Vanguard Webcast: Vanguard Founder Jack Bogle marks 65 years in the financial services industry

you for seven decades John C Bogle known as Jack has been fighting for the rights of the individual investor in 1974 Bogle founded a different kind of investment company one that's owned by the shareholders who invest in its funds Bogle served as Vanguard chairman and chief executive officer from 1974 to 1996 and was senior chairman until 2000 thanks to his dedication to creating low-cost investing opportunities and is focused on keeping a long-term perspective Vanguard has become one of the world's largest and most respected investment companies Bogle is credited with creating the first index fund for retail investors viewed is the conscience of Wall Street he's a best-selling author and a widely acclaimed financial leader Fortune magazine has referred to it as one of the four investment Giants of the 20th century well good afternoon and welcome to this very special live vanguard webcast i'm rebecca katz and it is my great pleasure to be joined today by Vanguard's founder john c Bogle as you just saw mr. Bogle is certainly a legend in the investment industry he's celebrating 65 years in industry but 41 years ago he started the Vanguard Group which is now grown to serve more than 10 million clients globally with more than three trillion dollars in assets so certainly mr. bogles relentless focus on low costs long term investing and always putting the client first has truly created a vanguard revolution mr. Bogle congratulations on this milestone a happy belated birthday to you turned 87 last month and thanks for being here Thank You Rebecca and thank all of you for listening in we have been participating we have more than 40,000 people registered for this webcast and as our regular viewers know we will typically spend the full hour asking questions now of course people submitted thousands of questions so we'll try to pick a representative group of questions to ask you mr. Bogle just some housekeeping notes on your computer screens you'll see at the bottom of the screen some little icons or widgets as we call them there's a blue one there if you have any technical difficulties click that people are at the ready to help you and there's a green one that will take you to a list of different Vanguard research which is pertinent to today's webcast you can download that and read it afterwards as I mentioned we got thousands of questions in but we will take some live questions so if you have a question on your mind or as we're discussing things send it in or you can use the hashtag and tweet it to us hashtag Jack Bogle it's an original one there you go I have a Twitter feed going here and we'll make sure to take some of those tweets so mr. Bogle I actually thought we would just jump right into questions if that's okay with you that's great but I should tell you yeah mind you that's my first hashtag your first time Jack Bogle I think we're going to see a lot of activity on our Twitter feed today so I think that you know one of the we've got a lot of very similar questions and one of the questions that came in was from Shirley who lives in Maryland and Shirley asks how has vanguard as a company managed to be so successful providing low-cost portfolios to investors through the years so how have you made this work and for such a long time well it's actually pretty easy first we have the only correct structure in the entire mutual fund industry we have a different structure than everybody else we operate it cost we are a mutual mutual fund group all these other people are misleading investors when they call themselves mutual funds and as much as my opinion it was the Chairman opinion of Chairman manuel cohen of the sec he says where does this mutual come from they're not mutual so we are a truly mutual and that means one simple thing put the investor first that is the focus of everything we do and with that structure being mutual we operate it cost and that means all the staggering profits that are our rivals and almost said peers our rivals take out of this business we don't take out the savings if you will the profits we make are basically given back to the shareholders in the form of lower cost and that's a huge advantage so we actually have a question about aren't you surprised that other fun families haven't adopted that structure and then that's from Jackie surprising I mean profits you mentioned profits no it's not surprising at all when you think about the way I explain it to you Rebecca Rebecca and the Rex explain it to the to the viewers is the problem with Vanguard is all the darn money goes to the investors we don't have someone sizing it off before before they get to know we have our own costs we pay people very well and but it's not a huge profit margin that we're laying on these investors it's there's no profit margin so the profits are theirs and that amounts to right now give or take maybe something like eighteen billion dollars of rebated prophesy here that's a lot of Solano money so obviously people are understanding the benefits of this we've grown to be more than three trillion dollars did you ever imagine that the company would get to be that size no how could i and we had a lot of untried ideas and of our structure was one of the keys to our success that mutual structure the other was our strategy and that was to focus on funds in which low-cost was the most self-evident the most obvious and the the clear way to do that is the index fund and we started the world's first index fund started in 1975 I wasn't sure I could