An Evening with John Bogle: From Wall Street to Your Street

welcome to all of you who are here in the studio audience and watching at home we're coming to you from the studio's of WHYY in Philadelphia now this hour is all about money specifically your money we're going to touch on the economy and on the banking and financial systems and what's happening right now on Wall Street but we're mostly here in this town hall-style meeting to talk about what's happening on your street now for most americans investing in the stock market is just something that we have to do in order to build wealth over a lifetime and now most americans just want to know if the worst is over well in just a couple of minutes we're going to sit down and have a conversation with the one man who's known as the champion of the small investor mr. John C Bogle first so let's quickly run through how this hour is going to unfold John Bogle is going to give us his explanation of how we wound up in the worst recession since World War two he'll give us his opinion on whether we can continue to invest with confidence and then we're going to open it up for your questions they'll come from the folks right here in the studio audience along with a few questions my money track co-host Jack Gallagher recorded earlier this week now for those of you who are not already familiar with our special guest here's a glimpse of John bogles extraordinary investing career over John bogles 58 year career in the financial markets he's been an advocate on the side of ordinary American investors he founded Vanguard in 1975 and created a whole new type of investment the index fund that made it much simpler and less expensive for Americans to buy stocks and bonds his advice to investors and hard times is keep your determination if you thought things through and know what you want to do and how you want to do them don't be shaken by events keep your character [Music] thanks for being here jack by the way Jon see bogles also known around this town as Jack and for this interview it's Jack now you have written several best-selling books about how to invest your latest though is titled enough true measures of money business and life what do you mean enough well the book is premised on a wonderful story which I really want to tell you and that is the story of Kurt von I got the famous author and Joe Heller author of catch-22 and I even even more successful authoring and they went through the party given by a billionaire on Shelter Island and right off that Long Island there and a kind of lifestyles of the rich and famous kind of place and they get in there and Curt says Joe see that man over there our host he's a billionaire he's a hedge fund manager and he made more money today on this one day than you have made with every copy of catch-22 that has ever been sold and Joe Heller looks over at Kurt Vonnegut and says that's ok because I have something he will never have enough ok it's not obligated talking to Jack are you talking to bank CEOs you're talking to politicians hedge fund managers the Federal Reserve or ordinary Americans who are you know have just been living beyond their means well we're actually talking to all of the above Pam and that is the money section is about the sins of our financial sector in this economy too much overreaching too much greed too much lack of awareness of risk too much financial engineering making numbers look better than they are they are and then I go from there from the financial sector to business itself where any aspect of professional behavior and professional conduct and the ethics that go with the role of a professional have been reduced greatly if not abandoned in many cases in favor of business business business the idea is to make a buck in this bottom-line society and we've gotten I think too much focused on let's say the ephemeral too much focus on charisma and not enough focus on the eternal and not enough focus on character so business general business in the u.s. particularly but all over the world and part because of greed human greed has gotten the message wrong and then finally the third section of the book is on us if you will us meaning the ordinary investor the ordinary investors the ordinary citizen right and that's the part that's the life part how to live a life and enjoyable life where you have enough now a good question is what is enough I think that's the question you're asking I don't know really how to answer that question I don't think anybody because it's a very personal thing it certainly has a lot to do with things other than money you know it has to do with serving the community it has to do with being a part of a family and raising a family it has to do with how we handle our colleagues it has to do whether we make a contribution to the welfare of this great land of ours and it also does have to do with money and where money comes out because we all want enough so we're not burdens for our children or whatever it might be and the best definition I come up with comes from the Roman poet Horace a couple of centuries back there and he said look for the golden mean somewhere between the agony the ignominy maybe of a hovel and the envy of a palace over here and I think most investors are in that admittedly very very broad range couldn't be a better time for it now that we right now have the luxury of looking back on all of it meaning the meltdown meaning the crisis that in your mind was a deregulation was it too much money flowing into the system was it lack of oversight or integrity for that matter what do you really believe was at the root of this crisis well and there's an old saying that Pam that victory has a thousand fathers and defeat as an orphan this defeat this great defeat for our capitalistic way of life has a thousand fathers that's just the reverse of what that saying would tell you and so there are many many people to blame but I put most of the blame on things like too many years of easy credit - - and too much credit made available through our financial system number - a total lack of concern about the quality of that credit particularly the mortgage industry but all over people weren't worried about the quality of the credit and then we add to that tremendous financial leverage so if you have a low quality portfolio of securities let's say mortgages low low grade mortgages