Investment Advice From Mutual Fund Legend John C. Bogle
John C. Bogle is founder, former chief executive and former chairman of Vanguard Group. Inc., one of the largest mutual fund groups in the world. He helped create the first index mutual fund in 1975. He is president of Bogle Financial Markets Research Center in Malvern. Pennsylvania. In 2004, Time named Bogle one of the 100 “Most Influential People in the World,” and in 1999, Fortune named him one of four “investment giants of the 20th century.
For four decades, Vanguard founder John C. Bogle has been a hero to small investors. He also has been a gadfly to the mutual fund industry which, he says, too often charges fees that are too high while delivering lackluster performance. Bogle, 77, has remained active on mutual fund issues since he retired from Vanguard in 1999. He lobbied in Washington, DC. for tighter regulation of mutual fund advertising and recently authored his sixth book, The Little Book of Common Sense Investing (Wiley).
Bottom Line/Personal asked Bogle to expand on his recent warnings to investors that danger signs surround the US economy and that investment returns will drop. He also discussed how investors can prepare for the future…
How do you expect stocks to perform in the next several years?
I predict annualized returns of 7% to 8% for the Standard & Poor’s 500 stock index over the next decade. 1 know that’s not what investors want to hear, and it’s certainly not what stockbrokers will tell them. But I base my predictions on the numbers, which I call the “relentless rule of humble arithmetic.”
Stock market returns are created by the growth of actual businesses. In the past century, those businesses have paid dividends averaging 4.5% of stock prices, and their earnings have grown an average of 5% - a total of 9.5% per year. However, since 1980. the S&P 500 - my proxy for the market - has provided total returns of 12.5% a year. Those extra three percentage points each year reflect a premium in the price investors were willing to pay for each dollar of earnings. That increase has kept returns artificially inflated for a long, long time. In effect, investors were convinced each year that the US economy would continue to do better and better.
Why can’t returns remain high for many years to come?
There are two basic reasons. First, even if companies continue to grow their earnings at the long-term average of 5% per year, their dividend yields - which are part of total returns - are nowhere near 4.5% now. In fact, they average less than 2%.
Second, the current price-to-earnings ratio (P/E) is about 18. To continue to get annualized returns of 12.5% a year from stocks, the market’s P/ E would need to rise to 25. That’s just not sustainable. It wasn’t sustainable back in the giddy days of 1999, and it won’t be sustainable over the next decade.
How can fund investors prepare for years of lower returns?
For starters, they should control what they have control over when choosing mutual fund investments - costs, expense ratios and tax efficiency.
Next, consider having a large chunk of foreign equity in the portfolio. I’m well known for ignoring overseas investments - I thought they were too expensive and too full of speculative accounting practices. However, I’m worried about the US economy now - our excessive borrowing for costly wars, an underfinanced pension system and the dollar’s weakness. In the next few years, I’m planning to put as much as 20% of my equity holdings into foreign stocks. That includes 10% in developed countries and 10% in emerging markets.
Third, don’t equate simplicity with stupidity. Warren Buffett likes to say that for investors as a whole, returns decrease as motion increases. In other words, more trades won’t necessarily boost returns. In fact, the less trading investors do, the better off they tend to be.
How do you pick investments?
I allocate my assets in such a way that I have to peek at how they are doing only once a year, and I probably won’t change that formula for the rest of my life. It provides decent returns in both good and bad market years.
My portfolio now includes 60% equities and 40% bonds. In the equity portion, I have 80% in Vanguard Total Stock Market Index Fund (VTSMX) and 20% in several other Vanguard funds, including Explorer (small-cap growth stocks, VEXPX)…PRIMECAP (large-cap blend of growth and value stocks, VPMCX)…Wellesley Income (high-yielding stocks and bonds, VWINX)… Wellington (stocks and bonds, VWELX)…and Windsor (large-cap value stocks, VWNDX). In the bond portion, I have 50% in Vanguard Total Bond Market Index Fund (VBMFX) and 50% in Vanguard Intermediate Term Tax Exempt Fund (VWITX).