get the board's approval for it but I had a wonderful document from dr. Paul Samuelson Nobel laureate an economics professor at MIT and he had almost the moment that we began an article in the Journal of portfolio management said that said would somebody somewhere please start an index fund and I was a well so good doctor now gone wonderful wonderful man and good friend of mine dot the age of I think 94 and 93 or for some probably a decade ago almost yeah and so we would give it to them and he gave that chapter of his that paper it is in the journal of portfolio management gave me credibility with the board to which I added the data what did the mutual fund industry actually done and we found there was about a two percent gap between the returns given by the average mutual fund and the returns given by the Standard and Poor's 500 index these were all basically large capitalization mutual funds and you compound that over time and I think the the final value of the investment was maybe one and a half one and three-quarters times if you went the index fund rather than the mutual fund so that's where it all began so it's the strategy the strategy of low-cost most manifested in the index fund which didn't take off right away right how many years did it take me for that I give or take twenty twenty two decades good thing you're a patient in long-term focus well you know it was it was a series of flops at the beginning Rebecca we had underwriting that the underwriters were going to bring us 150 million million dollars this was big in those days and they actually raised eleven million dollars and in fact they said I said oh my god we can't even buy round Lots hundred-year lots of old 500 stocks and they said why don't we give everybody their money back and I said you got to be kidding me we have the world's first index fund and we'll take it from there and then out came a big poster on Wall Street and there was Uncle Sam with a cancellation thing stamping out stock certificates and said stamp out index funds index funds are unamerican and that was the great reception right one of the most financial worlds mutual fund world's greatest changing idea of all time well we actually got quite a number of questions about whether the popularity of index funds you know they're pretty ubiquitous at this point actually might be problematic or whether index funds work in this more volatile market environment so how would you respond to that well indexing take the market environment the easy one first indexing works in all environments you just have to understand one simple thing all of us investors on all the stocks in the stock market and so those that are indexed on limiter proper proportion the market value capitalization weight we're things like Google and and the alphabet is it's now the older the largest and everybody owns two-thirds of that everybody but the index is roughly and the index on one third so it's volatile for us the index fund is followed for the investors they're all one because investors on the market and they can either do it the intelligent way or an index fund that holds it or trade with one another and one trader trades with another trader it must be obvious there can be no value added they're just who owns the stock ah but there is something nice going on here for Wall Street the man in the middle the broker in the casino the guy with a rake takes his share out so the other investors and the non index investors are playing a loser's game and people have figured that out and I get letters pretty close to everyday Rebecca saying I wish you'd I wish I'd read your first book earlier right that's not twenty years old twenty-five years old I guess almost and I wish I'd listened to your ideas earlier or I did and I'm now retired well we have already and something like 800 tweets in saying thank you and and similar sentiments about how you help people to be financially successful so I'm going to come back to some of those in a few minutes I mean this does beg the question though I mean if you know you basically just described the difference between active management and indexing and of course Vanguard has a lot of index funds we had a couple questions saying well why does Vanguard have active managers and what's so interesting is I think most people think of you as a father of indexing but most of Vanguard's earliest funds when when you're running the firm and even before that at Wellington were actively managed funds so how do you describe that paradox you let some paradox in of practicality if you want to look at it that way and then as we had when Vanguard began at the bottom of the 1973-1974 bear market where the market had gone down 50% and our assets were around 1.4 billion dollars in Wellington fund and Windsor fund and a couple of gogo funds we could talk about that at more length but they're gone now so we don't need to worry about it and so you couldn't had an index fund alone you couldn't run a company on eleven million dollar fund said 11 million dollars joins the active funds and it's kind of a little brother or sister as the case may be so the what we did do however and this is a very very important point for the very day Vanguard again I said to our tiny staff they're only 28 oh this counting they the one thing I want to make sure our first rule is to have funds that have I called it then relative predictability I had observed firsthand and in pain the typical pattern in the mutual fund industry Rebecca where the fund that's very distinctive and good then turns bad we call that reversion of the mean or regression