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Originally published Saturday, November 22, 2014 at 8:00 PM

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Advice from indexing’s patron saint, Jack Bogle

At age 85, Jack Bogle’s not about to change his ways now, not because he’s past learning new tricks or adjusting his thinking, but because decades of being right have created an unshakable courage in his convictions. Here are some things that he has learned.


Syndicated columnist

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If stock marketflip-flops scare you, Jack Bogle has some advice on how to tackle what’s about to happen next: Close your eyes.

Bogle, the founder of the Vanguard Group, the world’s largest investment company, and patron saint of low-cost, long-term index investing, has not changed his tune in the 40-plus years since he started the company.

At age 85, Bogle’s not about to change his ways now, not because he’s past learning new tricks or adjusting his thinking, but because decades of being right have created an unshakable courage in his convictions.

Many of his disciples have that Bogle’s audacity, but he laments the financial fortunes of all the people who haven’t gotten the message yet.

Recently, Bogle did a two-part interview on my radio showmoneylifeshow.com, and while he did not break much new ground, it’s always worth plowing important territory with someone who knows the lay of the land. Here are some highlights:

On markets: “What’s going on in the market is domination of short-term speculation over long-term investment,” he said. “Long-term investors simply are not affected by the comings and goings of the market.

“As I have said before, the daily machinations of the stock market are like a tale told by an idiot, full of sound and fury, signifying nothing,” Bogle added. “One of my favorite rules is ‘Don’t peek.’ Don’t let all the noise drown out your common sense and your wisdom. Just try not to pay that much attention, because it will have no effect whatsoever, categorically, on your lifetime investment returns.”

On why investors should ignore the noise and just aim for the index return over a lifetime: “Returns are created not by the stock market, they are created by U.S. business, our corporations,” he explained. “The formula I use for that is today’s dividend yield, which is around 2 percent, and the subsequent earnings growth which could be around 5 percent — we’re not sure, but that’s probably not a bad guess — and that’s a 7 percent nominal rate of return on stock in terms of fundamentals.

“If you go back and look at the history of American business over the last century, you will find the (price/earnings) effect of stocks is zero. All of the returns are created as investment returns, dividend yields and earnings growth, and P/E effect — the speculative return — goes up and goes down and goes up and down for 100 years and ends up just where it started.

“So try to ignore these machinations and stick with getting the underlying returns that provide stocks as a good investments,” Bogle said.

On how bond investors should look at the potential for interest rates to rise (several years ago, Bogle warned of a building bond bubble): “When you talk about bond investors getting hurt when bond yields start to rise, the answer to that is really yes and no. Certainly yes, absolutely, on a short-term basis, but you shouldn’t be investing in bonds on a short-term basis.

“Use the intermediate maturity around 10 years exemplified by the high-quality 10-year U.S. Treasury note,” he added. “Basically today you are entering into a contract with the Treasury to give you 2.2 percent every year for the next 10 years. The Treasury will be good for that; there’s no risk in that deal falling apart that I can see. The price of that Treasury (note) will drop a lot if rates will go up, however if you are reinvesting your income, you will have a higher total return over the 10-year period. So in a certain respect if you can stand the pain, we all should want rates to go up.”

On exchange-traded funds: “They’re fine just so long as you don’t trade them,” Bogle said. “It’s the ability to trade that distinguishes them (from a traditional index fund), and then there is the kind of Looney Tune section of the ETF market pursuing things that no investor should ever do. ... Anybody who plays that kind of game (using leveraged or niche products) is a damned fool.

“The ETF is the greatest marketing innovation of the 21st century so far. Whether it’s the greatest investment innovation of the 21st century so far, I can’t imagine. I think it’s counterproductive.”

Advice for investors who can’t be satisfied with shutting their eyes, doing nothing and letting indexing work in their favor: “Divide your money into your long-term investment account and your funny-money account for short-term speculation. Guess on funds, guess on markets, guess on stocks if you want to, because that gives you an opportunity to act on your speculative impulses.

But they will hurt you a lot so I recommend you have a funny-money account of no more than 5 percent of your portfolio. I also recommend that after five years, check it out. Has it done better than the long-term investment or worse? I’d be astonished if at least 95 percent of those funny-money accounts don’t do worse.”

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com or at P.O. Box 70, Cohasset, MA 02025-0070.Copyright 2014, MarketWatch



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