Vanguard's Jack Bogle: Investors Take Heed... A Financial Crisis is Imminent

by Mark Skousen

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:

  • The Vanguard S&P 500 Index Investor (VFINX)
  • Or the Vanguard Total World Index Investor (VTWSX).

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

comments powered by Disqus