to the mean nothing stays good forever it's a back and forth kind of knee when does the money from investors come in to here up at the top when is the money from investors go out down here at the bottom so it's well documented it's basically just exactly what you would think the typical mutual fund investor because of his foolish timing is bad behavior if you will loses about two percentage points a year in a fund that itself loses two percentage points a year because they're not as good as the index fund so you want relatively strong predictability of performance we now call that high correlation essentially and our funds by my design originally and most of them stayed this way typically have correlations with their market indexes we all have we have index standards for each of our funds right Welling and fund for example is about sixty five percent is 65 percent Standard & Poor's 500 index and 35 percent Barclays corporate bond fund index and it correlates with that the fund us even though it's actively managed at 97 percent is it an index fund no is it 97 percent an index fund well it's easy to answer that yes that's a little oversimplified but if you're 90 percent correlated with the market the manager is basically changing around things with 3 percent of the assets so all of our funds have high correlation almost all of them probably 95 96 percent and I like that that's good and the reason it works by the way a choice is you end up looking like your competitors and you're probably before costs you're probably about average that's what I liked and like because you then win on course right we marry up low as performance can go up or down or sideways or anything but costs go on forever so if you look at say one and a half percent cost advantage a year we do at least that because of expense ratios lower turnover no loads all that kind of thing that's a one and a half percent a year is 20 percent over a decade so if you can beat your competitors without taking any extra risk by 20 percent give the client 20 percent more money well it's a good deal right all right let's try to listen for everyone else that's so it's all of a piece it all fits into our philosophy ok great let's we've just got a related question and this one's live from Thomas who says with ridiculous expenses how come hedge fund are so popular well they're popular because people are fools I'm sorry to express it so bluntly but the hedge funds have not done nearly as well as the S&P 500 or I think maybe a little more a little more fairly a combination of the S&P 500 and the Barclays bond index because the hedge funds because they're hedging we're not fully exposed to the market but the mutual funds have been winning for the last five years earlier the hedge funds look good and people do too much looking back performance why did they do better before there were fewer of them they didn't there wasn't one a lot of competition in the field there were actually some very good managers when you're adding more and more and more hedge fund managers they must be average on balance and the big problem with hedge funds is this tremendous spread between the best hedge fund best performing hedge fund on a given let's say year and the worst and I think we calculated that last year as the best and was up 192 percent and the worst one was that 80 percent wow that's a hit might or might not have been quite that big but it's at least a couple hundred percentage point spread so I can tell the viewers the participants today is pick the one that goes up 192 percent I'm sure that's so easy to do yes very easy to do all right well mr. Bogle to make sure it happens again by the way well that's true Twitter is actually blowing up we have lots and lots of tweets coming for you again a lot of congratulations but a lot of good questions too so let's take one of the Twitter questions this one is from Joshua RAC and he says what are some personal rules that you abide with when you invest well I'm largely indexed and the only reason really that I'm not 100 percent indexed all in Vanguard funds of course is we have some funds that are very index like that you really can't find good indexes for they're very difficult to implement in the particularly municipal bond fund area and in my personal bond account and obviously it's very demand it requires I use municipal bonds because the rates are so favorable for people in my tax bracket and so you if we're there there they have correlations with these indexes which you can't really match you could with setting up your index fund but those correlations run on the 95 to 99 percent range between our long term intermediate long term municipal bond fund tax-exempt bump on intermediate term limited term and short term and and actually the high yield miss move on to high-yield taxis in so that their index like and almost entirely index like so I'm an indexer that's all haven't changed your stripes we did have a question from Reggie speaking of change who asks what are some of the most significant changes you've seen the broad investment landscape in your 65 years I mean there have been so many but what sticks out in your mind and are they positive or negative well certainly the first one is is highly negative and that is turnover in the stock market has gone from maybe 25% a year to 250 percent a year and so people are doing more and more swapping back and forth with one another creating value for Wall Street and subtracting value from themselves the same thing very few people that I think of thought about this the same thing has happened in the