Sunday, October 18, 2015


Last week, the Mrs. and I attended a series of financial seminars in Philadelphia, at what's come to be known as the "Bogleheads" annual get-together.

Among questions covered: How does a person invest money for retirement? What does a person invest in? What's the American economy going to be doing in the years ahead? Here are some answers given by Vanguard founder Jack Bogle, former Vanguard chief financial officer Gus Sauter, and financial gurus Bill Bernstein and Rick Ferri:

John C. Bogle on asset allocation:

Vanguard's Total Bond Fund is, I think, too heavy on government bonds. When I set it up, bonds were paying over 7% and it seemed fine. Now interest rates are 2%, and I think it's advisable to have more short term and some intermediate term corporates.

Regarding stocks, I don't believe anyone needs to invest in foreign equities. Foreign countries are 50% of large U.S. companies' markets, so if somebody invests in Vanguard's Total Stock Market or the S & P 500, they get exposure to non U.S. markets that way.

People ask if Japanese investors would be advised to invest in their home market the way I suggest Americans do in the United States, but there's a big difference the two countries. The U.S. has an economy that has the most robust entrepreneur ship, the most transparency and strong laws protecting private property. Japan's economy is nothing like the United states'. It's structure, controlled and much more "top down" and command-orented than the U.S. economy is. ...

Gus Sauter on investments and the American economy:

Stock markets don't necessarily increase at the rate of a country's Gross Domestic Product growth. Over the last century, the American economy grew at twice the rate of the United Kingdom's, yet both Britain's and the United States' equity markets returned 10.1%.

A major reason American Gross Domestic Product (GDP) isn't growing fast is demographics. Baby Boomers (people born between 1946 and 1964) are leaving the work force; many are past their peak earning years, and since they're a huge segment of the population, it impacts economic growth. Generation X, those born from the mid 1960s to the late 1970s, are now in their highest earning years but the group is not large relative to Baby Boomers. This contributes to the slower growth of the economy.

Generation Y (late 1970s to middle 1990s) is a much larger population segment, larger than the baby boom generation (71 million to 65 million), but the group has not yet reached its peak earning years. When it does, the economy will expand at a faster rate. ...

William J. Bernstein on tilting to Small Cap and Value equities:

In the past, tilting to U.S. Small Cap stocks in your portfolio, and tilting to Value brought investors higher returns over time. Of late, however, investors' money has been pouring into Small Cap and Value and so I don't think these market segments will outperform Large Cap by much in the future, maybe a half or one percent over time, if investors are lucky.

The game is now very small ball.

Going forward, Small Cap and Value premiums will, I think, be found in Emerging Markets. Investors might be looking at a five percent premium there, and perhaps a two to three percent premium in international developed economies. ...

Rick Ferri on saving, asset allocation and investing in foreign markets:

... Let's step back and look at the three legs on a successful index investing stool. They are philosophy, strategy and discipline.

Philosophy is your belief about how to achieve the returns you need to make your life easier. Do you believe you can outperform the markets with market timing or security selection, or do you believe you're better off getting a fair share of market return through a sensible long-term asset allocation and low-cost market matching funds? ...

Strategy is how you implement the philosophy. Here, we are all different. My portfolio is different than your portfolio. The asset allocation and security selection is based on each of our own individual needs and in some cases our desires and beliefs. Jack Bogle would prefer to get his international exposure through US stocks. I prefer to use between 30-40 percent in international unhedged equity. Who is right and who is wrong? Who cares! It doesn't matter much because it's the allocation to stocks and bonds, broad diversification and low fees that matters most. To use foreign or not use foreign isn't the cake, it's the icing on the cake.

... The third leg to all this is Discipline. This is the ability to implement your strategy and maintain though all market conditions. You can do this only when your philosophy is pure. You keep your philosophy pure by continuing education. ...

My take-away from everything I heard is, broad asset allocation is the most important aspect of investing. How much you put into stocks, how much you put into bonds, and how much you save over the course of your career are the most important things.

Everything else -- the tilts, the rebalancing, -- is just icing on your pile of assets.

Here's a write-up from the Bogleheads meeting from a year ago. Not much has changed.


Kevin Koch said...

So if Vanguard's VBFMX isn't the ideal bond fund any more, what does Jack suggest instead?

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