they call them ninja loans loans that are made people with inclined no income no job and no assets then we have Wall Street where greed took over the land it's not just 1% more but your margin may have been let's say one percent profit margin 1% 2% we know you're in sharp dips and so engineering to get there and the price of your stock goes up and of course you the executive sell your stock that you get all those options for these outrageous amounts of options that were issued this tremendous dilution to a to the corporations earnings and you get out and leave Main Street holding the bag that's not very attractive think about this you know if you if you're investing and you have a money manager the money manager takes his or her fee and you get what's left you are literally at the bottom of the food chain absolutely and so managers started to look much more at their own personal interest and what made this possible is something that's really important to understand and that is if you go back say into the early 1950s or mid 1950s we had true owners capitalism we had an ownership society in which individual investors owned 92% of all the stocks out there that gradually changed I called a pathological mutation in capitalism gradually changed to a system in which owners individual owners share dropped from 92% about this a minute for a minute to seventy five to twenty five percent ninety two percent to twenty five percent and that different gap was made up by financial institutions agents who are investing money for other people third party yeah third party agents and the most the largest of which are mutual fund shareholders and pension fund beneficiaries and so when you have that these agents took too much for themselves and we had what we can call agency capitalism or an agency society where at the beginning these agents owned eight percent fifty years ago eight percent of all stocks and now they own seventy five this has been a gradual change as you're describing a little bit the decades but in terms of this most recent crisis that's unfolded so violently where does personal responsibility come in well to begin with you in this system you kind of lose personal responsibility you don't invest other people's money the way you would invest your own Adam Smith wrote about this two hundred and thirty years ago saying just beware because people your agents don't invest your money whether it's in the corporation or in the investment company or mutual fund the way you'd invest your own so personal responsibility kind of vanishes and you put your own interest first and these agents turned out to be another very unfortunate thing started speculating with your money in my money turning over their portfolios at the highest rates ever even higher than the rates in 1929 far higher swapping back and forth stocks with gas faster and faster with one another right and that's clearly a zero-sum game right you win or I and I lose or I I win and you lose no not true it's not a zero-sum game it's a loser's game because we have that croupier in the middle that's right that's known as Wall Street and Wall Street always wins so when you look at investment returns over time and we see that the market has grown over a very long period of time and around nine percent per years the sort of accepted return on stocks if the croupier is are taking two or three percent of that that means you're earning six or seven percent and that's just what you're taking just as much risk and yet you're not getting the premium back for that raw Wall Street takes no risk you put up a hundred percent of the capital you take a hundred percent of the risk and you get over an investment lifetime believe this or not something like 25 percent of the return a hundred percent of the capital 20% risk 25 percent of the return it's easy to just believe that so do a little test and take your little compound interest table out and compound eight percent for 50 years that's kind of an investment lifetime these days for young people coming into the market compound eight percent at-at-at for 50 years and see what the dollar grows to and something like forty seven dollars and then compound six percent and see what that says that's what you get and it's eleven dollars forty seven dollars of return compounded generated and eleven dollars goes to you who put up the money in took the risk so I say and people I think kind of understand this if you put it in these terms just about everybody knows about the magic of compounding returns well you just used eight percent which is interesting because we're not living in a world right now obviously of eight percent we'll get into investing a little bit further into this show but that is an interesting historical sort of a percent that we like to use well we should realize that history has nothing to do with it that is the historical return actually it's more like nine but I try and be a little conservative but as samuel taylor coleridge observed a long time before I was born history is but a lantern over the stern showing you where you have been but not where you're going so what people don't realize is they do realize the magic of compounding returns but they fail to realize what I call the tyranny of compounding costs and that's what that gap between your return over time and the markets return and getting back to Wall Street for just a second some of that excessive all of that expectation all of that excessive risk-taking that happened with other people's money and then right down through the food chain right down to the to the borrower who took out the mortgage that you know he or she really couldn't afford it all helped to create the mess we're in right now and deleveraging is a big process it's not going to happen overnight what's a realistic expectation well when you when you get to a totally over leveraged economy and I could give you some data that says that debt in the economy was once one times our gross national product or gross domestic product and now got up to as high as two and a half times a staggering increase I don't know the exact numbers but that's not a bad indication of the dimension so to get back to where we ought to be in the first place because dad has carrying cost as their I say every credit card holder knows as every mortgage holder knows and we're gonna borrow anything knows