mutual fund business when I was in this business at the beginning the typical Redemption rate was let me just take a slight guess at this it was about 8% a year that meant if you had 100 shareholders in the beginning a year eight would leave during the year and now that Redemption raised up to 25 percent a year so the holding period the way we do it in this business and 8% Redemption rate suggest the average holding period is twelve and a half years and a 25% Redemption holding period suggest that the suggested emption rate suggests that the holding period is four years that makes no sense none nada no so that's another one we also had in a lot of ways a pretty good industry back when I came into it one thing very few people are aware about is the average expense ratio on this two billion dollar two billion dollar industry with lower and it is today it was around sixty basis points six point six of one percent and that's weighted by the assets in the fund and that a weighted average for foreign actively managed fund is I think it's about eighty eight basis points or something like that eighty eight of one percent so it's up about thirty percent maybe 40 so fees have gone up and when you multiply the higher fee rate times an industry that is going from two billion dollars to say sixteen trillion dollars you can see it's a bonanza for the fund industry and another thing it's much but made it much worse and this is something that almost nobody ever thought about until I mentioned it in some depth quite a few years ago and almost nobody still thinks about it despite my caveat and that is this has become an industry owned by financial conglomerates mutual fund management companies which used to be owned by their officers and and money managers partnerships or small closely held corporations privately held corporations of the 50 largest mutual fund groups now forty of them are owned by financial conglomerates and when a financial conglomerate or even a publicly held mutual fund management company they're trying to serve two masters they're trying to either it clearly I don't want the meaning of too much but they clearly want to get the best returns they can for their fund shareholders but not to the point that they're not making money mm-hm earning return on the capital of the owners of the company and that's just a conflict and as the Good Book says I'll get it right this time no man can serve two masters and it also goes on to say for you will hate the one and love the other and it is my officer firsthand observation that in the among these conglomerate held mutual fund managers the one that gets the love if you will is the is the person owns the management company and I'm not sure the other one gets to hate I don't want to go that far but they they get what's left essentially right this is why your first point about the structure is so important right so we have a tweet up from actually from someone local genome is a who says that who says what differences are you seeing investing attitudes and behavior across generational groups so you know we've talked about changes over 65 years do you see change your changes in investors themselves as we have different generations in the market well that's a good I don't have enough data to answer that question successfully but I do think that when you get toward retirement age that would be older investors you tend to have learned a lot about investing and tend not to switch around as much you're more comfortable with your portfolio you're more apt to be investing for income and capital than capital growth and income is kind of the steady thing that comes along month after month or quarter after quarter doesn't change a lot in a bomb fund or high-grade stock fund and the very young people have been so well educated in college in finance courses and in Business School that they know that the answer is the index fund I mean that is what is taught really in our universities and in our business schools everywhere I mean they say nice things about me they do so nice case studies on energy so it's kind of the group in the middle I think and this is a demographic study that I just I don't have I have not seen but I'm just taking a guess because you get a lot of experience in this over time and so it's the group in the middle maybe the mid 30s to mid 50 something like that they're just doing more trading than they should mm-hmm yeah I wonder I wonder sometimes if you you know having that information at your phone every minute you can check the markets if that creates some behavioral issues where you feel like you have to take action because it's in front of your face and it wasn't years ago I mean I was here before we had smartphones and the internet and it you had to really look for it we sure the Internet I mean it's so easy to move money around just by pushing a couple of buttons mm-hmm resist the temptation it's hard it's hard the light blinks at you we have a question from Stephen in Southampton Pennsylvania and he says you know most of us have actually only commuted communicated with Vanguard by phone since we don't have investment centers can you talk a little bit about what it's like at Vanguard so what are the crew like now you eat at our cafeteria every day that you're you're here and you get to you have lunch with the crew and talk to them can you give people a sense of what it's actually like to be here well I think I actually can because I spent a lot of time and delightful effort making sure that I'm in contact with the crew a great deal there will be Award for Excellence winners