09 Jack Bogle on Asset Allocation and Market Collapse (2014)

we seem to come down to a for most investors an idea that something like 65% stocks 35% bonds is intelligent allocation now we had we no stocks or almost certain to do better in the long run just because of the nature of the capital markets and so we've already said we want to do something to give us a little you know anchor to windward dry powder call it what you will to protect you against behavioral mistakes and to give you some stability in your account and usually more income although not much more today and so if it's 6535 and for whatever sound reason on emotional reason you can come up with and you and the market looks substantially overvalued don't don't worry about it if you think it's 20% over value or 25% or undervalued but by the same amount but if it seems to get out of line by substantial not take the sixty five to fifty take the thirty five to fifty and be 50/50 but the idea of an all-or-nothing approach well I so long my stocks yesterday you're going to have a long hard investment lifetime who can do that and we still know people left a lot of mutual funds we did not have much of a problem here because of our index base but it left the market after went down fifty five fifty percent in nineteen in 2007 to 2009 February or March of 2009 and I got out and they haven't gotten back yet well I mean the mutual fund flow date is is enormously powerful yeah right I already flooded into bonds and out of equities and we had a fabulous equity yeah I mean it's unbelievable strength of the equity market but I don't I don't see it quite yet being substantially overvalued enough to enough to make a change but again what you do it in a time frame to late 90s so you have stocks at thirty times plus you've got bonds investment grade bonds kind of 7% and so you know there's a case to be made where no just kind of pick your asset allocation pick your index fund and write it out but those do seem to be extremes where logic dictates that you really probably ought into some adjustment I hate to say this because the next being to a market timer but of course you're absolutely right and the neg matters worse if I deny it I would have to expunge my recorded comments at a Morning Star Conference in the spring of 2000 when the market was at its all-time high and I said to Don Phillips he had a one-on-one interview we did two sessions and the combined attendance in the two sessions was more than the attendance at the meeting I can't understand why anybody would've wanted to hear that twice but I said at one point when he asked me about that I said you know done with bonds yielding around 7% today the stock market yielding 1% the stock market being at that point closer to 40 times earnings to the 30 I think it's impossible in the next decade and I look at things in decade links that blunts will that stocks will outperform bonds this returns on stocks ought to be you know pretty close to nominal and it returns on bonds gonna be 7% a year that's doubling your money in the decade and then I looked at them and said you know done sometimes I see here in a worried why I had any money in stocks whatsoever and I was in the process then and I can't member the exact timing but obviously around that time or reducing my own equity position from that it's normal of about 70 75 percent I don't even remember maybe 80% down to about 25 or 30 percent and I did that so but but mainly well importantly because of that everybody says you know you knew what was going to happen I suppose you could argue that I did but that I was also you know my heart was failing and my life was endangered I wanted to make sure my what what part of it what a kind of estate I had mostly my retirement plan here was protected for my family so it was a with something personal financial decision greatly embedded by the fact that made totally financial and economic sense and how many times in a lifetime does that come along well I went through the crash in 72 74 that was before the after the merger and that was not as easy to see coming what I went from a moderately overvalued position to a greatly undervalued position stock yields got to seven percent in 74 and nobody said why don't we buy stocks and with bond yields and then when Paul burger comes in and some of the yields on say long-term Treasuries intermediate term Treasuries range around 15 percent nobody thought I want to get out of stocks and in two months it was not so much that stocks were overpriced it was the bonds with a steel the century and this last 50 percent decline went to I think for I've experienced was they're all different that's one really important thing don't say I've seen all this before you never very few times so the same thing happened twice and in in the financial markets the same problems haven't right yeah at the each one each one is its own there's some some statement like all happy families are alike and all unhappy families are different but all unhappy families are alike in their own way or something like that and the the problem here is that all all these pair markets are very very different inspired by different things sometimes mathematics allows investors emotions and sometimes by external factors and what really happened is we should have seen any of us and I didn't see it because I wasn't involved in that a mortgage market that was developing catastrophic if I'd spent eight hours for the salesman for Washington Mutual or countrywide even better on the west coast just going that salesman the house the house and here you can borrow three hundred thousand dollars put two hundred thousand dollars into a house of which I'll get you a two hundred thousand dollar mortgage and keep one hundred for yourself and you're making seventeen thousand a year go ahead and do it and you would have been if you've known that and I so arguable I should have known it but not many people did so the result of this was not only those insane mortgages but the insanity of being able to sell into a bank you didn't have to worry about whether that customer was any good that was up to the next guy and he didn't pay much attention and the next guy along with these collateralized debt obligations played the law of averages that just wasn't going to work given those circumstances nobody thought nothing about the risk so what