You favor index funds, but indexing peaked at about 10% of all mutual fund assets in 2000. Why hasn’t its popularity grown?
Broad stock market returns have not been great, so people are not content to just match broad indices by investing in traditional index funds. There are new index funds that give more weight to small-cap and value stocks, which have had a stellar run for the past seven years - but they don’t have enough of a track record to attract many investors.
I don’t think traditional index funds need to be fixed - they’re not broken. Not only do they work beautifully in hull markets, but they also hold up well in periods of modest returns, when investment management fees, transaction costs and taxes take a disproportionate bite out of most funds. These costs don’t take as much out of index funds, because they trade less frequently.
Even though S&P 500 index funds have returned only 8.3% per year this decade, on average, they have beaten 69% of all large-cap funds. And as foreign stocks beat domestic stocks over the past five years the Vanguard Total International Stock Index Fund (VGTSX) beat 90% of the funds in its category.
But there are still plenty of actively managed funds doing much better than index funds.
Agreed, but will the managers responsible for superior returns stick around for the next 10 years? Will the funds become so popular that they get bloated and their returns revert to the mean?
I tell investors who are sick of hearing me tout the benefits of index funds that they must, at least, be disciplined. Keep 95% of your portfolio in index funds, and use the rest to pick stocks or actively managed funds. Choose managers who invest in their own funds and I follow distinctive, long-term philosophies without hugging benchmarks.
Friday, November 14, 2008
Wall Street ends turbulent week sharply lower
Friday November 14, 6:19 pm ET
By Joe Bel Bruno and Sara Lepro, AP Business Writer
Stocks tumbles in volatile trade as investors cash in from big rally, refocus on economy
NEW YORK (AP) -- Wall Street ended a turbulent week with another astonishing show of volatility Friday, with stocks plunging, recovering and then plunging again as investors absorbed another wave of downbeat economic news. The Dow Jones industrials fell almost 340 points and the major indexes all fell sharply for the second straight week.
Hedge fund selling in advance of a Saturday deadline contributed to the market's gyrations, and some retrenchment was to be expected following a big rally Thursday, when the Dow rallied more than 550 points after falling near its lows for the year. But there was plenty of discouraging news for investors to focus on, including comments from Federal Reserve Chairman Ben Bernanke that the markets remain under "severe strain" and a sobering report on October retail sales.
Analysts believe the market is still searching for a bottom after last month's huge losses, and that the pattern of volatility will continue for some time -- selling, even on technical reasons like looming deadlines for cashing out hedge fund holdings, is still coming against a backdrop of an extremely weak economy.
"Clearly, the trading crowd like hedge funds can take this market in any direction they want to. Anybody looking to build a position is just not confident," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co.
The session saw another stream of bad news. Bernanke said during a speech in Frankfurt, Germany, that he would work closely with other central banks to try to alleviate the global financial crisis and left open the door to a fresh interest rate cut. The Fed is scheduled to meet Dec. 16 at its last regularly scheduled meeting this year.
While Wall Street would like to see another rate cut, many investors aren't sure, given the litany of bad economic and corporate news, of how effective a rate reduction would be in the near term. Many investors are still trying to assimilate the idea that the economy's downturn will be protracted, lasting well into next year and perhaps longer.
"The economic news continues to be very negative," said Ben Halliburton, chief investment officer of Tradition Capital Management. "The realization that '09 is going to be a very bad year for economic activity is starting to dawn on people and they are starting to digest how bad it's going to be."
The Commerce Department reported that retail sales plunged by the largest amount on record in October as consumers cut back on spending in the wake of the financial crisis. Retail sales fell by 2.8 percent last month, surpassing the old mark of a 2.65 percent drop in November 2001 in the wake of the terrorist attacks that year.
The market got more disappointing consumer news from retailers Abercrombie & Fitch Co. and JCPenney Co. Both warned that profits will come in below Wall Street's already lowered projections as retailers head into a holiday shopping season that could be among the slowest on record.
