By John Wasik
CHICAGO Aug 20 Some eight years ago, I was at a
presentation by Vanguard founder Jack Bogle at a business
journalists' conference in Denver, and when his PowerPoint
crashed, and he had to use transparencies on a vintage
20th-century overheard projector. After the presentation, he let
me keep them, and they still serve as a sort of Rosetta Stone
for me for enlightened investing.
The slides outlined some truths in the fund business, ones
that are well known but little heeded by investors: Hot money
chases bubbles and gets in and out at the wrong times; investor
net returns are lower than what most people think, and the
outsized disparity between fund asset sizes and performance.
Larger, actively managed funds don't often produce better
returns at a lower cost.
Bogle, as the Godfather of index investing, has ideas that
are timeless and based on simple math, and at the same time
exhibit uncommon sense and a routinely overlooked view of how
investors are consistently overcharged by the financial services
industry. Fortunately, his wisdom is widely available to
Much of that wisdom has been assembled in Bogle's most
recent book "The Clash of the Cultures: Investment vs.
Speculation (Wiley, 2012)." While most of the insights are
time-honored themes in the Bogle canon, they are very useful for
1. Cost matters everywhere
This has been Bogle's mantra for decades. It emerged as an
idea in his senior thesis at Princeton in 1949 and was one of
the seeds for the creation of the Vanguard Group (Disclosure: My
retirement portfolio is mostly in Vanguard funds).
His formula is simple: "gross market return. minus the cost
of financial intermediation is the net return."
Boiled down, that means what you keep is the return of the
investment, minus all of the fees managers and other middlemen
load into your account. The math is always compelling. When the
progressive think tank Demos did a study on 401(k)s earlier this
year, it found that in the long run, the average stock mutual
fund earns 7 percent, roughly matching the return of the stock
market. When all fees were subtracted, however, the net return
dropped to 4.5 percent. Expenses ate up one-third of returns, or
about $155,000 over the working life (from 1965 to 2005) of an
Bogle says you can always cut costs to boost returns, as
nearly every mutual fund group offers low-cost index funds.
Don't buy them through a broker and make sure they represent all
asset classes (stocks, bonds, REITs, commodities) in your
retirement plan. He writes: "If beating the market is a zero-sum
game before costs, it's a loser's game after costs are
2. Speculation costs everyone
By Bogle's calculation, some 99.2 percent of the market is
speculation-oriented trading, as opposed to investment where
firms and individuals hold positions for years instead of
nanoseconds. With robotic-trading machines and algorithms ruling
the roost, does the little guy stand a chance?
Don't try to beat the speculators, who have a casino
mentality, Bogle advises. Invest in the intrinsic "enterprise"
value of companies and reap their dividends. Find low-cost
indexes that represent everything from large companies to
start-ups. Bogle found that this kind of passive investing beat
active trading by 1.2 percentage points from 1976-2011. Trading
costs are embedded in lower returns of actively managed funds,
but not added into the expense ratio.
If you dig hard enough, you can find this expense, but it's
difficult. Demos estimates that the average trading cost for
retirement funds in 401(k)s is 1.2 percent. That's in addition
to 1.27 percent annually for other expenses. So you're often
taking a 2.4-percent haircut every year before you even see an
investment return. "In the long run, investors win and
speculators lose," Bogle writes.
3. The basic rules don't change
Bogle says fund managers may have lucky years, but
eventually their returns revert to the market average. There's
always risk in the securities market, so don't increase it by
trying to time the market. Adjust your stock allocation as you
get older - the percentage of bonds you own should roughly match
your age. Don't invest based on last year's returns.
Even as the headlines trumpet any number of financial
maladies and economic turmoil, Bogle is a voice of calm. "As the
financial markets swing back and forth, do your best to ignore
the momentary cacophony, and to separate the transitory from the
durable. This discipline is best summed up by the most important
principle of all investment wisdom: Stay the course!" Bogle
After all of this, what, you may ask, is "the course?" Start
with an investment policy statement that puts in writing your
goals, risk tolerance and allocation. If you can't go it alone,
work with a fiduciary adviser or planner who doesn't buy and
sell investments - they only provide advice and guidance. Then
find or create a portfolio that's right for you. There are
simple, pre-fab "lazy" portfolios at bogleheads.org, a website
that offers "Investing advice inspired by the example of Jack
As an investor who can make a difference by lowering
investment costs and eschewing speculation, you won't be able to
entirely defeat the "happy conspiracy" that Bogle says has been
milking investors for decades. Yet if enough people run the
numbers, take action and "stand up and be counted," you won't be
a victim, you'll be a successful investor.