about ninety eight or ten each month each quarter and I'll spend an hour sitting down just talking to them but know what keeps them here what makes them happy and where they grew up if I'm not violating an HR regulation ask them about marriage children things like that I might ask them what their parents did for for a living we often find that that crew members who have teachers are in a basically disproportionately large here which i think is great and then if we get a retirement or a 30 year anniversary or a 25 year anniversary they'll often invite me to come and just talk to them informally at the celebration and other than the fact that I don't need much cake I love to do it I love to be with them and then somebody will come up and say maybe drop me an email or even or even just cost me for the one of a better word on the galley our cafeteria and say they want to have lunch with me and maybe they've been here three months and I say that'd be great but you know my time is limited so I'll only do it with you if you can get like six or seven of your friends so we have a six or seven person luncheon so I feel like I'm very in touch and you know I try try to explain him let's be fair to the audience you know working at Vanguard is not heaven on earth maybe as close as I could get it to where the president management could get it to - for that matter because we're all looking at this the same way but you can work to make it bed the best place you can find to make a living and we're pretty good on promoting we're very good on on the gender lots of women in the and the higher ranks of the company and it's very diverse very diverse racially and we of course have a lot of people from Indian China Taiwan and they speak better English than we do I think and so it's it's a little micro micro section of the world but certainly the upper intelligence level of the world almost all college graduates and many business school graduates many the computer people are you know there's the technology people on technologies to I fear so much better in India and China that is here in the United States maybe we ought to think about getting our us act together a little bit I think science is definitely a top priority okay well we have a couple live questions so our next one is from Edward and you talked about bond funds a little bit and he says why do bonds stop do bond funds still make sense even in a low interest rate environment so well tough for income nothing makes sense for everybody let's start with that okay but for the vast majority of investors I believe now and have always believed that you need basically I don't care for long-term bonds they will provide the highest returns over time but they're quite Vall and apt to scare people when interest rates go up they can go down 25 30 percent in price and I don't think most investors are just up to that up they're really staying that way in the long term on a bond account so there because when the market gives us one of those 50 percent drops of which I've seen three you know if you're 50/50 stock bonds that that 50 percent problems going to be 25 percent in your account it moderates the volatility in your account now I happen to believe that's a good idea but if an investor says I can handle the volatility and I believe them I say you don't really need any bonds at all and so we have a little rule of thumb no more than that of having start thinking about your age as a percentage as the percentage of bonds you have in the portfolio so in the abstract and this is a rule of thumb this is not a rule 20% in bonds when you're 20 and 80% bonds when you're when you're 80 now what comes into there I don't want to make this too complicated but it's a very important thing for just about every single person on this webcast and as you also have Social Security the vast majority of people do and that has much more kinship with a bond than a stock it pays you income every month yes you don't have any capital position or anything like that but you should take that into account and therefore if you have social security of a substantial amount and can get pretty large you can only bonds and more stocks because you look at the tree high stocks bonds and Social Security or corporate pension fund if the corporation is going to make it that's a big Evan if the polity is going to make it and not them anything that's a big if pension funds left either at least in the private sector next questions shifting gears from retirement is from Krish in San Jose California who says congratulations mr. Bogle may you live longer and provide sensible financial guidance to us all I have two sons ages 23 and 20 so what is the one single piece of advice you give them so that they are financially secure when they retire so what's the one thing investors just getting started right out of college really should know start to invest now continue to invest as you have the money increase your investments as you make more money have a little note in your budget so that let's say 15% of your of your compensation that goes into a mutual fund investment a low-cost mutual fund investment or even better an index fund investment and that's only because I believe it I'm not trying to sell anything and you can sell it's a vanguard webcast so but to make sure that your contributions go up with your income and and then you know I would always say another rule that I use it's a little overdone maybe don't peak PE EK and don't look at your account every day don't lose your account every month I tell people what if they don't look at start investing