The great fear on the Street is that Americans' reluctance to spend will extend what is already a serious economic downturn. A barrage of negative consumer news sent stocks tumbling earlier in the week.
The market drew some brief comfort in the afternoon from comments from Treasury Secretary Henry Paulson, who told CNBC that capital injections in the banking sector will help stimulate lending. He also defended the decision to not buy toxic assets from banks, saying that it would not work as quickly; the move helped send stocks falling earlier this week.
There was disquieting news from the tech sector that weighed on the Nasdaq composite index. Sun Microsystems Inc. said it will cut up to 6,000 workers, or about 18 percent of global staff, as part of a massive restructuring plan. And handset maker Nokia Corp. warned the global economic slowdown will weigh on sales next year.
The Dow fell 337.93, or 3.82 percent, to 8,497.31, at its lows of the day. The Dow fell more than 300 in early trading, recovered to a slim advance and then turned sharply lower at the end of the day as hedge funds cashed out. Fund investors had a Nov. 15 deadline for withdrawing their money, which forced the funds in turn to sell stocks.
The Standard & Poor's 500 index fell 38.00, or 4.17 percent, to 873.29, and the Nasdaq stumbled 79.85, or 5.00 percent, to 1,516.85.
The Russell 2000 index of smaller companies fell 34.71, or 7.07 percent, to 456.52.
Declining issues outpaced advancers by about 4 to 1 on the New York Stock Exchange, where consolidated volume came to 5.73 billion shares, compared with 7.67 billion on Thursday.
For the week, the Dow lost 4.99 percent, the S&P fell 6.20 percent and the Nasdaq tumbled 7.92 percent.
The major indexes have fallen dramatically since their highs of October 2007 as the housing and credit crises have taken their toll on the economy. The Dow is down 40 percent from its closing record of 14,164.53, while the S&P 500 is off 44.2 percent from its record close of 1,565.15. The Nasdaq is off 46.9 percent from its then 7 1/12-year high of 2,859.12.
The Dow's surge Thursday was the third-largest single-session point gain on record, following the 889-point rise on Oct. 28 and the 936-point surge on Oct. 13. The rally came after three days of selling that wiped out about $1 trillion in shareholder value.
Wall Street's violent swings in recent weeks are part of the market's ongoing "bottoming" process, analysts say, in which the market retests the lows hit last month. The market is expected to remain volatile, as evidenced by past recoveries from a bear market.
Randy Frederick, director of trading and derivatives at Charles Schwab & Co., said the sell-off could be attributed in part to investors not wanting to hold on to stocks going in to the weekend, particularly ahead of a meeting of Group of 20 international leaders in Washington. The meeting could bring decisions on how to help the troubled global financial system.
"Certainly in this market we've had a lot of late Friday sell-offs," he said. "The government has been very insistent on making major announcements on Sunday nights."
Bernie McGinn, chief executive of McGinn Investment Management, said the market needs to have a sustained rally for a couple of days to lure buyers back into the market. For the moment, he believes the market will continue to fluctuate based on events like earnings or government reports.
"We're in the middle of chaos," he said. "That's what it is, pure and simple."
The volatility helped send government bond prices higher as investors looked for safety. The three-month Treasury bill's yield fell to 0.14 percent from 0.20 percent late Thursday, and the yield on the benchmark 10-year Treasury note fell to 3.72 percent from 3.85 percent late Thursday. Lower yields indicate higher demand.
Meanwhile, the price of a barrel of light, sweet crude fell $1.20 to settle at $57.04 a barrel on the New York Mercantile Exchange. Oil has been falling for the same reason as stocks -- the fear of a deep global recession.
Shares of major retailers fell as the string of disappointing earnings and outlooks continued. JCPenney lost $2.01, or 10.4 percent, to $17.27. Abercrombie & Fitch tumbled $4.65, or 20.7 percent, to a 52-week low of $17.79.
The dollar rose against other major currencies. Gold prices also rose.