it has a big cost over time and it so the number has to come down and I would say we should probably see as a as a very rough guess and nobody knows that maybe by the middle of the year 2010 this economy will have bottomed out and will start to come back some of the debt will be paid down it will take longer than that to pay it all down and maybe it will be moving forward again well one of the consequences of having enjoyed the party is now the payback which I fortunately includes higher unemployment rates and it's a huge concern for the entire economy but at the same time those tiny green shoots of hope are showing up the stock market's not quite as despondent as it was a few months ago and consumer sentiments actually been surprisingly upbeat just recently so in the end it's really investing has more to do with confidence than anything else does it well it has to do with confidence but I think a good rule for everybody observed is that the stock market is a poor place to expect hope to bail you out because hope does not spring eternal in the stock market so basically the stock market is not even the right way to look at what you are doing as an investor now I've made the distinction many times I think you know this and when people say what should I do I said first thing you have to do is answer there's one simple question for me you have to tell me whether you are an investor or whether you are a speculator what's the difference between an investment investor and the speculator well a speculator that's the easy one is buying and selling stocks trading with somebody else hoping to outsmart this person day after day after day so in every speculation there's a winner and a loser we won't go through the croupier winning again and we've had enough of that but it's betting on stock prices betting on the short term betting on perception rather than reality betting on expectations all that relates to speculation yeah bedding bedding bedding what is betting what it what is investing investing is buying and holding stocks for the long term not a stock let me be very clear on that because in this day and age buying a holding of stock is I believe more risky than it has ever been in human history single stock versus the reason is we have first its financial crisis which is going to put a lot of people out of business number two we have global competition for the first time and powerful companies in the United States aren't going to be able to make it when a powerful competitor arises in Europe or in China or in India or in Japan whatever it might be and number three we have this information age revolution revolution and technology and a big smart successful technology company may open the doors let's say today and when they close the doors tonight they're out of business somebody has got a better idea so for those three reasons you know the financial crisis global competition and the rapid change in technology and innovation it's not safe to hold a stock so what do you do if you can't hold a stock what you do is hold all stocks buy I would argue American business every single company in America and hold it in terms of how big or small it is in the market you have more Microsoft and more General Electric than you would have some little what we call over-the-counter and listed company that it doesn't even trade so place your bets for the large sizes is I think the best thing to do because that will give you the same ownership as we all have collectively and was we all own more Microsoft as a group than anybody else where Exxon is now the biggest company in America and we since the world owes more of that we just want to own our fair share say four percent of our portfolio in their case so own the market portfolio own American business and hold it forever diversification wins all battles don't bet on one horse bet on the whole race right now but getting back around the Condor actually stay out of the racetrack just stay away from Teresa Conti okay but confidence how important is confidence to the overall market at a time like this well you know confidence is a has many many aspects but let me let me give you a few and one the one reason our economy is suffering now is that people do not have the wherewithal to spend they've lost their jobs they're worried about losing jobs they've lost a lot in their 401k or their investments if they were overwhelmingly invested in equities which we can talk about later on it's not not the best of ideas we need some kind of balance there and but spending is also not just wherewithal but the confidence to spend and that confidence has been badly shaken so confidence basically yields a lack of confidence yields further loss in conference because it slows the economy down and builds the circle of those who are who are worried about the future so we have to restore confidence that's not going to be easy but my own personal view is that with good leadership in Washington and I think our president is providing good leadership I'm not so sure about the Congress they seem to be doing some very funny things to me and it only case should be running the accounting profession for one thing but that's another story but I think we need to kind of set up a program which the administration is desperately trying to do under the most extreme circumstances we've ever faced a program that will be stabilized that will not change from day to day people know what to rely on and make their decisions based on you know a pretty sound plan that's gonna be long in duration and hard to get through this mess I'm convinced we will get through it but not without strong leadership I can see where that will go a long way for confidence and what about trust these were supposed to be the smartest guys on Wall Street and they took excessive risks with other people's money as some of these structured investments were nothing more than especially the credit swaps nothing more than side bets glorified side bets and that didn't work out so now the divide between Wall Street and my street seems wider than ever what's it going to take to restore trust in the system well first just think about what you just said and that is here's and you're correct by the way the problems were created by Wall Street and the results are being borne by Main Street so if people don't have trust I think they are very good judges