when they're 22 years old and they don't peek at their 401 K statement or IRA statement until they retire a caution had a good cardiologist next to you because when you open that final statement you're allowed to open at the end you will probably have a heart attack you won't believe how much money you've accumulated it's so remarkable what long-term compounding Plus well the magic of long-term compounding returns without the the tyranny of compounding costs is magical mathematics and if you're aware of that's really all you need to know start early save off and don't look it sounds good you know I want to take a second as I mentioned we are getting a lot of congratulations in both through Twitter and through the computer and there were a few that I noticed came in that I wanted to share with you because I do think you know certainly I've been here 20 years and I thank you for that for making this home for me and many people feel the same way so the first tribute to you comes from our friends the Bogle heads for those of our viewers who don't know there is a Jack Bogle fan club called the Bogle heads and you can look at their website which is Bogle heads org and this is from Mel Mel Lindauer who says hi jack on behalf of Taylor myself and all the Bogle heads I'd like to congratulate you on this momentous occasion celebrating celebrating your 65 years in the industry more importantly though is what you've accomplished in those 65 years as a beacon in the darkness selflessly ensuring that investors get their fair share we're blessed to call you a friend and a mentor and I guess we'll be seeing them in the fall when they come to Vanguard you know I spend more hours you can ever imagine in their 2 and a half day visit here and I love it a wonderful group of people MELAS great Taylor Larimore is essentially the founder was a almost a victim of the Battle of the Bulge in World War two is marvelous gentleman and the rest of the Bogle heads are just I mean how people could stand sit in this room wait I think we can only take around 230 people in the local hotel and how they can sit in that room and listen to me go on sometimes for two and a half hours consecutively then with a five-minute break and another two and a half hours while I'm exaggerating about the break in the second to none I've seen it is it is a great event we have a couple other comments I've admired John Bogle for years this one is from Elaine and she lives in Wisconsin says I've admired John Bogle for many years when my husband died suddenly at age 50 I was left with some insurance money and no clue what to do with it someone suggested Vanguard that was in 1982 I've been so happy that I made that decision now my assets have grown to the point where I've been able to designate a substantial amount to each of my three children and my seven grandchildren as well so thank you Vanguard in a very special thanks to you mr. Bogle well you know I get a lot of letters like that and one of the really it less well-known things about them is they come from everywhere mm-hmm I mean towns that we have never heard of we've heard of all the states they sometimes come from abroad and the diversity of geography and the diversity of the people and their needs and how they're doing is really makes my day yeah my too and a couple of me but bring tears to my eyes to be honest with you makes you feel very good about working here speaking of feeling we did have a question from Paul in New Paltz New York and he says how are you feeling and what's what's the most important thing to you now he also says he's read everything that you've ever written and he thanks you for giving him and his family financial independence so we had a lot of questions asking how you are feeling I was gonna first say a salute anybody who's read everything I've ever read I think there are 500 speeches on my website and we know from the introduction there are ten books but I'm actually feeling I guess I have to say considering pretty good had my 87th birthday a while back and I feel mentally very strong I had a uber driver pick me up the other day and and when I got out of the car he said you sound like you're 30 years old how old are you I confess to 87 no point lying but I'm getting older and you know I got scoliosis a little hard to get around I carry a walking stick but I am not complaining and as I think I can say this on the air I gave a commencement speech up a Trinity four or five years ago I was talking about some of the adversity including having a heart attack my first heart attack when I was thirty and some of the adversity I'd encountered but I said you know if you had the life I've had and gotten at that time I think 16 extra years of life from the transplant or transplant it doesn't seem like a good idea to go around bitching and the audience I guess I look like nice or distinguished I don't know I never never said about myself but the the applause that she years.the laughter overwhelmed the next sentence which was I apologize for using such a gross word but the word complaining simply does not capture my meaning I think we're going to see that word on Twitter a few times mr. Bogle that might be the the tweet of the evening so all right let's take a few question they have a couple more live questions that have just come in we have a question from Ralph who asks what about value based investing for long term capital appreciation picking companies based on good value earnings ratio and management how do you feel about well there's two issues here picking the companies and contrarian investing which I