Overseas, Japan's Nikkei closed up 2.72 percent and Hong Kong Hang Seng rose 2.43 percent. In European trading, London's FTSE 100 was up 1.53 percent, Germany's DAX rose 1.31 percent, and France's CAC-40 added 0.98 percent.
The Dow Jones industrial average ended the week down down 446.50, or 4.99 percent, at 8,497.31. The Standard & Poor's 500 index finished down 57.70, or 6.20 percent, at 873.29. The Nasdaq composite index ended the week down 130.55, or 7.92 percent, at 1,516.85.
The Russell 2000 index finished the week down 31.73, or 5.90 percent, at 505.79.
The Dow Jones Wilshire 5000 Composite Index -- a free-float weighted index that measures 5,000 U.S. based companies -- ended at 8,721.88, down 636.42 points, or 6.80 percent, for the week. A year ago, the index was at 14,727.28.
By Joe Bel Bruno and Sara Lepro, AP Business Writer
Stocks tumbles in volatile trade as investors cash in from big rally, refocus on economy
NEW YORK (AP) -- Wall Street ended a turbulent week with another astonishing show of volatility Friday, with stocks plunging, recovering and then plunging again as investors absorbed another wave of downbeat economic news. The Dow Jones industrials fell almost 340 points and the major indexes all fell sharply for the second straight week.
Hedge fund selling in advance of a Saturday deadline contributed to the market's gyrations, and some retrenchment was to be expected following a big rally Thursday, when the Dow rallied more than 550 points after falling near its lows for the year. But there was plenty of discouraging news for investors to focus on, including comments from Federal Reserve Chairman Ben Bernanke that the markets remain under "severe strain" and a sobering report on October retail sales.
Analysts believe the market is still searching for a bottom after last month's huge losses, and that the pattern of volatility will continue for some time -- selling, even on technical reasons like looming deadlines for cashing out hedge fund holdings, is still coming against a backdrop of an extremely weak economy.
"Clearly, the trading crowd like hedge funds can take this market in any direction they want to. Anybody looking to build a position is just not confident," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co.
The session saw another stream of bad news. Bernanke said during a speech in Frankfurt, Germany, that he would work closely with other central banks to try to alleviate the global financial crisis and left open the door to a fresh interest rate cut. The Fed is scheduled to meet Dec. 16 at its last regularly scheduled meeting this year.
While Wall Street would like to see another rate cut, many investors aren't sure, given the litany of bad economic and corporate news, of how effective a rate reduction would be in the near term. Many investors are still trying to assimilate the idea that the economy's downturn will be protracted, lasting well into next year and perhaps longer.
"The economic news continues to be very negative," said Ben Halliburton, chief investment officer of Tradition Capital Management. "The realization that '09 is going to be a very bad year for economic activity is starting to dawn on people and they are starting to digest how bad it's going to be."
The Commerce Department reported that retail sales plunged by the largest amount on record in October as consumers cut back on spending in the wake of the financial crisis. Retail sales fell by 2.8 percent last month, surpassing the old mark of a 2.65 percent drop in November 2001 in the wake of the terrorist attacks that year.
The market got more disappointing consumer news from retailers Abercrombie & Fitch Co. and JCPenney Co. Both warned that profits will come in below Wall Street's already lowered projections as retailers head into a holiday shopping season that could be among the slowest on record.
The great fear on the Street is that Americans' reluctance to spend will extend what is already a serious economic downturn. A barrage of negative consumer news sent stocks tumbling earlier in the week.
The market drew some brief comfort in the afternoon from comments from Treasury Secretary Henry Paulson, who told CNBC that capital injections in the banking sector will help stimulate lending. He also defended the decision to not buy toxic assets from banks, saying that it would not work as quickly; the move helped send stocks falling earlier this week.
There was disquieting news from the tech sector that weighed on the Nasdaq composite index. Sun Microsystems Inc. said it will cut up to 6,000 workers, or about 18 percent of global staff, as part of a massive restructuring plan. And handset maker Nokia Corp. warned the global economic slowdown will weigh on sales next year.