of character I do not like what I see in Wall Street I do not like the short term focus I don't know like that grotesquely excessive compensation and those things are very difficult to fix we have compensation consultants out there it doesn't matter if we say you can't have another nickel somebody will find a nickel for somebody somewhere I'm sure so it's basically trying to mean my big hope for this country to just go a little bit beyond your question is that the young generation that's coming along is a lot stronger than the generations that have going before them that's our big hope and that will take a little time to happen but to rebuild trust and confidence it's not going to be an easy matter well I've heard you say and I've read and I love this expression you like to say that Wall Street blew itself up by its own dynamite that's actually a statement I stole stole from one William Shakespeare and he said blown up by its own petard voiced by its own petard and that means blown up by our own dynamite and the problem with Wall Street is I mean frankly if they have to blow themselves up with their own dynamite that suits me just fine I don't like a lot of innocent victims out there that did nothing to create Masen are paying an extreme financial and personal price it is not fair and it is not right and it's not just well you know Ben Stein who's pretty well known for his opinions on all things economic wanted to add to your remarks about Wall Street blowing itself up take a listen to this nobody would care if they blew themselves up if their own dynamite they blew up the rest of us with their dying right they blew up the rest of us with the dynamite that they were using playing with and for which we were paying them stupendous sums of money confidence in the financial system is completely shot it's shot at every level what we've learned is that Wall Street took huge enormous depend as amounts of money out of the savings of Americans gigantic unbelievable amounts amounts so large that it staggers the imagination and for this they supposedly invested wisely they didn't do that it turns out that was a big supposedly and second they supposedly distributed risk which is a phrase that some smart PR person invented to me that they a lowered risk for their day investors they didn't do that they greatly concentrated risk and made the system far more dangerous that's been now you know ask people in any city or town across America and a lot of them are going to tell you that this crisis and the government's response to it are total game changers in other words that everything going forward will be different now and that the old rules of capitalism are not going to apply do you agree well I agree with that in terms of the economic system that we need new rules we need to reform capitalism and my own personal view is that what went wrong in this agency system I've described and you recall it was an ownership society that is going on ever in a return to an agency society that's not serving the prints of pals that it's supposed to serve those fund shareholders for example to a new what I call fiduciary society and that is a federal requirement and I'm not a big believer in regulation but I don't see any other way to do this a federal requirement that mall money managers observe traditional standards of fiduciary duty a federal fiduciary standard for money managers which says what simply put it says put the clients first don't charge those excessive fees participate in corporate governance and force those corporations out there to operate in the interest of their shareholders focus on the long term we'll call that investing and not on the short term we'll call that speculation and don't let big financial conglomerates come in here and own your management company because those financial conglomerates which own two-thirds of the mutual fund management companies you do you think pain that those financial conglomerates buy a mutual fund company for a billion dollars to earn a return on the capital of the mutual fund shareholders I don't think we know who I am or to return a return on their own capital but that whole different set of stockholders and that gets to you can see this coming very clearly here here are the mutual fund shareholders they're on the rumble seat if anybody remembers that phrase look I do or should they serve the shareholders of the management company this big conglomerate and I think Matthew and Luke put it pretty well no man can serve two masters and so we've got to not allow these financial conglomerates to get into this money management field and they could not do so if the rule was you and your fine da but you can't serve two masters you got you have to choose you have to be alright now we've gotten a sense of what's happened on Wall Street let's now turn our attention to your Street Jack you point out in the book that we meaning ordinary investors really do need to understand that that you just pointed out the difference between investing and speculating the huge difference and as I listened I mean it sounds pretty basic but kind of turns out that the payoff the biggest payoff always seems to be when it comes to investing sticking to the basics so I guess the question on the minds of those who are staring at their 401k statements right now is where do we go from here well you know to me there's a wonderful saying out there that says investing is simple but it's not easy and it's it's a you know it sounds like a little twist of words but it's actually much more than that what is simple about investing is if you believe what I believe and that is owning not a stock but the stock market and holding it forever and apply that only to your stock position now that's the way you run your stock portfolio my opinion it's called an index fund been around actually I started the first one in 1975 and it's worked just the way it should it beats most of the managers most of the time can't fail to do that because of its low cost but before even before you get to how you want to handle your stock portfolio the first thing and the unchanging rule and the simple rule is think about asset allocation how much in stocks for growth with a lot of risks that comes with it how much in bonds with income and a fair amount of safety that comes with them and balance off those things I use this rule I've