think are two separate there's quite a bit of material written papers written about the value is the endurable so-called factor yes and if you do value investing that that factor will drive higher returns for you as compared to growth I see as the usual alternative and the similar things are saying said about small cap and large cap I don't see it I see it in the aggregate if you go back to 1926 when these data started and up to date it's clearly true that value has done better than growth but you can look there and they'll be maybe periods as long as 15 years when growth does better than values so we don't know if we're just at the high end of the cycle or it will continue but I have this conviction and a lot of people whose opinion is much more valuable on mine and whose opinion I deeply respect think value can go on forever in my opinion reversion to the mean again value does better growth does better value does better growth this better is likely to happen which I give you just an excellent example of this and that is in a couple of ways and that is back in 1992 it's almost more than 25 years ago I thought it might be interesting to allow people that want to accumulate money tax efficient way in a growth index fund would accumulate money and then when they got to retirement they would go into a value index fund which with a less volatility and higher income and I said I preside my basis in the presumption that over that kind of time period growth and value will do the same both of them had exactly the same return in that period for those are saying bogles one lucky guy to have said that I say you're right but just happened to come out exactly the same but there's a real lesson here because the average investment in those funds didn't earn 9% he went over nine percent in growth nine percent in value right but by going back and forth here in six percent trading band I warned them about this in the first annual report and the second annual report and the third annual report and probably the 15th annual report and that is don't trade these back and forth because you'll make a mistake you'll go into the hot one and you turn out to be the cold one so we've tested it that far and that one particularly one it shouldn't be definitive but I'm skeptical as I because I have always held the belief that if something seems to work so well then all the growth investors will buy value stocks and bid them up and grow stocks will go down and then the equation won't work anymore right all evens out in the end a little complicated for the audience here maybe I don't know I think I'll let prestidigitation absolute sense you know we've had a lot of questions about both what you think the most valuable lesson you've learned over the last 65 years and what your biggest mistake was over the last 65 years I think they're related so Matt in Colorado Springs asked about your most valuable lesson and Sierra asks about your biggest mistake well the most valuable lesson I suppose was talk to me by Walter Morgan my great mentor at Wellington because we had one fun in those days well I can fund was started in 1928 I came here in 1951 it was about a hundred and forty million dollar fund and one of the larger funds larger funds in the industry and it was all about balance balance balance you know we've been through a tumultuous period in the 30s sharp and even it's through halfway through the 40s and it worked just fine a balanced idea so the idea of some kind of investment balance is was just drummed into me he also drummed into me in fact the crowd was always wrong if a pair really wanted something that's what you did not want mm-hmm I'm not sure how these things have stood the test of time but it's now we call it the first everybody calls it the first thing the investor needs to decide on is asset allocation and as long as it's stocks and bonds as we're talking about investment balance and on that point Rebecca I don't believe in these other funny things that have entered the marketplace I do not believe in commodities I do not believe in gold which is a kind of commodity sure I don't believe in these funny real-estate things that are real estate real estate index fund is fun or a managed real estate fund but all these limited partnerships and all the accounting money stuff that goes on and I don't believe in all these triple leveraged funds sure that you can buy through exchange-traded funds all these little tricks if you will shortcuts have absolutely drummed into my head again after 65 years in this business almost 65 years don't do it stay the course but stay the main course mm-hmm I like that Stan the main course what do you think your biggest mistake was oh I made so many it's a curious thing it very clearly the biggest mistake I made was when I was given the responsibility at age 35 to take over the well again management company because we were in deep deep trouble and mr. Morgan said do whatever it takes to fix it and after trying three or 40 I had to do a merger partner in the middle of the go-go era and to stay alive you had to have a go-go fun it's kind of unpleasant to think of now and particularly since Wellington fund slipping a good bit at that time so the biggest mistake was making that dum-dum-dum merger these Boston managers were greatly overrated they were short term they were gogo and they weren't particularly analytical you know they believed in things like momentum and all that and started to more go-go funds to go with the one we acquired and all those funds lasted for they they were very good for five years and then they weren't