Vanguard’s Jack Bogle: Investors Take Heed… A Financial Crisis is Imminent
by Dr. Mark Skousen, Contributing Editor
Monday, May 3, 2010: Issue #1251
“If we do nothing, we’re headed for a real crisis.” – Jack Bogle
Jack Bogle is 81 years old, but he still doesn’t pull any punches.
I visited him at his headquarters outside Philadelphia – and it didn’t take long before he expressed some strong opinions about Wall Street…
Jack Bogle’s Had “Enough” of Wall Street
For starters, Jack Bogle is madder than hell about the recent troubles on Wall Street. Specifically, that includes excessive compensation at Goldman Sachs (NYSE: GS) and speculation from the likes of John Paulson, who’s profited from contrived doom-and-gloom investments (for example, on the real estate collapse).
Citing Teddy Roosevelt, Bogle argues that “rank speculation” is bad. “If you’re adding value in society, the sky’s the limit. Bill Gates can earn all he wants, but when John Paulson makes $3 billion shorting the real estate markets, that’s enough.” (Bogle recently wrote a book called Enough.)
Bogle continues: “Wall Street doesn’t lose. Speculation on Wall Street subtracts value from our society. It’s a gamble, like Las Vegas, pitting one investor against another.”
As such, Bogle sees little value in trading or speculating by hedge funds or day-traders. He said the $6 trillion in trading by Wall Streeters every decade is a “real waste of the nation’s resources. It makes no useful contribution to society. When I came into this business in 1950, the turnover on the NYSE was 25%, now it’s 250%.”
And he was critical of Fidelity funds, a competitor, for hyping its returns and encouraging short-term trading.
I countered that speculators and traders offer a vital benefit to Main Street by raising much needed financial capital for new companies (IPOs). But Bogle, known as the “conscience of Wall Street,” would have none of it. His only hero is the long-term investor (Vanguard’s primary customer).
As founder of the Vanguard Group of funds, his investment company is famous for providing low-cost investing (the annual expense ratio of Vanguard funds is only 20 basis points). Established in 1975, the Vanguard S&P 500 Index Fund is also the largest mutual fund in the country, with a combined value of $150 billion. The Vanguard Group as a whole manages over $1.3 trillion.
But the fact that turnover has catapulted so much and the cost of doing business on Wall Street has fallen sharply is arguably something that Vanguard has contributed to. Because of the financial revolution, bid-ask spreads and commissions are at historic lows.
So how should you invest in this new era?
Jack Bogle Says to Keep it Simple… And Invest According to Your Age
Overall, Jack Bogle is optimistic about America. And while he likes President Obama, he’s worried about a looming financial crisis, due to excessive deficits and unfunded liabilities:
“He inherited most of this mess from Bush, but listen, if we do nothing, we’re headed for a real crisis.”
To solve the deficits, he urged “strong medicine” – for example, raising taxes, including a $1 gasoline tax, and reducing benefits.
From an investment standpoint, I asked Bogle about putting money into various asset classes, such as bonds, growth stocks, foreign investments, real estate and gold. Specifically, I mentioned David Swenson’s strategy and Alexander Green’s Gone Fishin’ Portfolio – both of which have proved very successful recently.
Bogle likes the idea of a simple mix of bonds and stocks. He suggested that the percentage of bond holdings should equal your age. For example:
- If you’re 30, then 30% should be in bonds, 70% stocks.
- If you’re 80, then 80% should be bonds, 20% in stocks.
But otherwise, he’s skeptical about adding real estate, gold and other exotic investments to one’s portfolio. “I don’t like the idea of complex investing, other than simple stocks and bonds.”
So if you’re looking for the cheapest way to buy a broad-based index fund, consider:
Finally, I asked Jack Bogle about his lasting legacy and lesson in life. He responded quickly: “Character counts. I think I’ve made the world a little bit better for investors.” Indeed, he has.
Good investing – AEIOU,
Mark Skousen
Any investment contains risk. Please see our disclaimer.