used it for I don't know 25 35 years certainly as long as I can remember how much in stocks how much in bonds and my simple rule rule of thumb really just to begin to think about it is have your bond position equal your age no it must have occurred to you as I'm saying that for someone who was 111 years old that I'm feeling not badly about the recent decline in the market because I was that I was not a hundred and eleven percent in bonds no I can't do that but ever since the beginning of the 90s when the stock market was ridiculously high at that point I was about 65% in bonds roughly my age then and now these years later I'm I guess approximately seventy seven or eight or maybe eighty percent in bonds and twenty percent in stocks that you're pointing out is so important it is so essential and so overlooked it's how much to put in real estate how much to put in stocks how much to put in bonds and when a problem I mean you should be doing that at all times because think about this for a minute just think about what happens and I said I regret to say that personally affecting me but what happens is you get older you have less time to recoup your mistakes you have more money at stake and therefore you want to be more careful you want to think as you get toward retirement and I'm not suggesting I'm getting anywhere near toward retirement cuz I don't expect a retire but as you get toward the retirement an investment that produces income and its relative security as compared to an investment that produces capital growth and it's tremendous fluctuations between the Absinthe and adds and finally as you get older as compared to when you're young I think you get a little bit more nervous when the market goes through a phase like it's going through now we have never had just give you one more number to show you how speculative this market is in the last 50 years there were 28 years well over half in which the market never moved once in any single day by 3% in a day in the last six months there have been 58 3% moves from 0 to 58 and that is rank speculation and of course adds ends badly tremendous volatility absolutely I've been around the industry in and around the industry for about 30 years now I have always thought of you and I think that most people do as a buy and hold kind of guy and maybe even the poster child for investing in a diversified way with the proper asset allocation for the long haul I think a lot of people want to ask you what do you mean when you talk about long term investing I mean exactly in years I'm talking about Warren Buffett's favorite holding period forever think about that and let's say to put a number on it how about 50 years and now for somebody my age I'm not sure I have 50 years left but who knows really and as you get older you know that time period obviously shortens but it should be a life to investing is a lifetime affair and it's doing simple things owning a diversified stock portfolio owning a diversified bond portfolio deciding I think correctly that you have a little more in the latter and a less than the former as the years roll on getting costs out of the system keep the croupier sat if it takes a double-barrel shotgun to do so if you have to go into the gambling casino once you've made your bets get out and never go back again it's the way I would look at it so these things are all pretty simple why it's not easy to complete that phrase is because we are our own worst enemies we are greedy we believe that the past performance of a mutual fund or even a stock is going to tell you how we'll do in the future nothing could be further from the truth so we look back and buy the wrong funds at the wrong time we also love to buy stocks when the market is at an all-time high apparently thinking that the market will go up forever and we'd love to sell stocks when the market goes down thinking that the market will go down forever it's so much about emotions and behavior and it's interesting when you think about the basics because what you're saying if you're really thinking about it is is quite simple that's not easy but but not easy to do we can't get out of our own way when it comes to investing all right now the toughest question of the evening for you is buy and hold dead or alive going forward well if it's alive forever I mean it's so funny you read about in the paper they have these you know short-handed headlines and the people would say what about buy-and-hold are gonna tell you well the stock market has done nothing for 10 years which is actually nothing for about 13 years and that's true but I'm not talking about buying and holding the stock market I'm talking about buying and holding a balanced portfolio allocated between stocks and bonds and that is eternal and what people that this has been a little bit on you got a very unusual period and that is it's not just this decade this first decade of the new millennium that stocks are down probably an average of maybe 2 or 3 percent a year I don't know the exact number but that will be close but in the previous two decades stocks were going up at 17 percent a year well I got used to that what we got used to that but think about where the 17 percent came from it came not because American business was generating larger and larger it's because investors in their unwisdom we're paying more and more for each dollar of earnings now just to give you one more little mathematical number if I may if the price earnings multiple IAM at you pay that for a dollar of earnings goes from $10 to $20 that's over a decade that's 7% a year at ADEA return so the real return on stocks was 10 and you thought it was 17 in the next decade unprecedented in American history that price earnings multiple went from $20 to $40 it doubled again another 7% return on top of a business return of about 89% that not only cannot happen again unless you're crazy enough to pay $80 which is what's required the next time for another next decade not only cannot happen but you have to add what we call reversion of the mean stocks have to come back the laws of physics when it comes to exactly what goes up must come down in this in this speculative sense American business doesn't need to go up and down sometimes it will but it's mainly the stock market and that's why I've often said what happens in these markets and all their speculative flavor and all