that gave rise to was first huge amounts of spending from equit izing the value of houses or as the economy was pumped up by something like two trillion dollars in that period for people taking money out of their houses to spend we can only do that once maybe they thought they could do it more but those things don't happen like that and then in the following act shows these are trying to restore all that's here spending two trillion dollars less to restore your equity or you can't keep saving like that and the other thing that happened was it basically put the financial system under enormous pressure and one entire industry banking basically eliminated all its dividends this does not happen very often this was the worst decline in dividends I think yeah oh yeah but but it took the ESPY dividend down about 22% and if you look at the long chain of S&P dividends have your students just short the ESPY dividend from 1926 and it goes that's the depression and then it kind of grows grows and grows there are little bumps but this is the this is the biggest bump in dividends since the depression and so this was this was a market collapse it was borne by essentially an economic or financial collapse I mean collapse might be a little bit strong but the industry eliminates his dividend that is not something that will happen in the marketplace without recognition so was this was a more logical collapse if we'd only seen it coming first let me differentiate between the active managers like I'm a stock picker and for each good stock picker of course it's a bad stock picker but no way around these things and then there's asset allocation how much do you want the stocks and how much do you want in bonds to me that is by and large a buy and hold proposition don't do something just stand there no matter almost no matter what happens and maybe no matter what happens for example even this 50% decline you know you ended up with more money seven years later from 2007 to 2014 if you just stayed in and just taking your lumps and then came back if you were in one market index fund so asset allocation is a little different but there's one thing that is the same please don't let anybody get this if you're smart enough to reduce your allocation to stocks and increase your allocation to bonds somebody else is reducing their allocation their bonds and increasing their allocation to stocks and other the logic is identical so if the system is roughly which it is and depending on how you count the Treasury's debt which is another interesting story but roughly a 60/40 situation COV you have the total market allocation for the typical investor and the variations are not huge you know somebody's going to be a hundred percent in equities which by definition is the best long-term strategy and yet you may not be able to handle the bumps well let me correct myself no one hundred percent equities is not the best long strategy 100 percent equities leveraged 2 to 1 3 to 1 just so long as you get someone to bail you out at the bottom and you can even pay them back later this is not an easy thing to do but we all know those fundamentals and we all know the allocation for the system is is fixed for all of us so we're trading back and forth with one another trying to prove we're smarter and I'd say this about Warren you know when he he's as everybody knows decided to in the in the money he's leaving to his widow in a trust his the record be invested ninety percent in the SP father an index fund not a bad Vanguard S&P 500 index fund I should say because he said it to and so and his this big Betty has with a hedge fund which he's winning by a huge amount happily and they're kind of random events his bed so his side of the bed is not that Berkshire will do better than the hedge fund with the S&P 500 will do better so he's he's a huge supporter and has been for as long as I've known him of the index fund and indeed when I talked to him about Little Book of Common Sense investing I said you know I'm going to write in the conclusion I was just working on the book when I had dinner with him I guess that would be back in around 2006 and I said I'd concluded the Benjamin Graham would be an indexer do you think that's fair and because every chain event the Benjamin Graham recanted a lot of it's hard to find value any more than too many people looking for it and he said of course he was an indexer fund I know because he told me so and that was good enough for me so I put it in the book but so these are the verities of investing that you're going to depart from this universe of stocks and bonds if you depart somebody else does the exact opposite thing it's a closed universe and so in that sense and I love this point it's a little bit difficult to do without a chart but the chart is entitled we're all indexers look at the total stock market that's what we all own now slice about a third of that out and those are indexers who know the value of indexing stay on an index fund and with no trading or Yui no trading then look at the other two-thirds those people own the market index by definition those stock holders but they don't they're not satisfied with that they want to bet against each other and therefore they lose the index by the amount action cost they have none of this is complicated Warren wrote this great piece which I added a little bit from for my book little book of common sense about the got rocks family and they were fine as long as they kept to their own devices when they started think they could could beat each other then they started to do worse and the cost went up and the taxes went up and they did worse and worse until they went back to just buy and hold and don't fight fight over this with each other these are verities

Channel: Mark Witte

Views: 253,974

Rating: 4.9202871 out of 5

Keywords: John C. Bogle (Author)

Id: k6ra5POdsYg

Length: 13min 56sec (836 seconds)

Published: Thu Jun 26 2014

Reddit Comments

[u/AlbanySteamedHams]

Sharper at 85 than the vast majority of people half his age.

[u/username4589]

I miss that guy.

[u/DurdenTyler2020]

Not as easy to jump into bonds today. I really miss hearing JB's insights on current events and his rational insights on investing no matter what is going on in the world.

[u/WhatDidIDoNow]

Excellent insight

[u/Ecto_88]

Just shows simple and steady investments is the way to go.