The Dow fell 337.93, or 3.82 percent, to 8,497.31, at its lows of the day. The Dow fell more than 300 in early trading, recovered to a slim advance and then turned sharply lower at the end of the day as hedge funds cashed out. Fund investors had a Nov. 15 deadline for withdrawing their money, which forced the funds in turn to sell stocks.
The Standard & Poor's 500 index fell 38.00, or 4.17 percent, to 873.29, and the Nasdaq stumbled 79.85, or 5.00 percent, to 1,516.85.
The Russell 2000 index of smaller companies fell 34.71, or 7.07 percent, to 456.52.
Declining issues outpaced advancers by about 4 to 1 on the New York Stock Exchange, where consolidated volume came to 5.73 billion shares, compared with 7.67 billion on Thursday.
For the week, the Dow lost 4.99 percent, the S&P fell 6.20 percent and the Nasdaq tumbled 7.92 percent.
The major indexes have fallen dramatically since their highs of October 2007 as the housing and credit crises have taken their toll on the economy. The Dow is down 40 percent from its closing record of 14,164.53, while the S&P 500 is off 44.2 percent from its record close of 1,565.15. The Nasdaq is off 46.9 percent from its then 7 1/12-year high of 2,859.12.
The Dow's surge Thursday was the third-largest single-session point gain on record, following the 889-point rise on Oct. 28 and the 936-point surge on Oct. 13. The rally came after three days of selling that wiped out about $1 trillion in shareholder value.
Wall Street's violent swings in recent weeks are part of the market's ongoing "bottoming" process, analysts say, in which the market retests the lows hit last month. The market is expected to remain volatile, as evidenced by past recoveries from a bear market.
Randy Frederick, director of trading and derivatives at Charles Schwab & Co., said the sell-off could be attributed in part to investors not wanting to hold on to stocks going in to the weekend, particularly ahead of a meeting of Group of 20 international leaders in Washington. The meeting could bring decisions on how to help the troubled global financial system.
"Certainly in this market we've had a lot of late Friday sell-offs," he said. "The government has been very insistent on making major announcements on Sunday nights."
Bernie McGinn, chief executive of McGinn Investment Management, said the market needs to have a sustained rally for a couple of days to lure buyers back into the market. For the moment, he believes the market will continue to fluctuate based on events like earnings or government reports.
"We're in the middle of chaos," he said. "That's what it is, pure and simple."
The volatility helped send government bond prices higher as investors looked for safety. The three-month Treasury bill's yield fell to 0.14 percent from 0.20 percent late Thursday, and the yield on the benchmark 10-year Treasury note fell to 3.72 percent from 3.85 percent late Thursday. Lower yields indicate higher demand.
Meanwhile, the price of a barrel of light, sweet crude fell $1.20 to settle at $57.04 a barrel on the New York Mercantile Exchange. Oil has been falling for the same reason as stocks -- the fear of a deep global recession.
Shares of major retailers fell as the string of disappointing earnings and outlooks continued. JCPenney lost $2.01, or 10.4 percent, to $17.27. Abercrombie & Fitch tumbled $4.65, or 20.7 percent, to a 52-week low of $17.79.
The dollar rose against other major currencies. Gold prices also rose.
Overseas, Japan's Nikkei closed up 2.72 percent and Hong Kong Hang Seng rose 2.43 percent. In European trading, London's FTSE 100 was up 1.53 percent, Germany's DAX rose 1.31 percent, and France's CAC-40 added 0.98 percent.
The Dow Jones industrial average ended the week down down 446.50, or 4.99 percent, at 8,497.31. The Standard & Poor's 500 index finished down 57.70, or 6.20 percent, at 873.29. The Nasdaq composite index ended the week down 130.55, or 7.92 percent, at 1,516.85.
The Russell 2000 index finished the week down 31.73, or 5.90 percent, at 505.79.
The Dow Jones Wilshire 5000 Composite Index -- a free-float weighted index that measures 5,000 U.S. based companies -- ended at 8,721.88, down 636.42 points, or 6.80 percent, for the week. A year ago, the index was at 14,727.28.
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