its growth that was created and created the name what I call phantom wealth that wasn't real wealth we had and they as this a decade began it was well that was way overstated because of the valuations people put on stuff for paper so Sony watch the stock market as I've said in my one of my previous books it turns out think about this for a minute with all the stuff we see on television and and in the paper every day and prices are up and this is Dan and he's in and she's out and so on down the line it turns out and companies earned this or that and nobody knows really where the earnings come from it's a stock market is a giant distraction to the business of investing yeah because the best thing is corporations earning a return on their capital paying dividends and taking what's left to create earnings growth over time and that's what is simple great you know you would think that the people who have access to the highly sophisticated the most highly sophisticated investing strategies I mean far too complex for the average person to comprehend you would think that those strategies would beat the buy-and-hold description that you're describing by a longshot no I would not think that I've been around too long first you have to understand something that's very simple and that is if you're trading and say I don't know a collateralized mortgage obligations say something like that and you're going short as one of the hedge fund managers didn't made himself I think three billion dollars a year it's a living it's a living and someone else was on the other side of that trade he was short those collateralized obligations somebody else was long so if he made 20 20 billion dollars for his clients somebody lost 20 billion dollars for his or her clients there's no way around the fact that the market is a closed system and when you read in the paper think about this for a minute money poured into technology stocks and out of bank stocks today poured into technology stocks means everybody bought technology stocks and nobody sold them I mean really think about that and then everybody sold bank stocks but nobody bought them well how did they sell them then the market is essentially a closed system and most of what people think about and read about and look at in the news and the headlines is simply not worth difficult perspective that's a distraction right I can understand that now we're ready to take some of your questions let's get started right here in the studio note about stock and I was wondering my 401k is worth about half of what it was a year ago and you've taught us about confidence now I know you can't tell us when the market is going to recover but should I still continue to contribute to my 401k plan the answer to that question is absolutely just think about it this way you're out buying groceries and all of a sudden the price of milk or eggs or steak is cut in half is that a good thing for you or a bad thing it's a good thing these values are that they they the stock market may go lower we just don't know that but you have to continue investing when you're buying stocks at roughly half of the fundamental value that you that you were buying at the high but your emotions it's a good example your emotions are leading in the wrong way the time for you to get scared and get out was when you were so happy and optimistic when your 401k account had its previous double the value so the your emotions betray you so I'm not trying to tell you to be very clear on this that this is the time to jump into the stock market but it is time always time to keep your plan going and eventually you're gonna want to add a little bonds to that I would for someone that's relatively young always have a bond position personally speaking just because having a little what can we say anchor to windward maybe a little dry powder can help keep you from making mistakes that you shouldn't otherwise make so you might want to think about I'm not in any rush but gradually having a little bond position I'm guessing your age here like that guy down at the Atlantic City Boardwalk and yeah you should probably have I don't know 10 or 15 percentage bonds I don't know exactly but but but think about a little bit of safety there in an appropriate way not don't know do anything ever do anything in a hurry in the stock market good let's take another question now this time from my co-host Jack alligaroos outside out about in Philadelphia we're now in Delaware County Pennsylvania we're at the granite farms estates it's a LifeCare community I'm with one of the residents al hahn and al has a question regarding folks of his generation in the current economy retirees living on a fixed income need to go to safer investments what do you recommend as a safer investment the safety you find is in bonds but we now have a very complicated bond situation where there's been such heavy bidding often from abroad for US Treasuries the yield on US Treasury bonds which is where you want to be from a credit standpoint it's the Full Faith and Credit of the United States of America is still good certainly the best credit in the world no matter how you whether you argue what's good or not it's the best in the world and corporate bonds in the u.s. high quality investment grade corporate bonds are yielding much more but they had that default risk right now that's spread we have to bond markets the Treasury bond market let's call out a three percent yield and the corporate bond market let's call it a six and a half percent you know very roughly illustrate the point so I would not limit myself to Treasuries I happen to believe that this will maybe not surprise anybody but a bond index fund that includes the entire US bond market which is part Treasuries and part corporates and part government backed genuine Ginnie Mae we call them back are those corporates considered you know the triple a trip well very few triple-a but they're quite a few Double A and a very diversified portfolio where you own maybe five hundred bonds three hundred bonds no none of which you're over one there might be a concern that down the road interest rates may have to go up at some point you're not really concerned about owning a bond fund that's you don't want to go out too far no well you can make your choice and the bond funds are either short term bonds intermediate term bonds or a long