11 Responses to “Vanguard’s Jack Bogle: Investors Take Heed… A Financial Crisis is Imminent”
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Its appropriate that my name is poo because that’s what i think of the above. I just checked this guys mutual fund. VFINX is 109.43 with a 2.86 yield. Excuse me but i think i can do better than that.
As curt and sharp as his replies were he added no value to the argument either that you should go ‘long,’ except that because people are shorting the market its affecting his overall profit share. Just because he’s figured out which charities and sons and pet causes he wants to donate in the name of doesn’t mean that his ‘interview’ is worth any more than my name.
Shorting is legitimate. It’s one way the average investor makes money these days. What should be made illegal is the secret insider info that enables people to leverage options to make trades like $17 billion in shorting the real estate market.
How has this guy donated anything to society? He just opened up a mutual fund… Big deal. Character may count but narrow-mindedness was never a major plus in anyone’s book.
PS. I’m doing well on my buy and holds. Thanks. It’s my main strategy and although i don’t short, i respect anyone who does as they need to earn a living too.
PPS. Who the hell invests in bonds? Apart from china?
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I wonder if Mr. Bogle addressed the opinion of some that our SSA account value should be considered as part of the “bonds” portion of our allocation, or if others might comment on that.
I’ve read advice that our annual SS income should be regarded as equivalent to an investment paying a current “typical” interest rate. For example, if annual SS income were $12,000, and current market rate interest were 1% (for simplicity), that $12k might be considered equivalent to having $1.2M in “bonds”, and should be included in the asset-allocation calculation.
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I liked the article, but when Bogle mentioned he liked Obama and placed the blame for our financial situation on Bush – that shows either naivete or extreme partisanship. The Democratic Congress has their fingerprints all over the current financial crisis. The Republicans certainly deserve some of the blame, but not all of it. And Obama certainly appears to be no advocate of free market capitalism.
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YOU HAVE A SENTENCE IN BOGLES COMMENTS THAT I CANT BEGIN TO UNDERSTAND.
‘But the fact that turnover has catapulted so much and the cost of doing business on Wall Street has fallen sharply is arguably something that Vanguard has contributed to.’
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I like the words:
Character counts.
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The guy is washed up. Markets have changed and he is stuck in the past. I see he is a liberal and that raises a big red flag right there. Levying taxes while playing along with the Obama regime is no icon investor in my book. I read enough, NEXT…
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I admire Mr. Bogle for taking a stand. I admire my elders (I am 63), but I do not swallow: hook, line and sinker. I could never follow one political party to the end of time. Too much ado blaming George Bush and far be it from me to encourage raising taxes. People got sick of mutual funds hemming themselves in by their own short-sighted objective. People got tired of seeing their fortunes build and erode by one-way street funds. They want you to put together a herd of these funds, and call it diversification. How about providing freedom in the objectives of the fund and actively managing it for a change?
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“It is a real waste of the nation’s resources. It makes no useful contribution to society”
This statement by Mr Bogle has to be heard by the western world particularly its leaders.
What goes on in Wall St and most western banks is basically robbing one another and the best robber wins ie Goldman Sachs John Pauson etc etc these people create no wealth
The simple mantra “Give credit where credit is due’ has to be the new or should I say real mantra for our western economies. Where is it due ? Its due to any enterprising person or company who produce goods and services that society needs
Yours sincerly
Neil Mc Dermott
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I found the article to be less… It’s understandable for this man to prefer ‘buy and hold’, that’s what made Vanguard, but those days are gone. To lay the blame at the foot of GW Bush is beyond partisan, both parties share the blame. And, finally, raising taxes remains the single minded mantra of the democrats. Why not champion cutting spending.
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How has buy-and-hold done for the Japanese retail consumer?
We are looking more and more like Japan.
Time to change strategies…
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Can someone shed some light on the whereabouts of an Investment U newsletter (9/22/11 ?), which talked about the 0.001% of the population making about 94% of the nation’s wealth and the Wall Street folks set to profit immensely through capitalism’s new frontier, the Derivatives market?
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