the fixed income markets, and therefore I would not use long maturities. In the long run, as everybody should know, the long maturities having the highest yield will pay the highest return. But on the other hand, they fluctuate much more widely.
And so, I’d say some combination of maybe one half short term bonds, or limited term, a little longer than short term, or in intermediate terms. In other words, half in short and limited, and half in intermediate term, which should give you some reasonable income, and should enable you to ride with these fluctuations that are sure to come, I think, in the bond market…
So, he’s not really bullish on bonds, but believes they are worth holding as long as you are careful. That makes sense to me, although I still think intermediate term bond funds are the sweet spot for income investing.
Disclosure: No positions