term bonds and I favor some mix of short and intermediate I don't like the long risk but it's so short and intermediate a nice two-person you can buy a mutual fund with that kind of a portfolio just make sure it doesn't cost much but with with that with bond yields and then these ranges if the mutual fund manager is taking a percentage out of your yield of four percent that means the manager is getting twenty five percent and you're getting seventy five hundred it's just math we never do a lot of times it's because the fees are buried but let's take another question right now can I just make one more little answer because it's a very important thing to think about and then this is one another reason that the choice among bonds is difficult we actually have in the United States the ultimate inflation hedge and it's pretty close to perfect and as we have US Treasury bonds you can buy short intermediate or long ones that are hedged against inflation and so if the inflation rate goes up your interest rate on those bonds these inflation protection paths will go up - that is the ultimate protection alas there's a catch there's always a catch to everything and that is because of that protection those inflation hedge bonds have been bit up to the point where a 10-year bonds is about one and a half percent yield around much more than that so if inflation is one if you're getting 3% now if inflation explodes and you gets a 6% inflation well you'll add six to that one and a half no question about that and you'll get seven and a half but you start off at a pretty much yeah understand that so stick with the shorter and the more intermediate let's take another question right now from Jack Gallagher this time it's from a high school student who's asking you about trust I'm with Maribel Moreno Maribel is a high school student what year 10th grade a sophomore in high school and she has a question concerning her age group well I'm really concerned about the future with everything that's going on can we ever trust Wall Street again we have the answer to that is of course we can trust Wall Street again but not the Wall Street we know today people have lost their trust in Wall Street and they're gonna demand these individual human beings who have been so badly hurt by the behavior of Wall Street will demand a better Wall Street they will demand to refer to a previous conversation a previous subject Wall Street behaved as fiduciaries for your money and will invest your money the way you would invest it yourself and not the way they would do it was speculative risk so Trust can be restored but you know there's an old saying and it could never be more true than where we find ourselves right here and right here this evening right here in the studio and that is trust is an awful lot easier to destroy than it is to create creating or restoring trust is a long range proposition and Wall Street was able to destroy it in a matter really a month from the middle of 2007 to say September of 2008 took a year and a quarter for that trust to be destroyed I really really appreciate your answer there let's take another question for right here in the studio now obviously I'm a military member and I currently contribute to my first Savings Plan I was just wondering if there's any investments that I just should just stay away from so the Thrift Savings Plan is people who don't know is just like a 401k for all federal employees and service members well first of all all I think I would be totally derelict in my duty if I didn't say thank you for your service to our country we really depend on people like you and I thank you really from the bottom of my heart for that to get to your question I really like the Thrift Savings Plan I've been familiar with it for a long time I knew some of the executives down there it's run I didn't even lower price than Vanguard is run the ultimate accolade and I like that because I like competition and they're their prime offering is an index fund stock index fund and they do offer a bond option so yes that's the right way to go I mean I would not they got into I think real estate you'd remember this you're not real estate funds a few years ago I'm not just so keen on real estate and of course this year real estate has blown up so stick down the center stick with the stock index fund stick with the bond index fund balance them in the way that I've kind of suggested I and don't be tempted by you know the grass is not always greener on the other side of the fence in this case the ground is the grass is pretty terrible on the other side of the fence so stay on the good side of the fence Kristine and again diversification wins all battles so let's go back to Jack he's at a diner in media Pennsylvania Pam and Jon I'm now with Steve Kurtz and we are at the court diner in media Pennsylvania and Steve has a question that a lot of people are wondering about dude how was that the heads of these banks that took risks with other people's money have not been penalized they get to keep their bonuses having that be first of all it's not a very attractive situation and I have the same kind of outrage that I think Steve shares or I share Steve's outrage but in our system you know before before you can take property away from somebody and they really have to commit a crime or have gotten the property by illicit or illegal means me for example stealing and these kinds of white-collar crimes let's call them are deeply disturbing but there is no criminal behavior that we know of no I'm not talking about mr. Bernard Madoff and I guess mr. Stanford and the half a dozen other Ponzi type people who have come along the street here but I'm talking about these executives who will argue you know they had do a lot of meaning and this is what makes the system really a problem well we had to do a lot of leverage in our bank we had to buy these lower quality investments because everybody else was doing it and we had to keep up with them or Wall Street would say look you're not running your bank well enough so there's a lot of pressure to make earnings grow even beyond expectations and that gets to a point which I'd like to make at Pam which is the whole ethics of our society and the ethics of our business community have really gone quite to seed here and the way I like to express it is and the older the older people in the audience who understand this you know wasn't very many years ago when the standard of conduct there were some things one simply did not do you just don't do that that's all you don't need a rule to tell you and that changed too if everybody else is doing it I can do it too and I call that the difference between moral absolutism over here and moral relativism over here and I don't like it there are some things that are not negotiable there is not just a nation of gray or a world of grey there is black and there is white and we darn well better figure out what the difference is a good evening jack I have a question about the national debt I'm planning to start a family soon and I'm really concerned about their future and the impact of the debt on it and what what's going to happen with the debt and regards to the value of the dollar and also or my kids and their kids gonna end up footing the bill for it that's the course a very profound and very good question which I worry about too because I have six children and twelve grandchildren and who's gonna pay off all this debt and what's gonna happen to the value of the dollar and the answers to those questions are by no means self-evident you know we're borrowing at levels the federal government is borrowing or guaranteeing a levels that are beyond any remote connection with anything we've ever done before and so what we have to do is try and have a plan to keep those deficits under control and that will mean another only two way this is a financial system of the US Treasury is pretty simple there are two ways to work on a budget deficit and one of to raise revenues and the other is to reduce expenses this is not complicated it's simple but it's not easy I guess I could say again because when you think about it it's gonna be very difficult to raise taxes I think that the administration's honestly going in the right direction about raising taxes on the the better off among us the top 5% think that's appropriate and they're gonna have to really be focused very heavily on trying to cut back on government expenditures at a time when it is awesomely difficult to do so just think about this for a minute when we have and you can't just not give our troops enough Afghanistan and for a while at least Iraq send them over there without weapons and and protection we have to do something about our educational system that's a long-term problem but you can do the longer you wait to get working on the US gonna fall way behind unless we work on that system our health care system has a lot of room for improvement and I think we can generate some savings there but it's a tough long job and we have to hope that we'll be able to grow our way out of some of the problems that have just been raised but that's not gonna be easy it's not gonna happen overnight but with a little fiscal discipline and a little intelligent planning and a good leadership and a terrific generation coming along I don't think it's impossible I like the optimism of them mister BOGO I'm divorced and I've been using the services of a financial planner but in the light of what's happened recently with the Madoff and the Stanford disasters I wanted to know if I should still depend on my financial planner or can I do it myself that is a great question right now not only that how do you work with a financial adviser do you turn your money over to that adviser what's the best way to have a relationship with a financial adviser well I I guess I'm tempted to quote former President Clinton says it all depends on what the meaning of it is can you do it yourself and the answer is yes you can if the it is a simple program an asset allocation program diversified between stocks and bonds that you forget you put your money in regularly you make sure it's very low-cost and keep putting your money in don't peek is another you don't need to look at that darn thing every day or every time that gastly statement comes in at least gastly at the moment and just hang in there and I should say much borden parenthetically that's what I've been doing since 1951 in July of 1951 my first job with Welling in a management company I was making two hundred fifty dollars a month and 3750 went into my defined contribution pension plan there and I've been doing it ever since then fifty-seven years and you would be I'm in in the Wellington and Vanguard funds stocks the beginning bonds the end you would be amazed how much money is in that plan I if I break my own rule once in a while there's so much money in there that I peak everyone's trust but verify maybe if you're working with a financial advisor if you're trying to beat the system which I don't recommend and you want to get into more exotic instruments what we call alternative investments maybe a little hedge fund here's and commodities they're trying to pick the latest hot manager you can't do that by yourself the big caveat here is I'm not sure there's an advisor that can do that with success we actually have data done by some professors up at Harvard that show that investment advisors do a little bit worse than the investors operating on their own and that's before we take into account that the advisor takes usually something like 1% a year from your account so if you're comfortable doing that if you're coming comfortable going the simple way I think you can do it yourself well listen thank you so much everybody for your questions they were all really on point now let's review what we've learned today we do this at the end of every money track episode first we learned that what got - this mass was a lack of oversight and integrity that led to excessive risk-taking which we are now all paying for number two we learn the confidence and trust or essential elements in order for the financial markets to work and finally we learn from Jack Bogle that asset allocation is the key to successful investing buy and hold may be alive and well but asset allocation diversification are key and be very mindful of the costs associated with investing 'is matter Jack Bogle thank you I want to thank you so much for taking the time to be with us today and one more thing [Music] [Music] [Music] [Music] [Music] [Music] you

Channel: MoneyTrackTV

Views: 13,727

Rating: 4.9224806 out of 5

Keywords: john bogle, wall street

Id: xa3V2GBSehs

Length: 55min 4sec (3304 seconds)

Published: Fri Jan 18 2019