very good and then they were so bad that they vanished so they're going forever so doing that stupid stupid merger for the sake of the company which I thought I had an obligation to do I'd a fiduciary duty to the Wellington management company and a fiduciary duty to Wellington fund two and two trying to make things better the Wellington fund got so much worse that it's breathtaking I didn't know that in advance the manager they brought in was well I won't get into that Bob's naming names which I imagine gentlemen to do here but they were gone and fired me yeah and they made all the mistakes well this doesn't really seem like a very good idea as a matter of fact I was crestfallen again in my career and out of that came a new company yeah thank goodness it happened Edgard best mistake you ever made yeah so the mistake was terrible right but the outcome this is I think a pretty good lesson for everybody you know you can't you can't get down into yourself you can't think the existing conditions are going to last forever you need a lot of determination something he says grit these days yes those kind of things and you have a lot of confidence I always had a lot of confidence in my investment acumen I'm not known for that when I fixed the Wellington fund myself told the manager what to do in 1978 it's beaten the average balanced fund for every year since 1980 every single year primarily because it cost right I tell people about cost for particularly for Wellington fund but the competitors come to us every year there's a cost differential of about a hundred and fifty basis points one hundred and forty one point four percent so they say we're going to have 100-yard dash and we want you Wellington to start on the 20-yard line thank you I'd be glad that's right that's right all right let's take another live question this is a good one and certainly a lot of sentiment around this this is from Loretta and she says everyone is saying that the markets are currently in a state we've never seen before do you think we can still rely on the historical principles we have always relied on today well different this time this time is not different but stock valuations are higher than they've been and the prospects for the future or lower than they had been in a long long time and on the period I've been in this business the stock market has averaged it's a return of about twelve percent a year and that's just not going to happen again because at that time during that period the dividend yield on a very important component of stocks stock returns was about almost six percent call it five and a half now it's - that's a deadweight loss the average earnings growth was pretty close to six percent I don't see that earnings growth happening in the future I think it'll be if we're lucky 4% and stocks have high valuations the price earnings multiple the essential nature the central measure of value is around 22 times earnings in the norm is about 16 so putting those three two things together they're all Deere expensive if you will and so we can look for maybe stock returns on a balance by an interest rates are five and a half percent during that long period of my time in this business and now they're two percent on the actually one point six percent on the ten-year at intermediate term Treasury and so bond returns will be lower so I think that we'll be lucky to get a return of four or five percent from a balanced portfolio in the next decade I don't look at this I don't want the viewers to look at it as saying he's predicting something for the year I have never predicted anything year I don't believe in year-long perd too many things can go wrong but in the long run and this gets to the heart of that question the same reason for generating returns the reason for generate that stocks generate returns is the same as it has always been the earning power of corporations they make earnings they taste some out in dividends they reinvest to build newer faster innovate whatever they do and that's where earnings growth comes from from that reinvestment buy at large so dividend yields are lower and the reinvestment will be lower and so the returns will be lower I think that's almost certain and so just relax because the one thing that will guarantee your retirement plan will have an asset value of zero is don't invest at all true yeah actually you should save more yep so it what's what's hard ain't very important for the audience to understand is you have to accept the market returns for what they are going to be don't reach beyond them don't do something speculum don't lever up to make up the difference it just is highly unlikely to pay for it II will not work for everybody and highly highly unlikely to work for very many people great well we have a tweet that just came in to our hashtag Jack Bogle and this one is from V M Campos who says what is a concise one sentence way to convince Millennials to think about their retirements which seem unfathomably far away how do you I mean we've said you got to start saving how can we convince them something that is 40 or 50 years off well I'd say the miracle of compounding and I will repeat myself and say the miracle of compounding returns without the tyranny of compounding costs because that can ruin everything the cost factor so just the mean get out of compound interest table and the dollar is going to grow to 30 dollars in 25 years if it'd been 50 years think it is and $1 to 30 that's 30 times and if you've got another 25 years it probably goes another let me say twelve times over something like that those dollars you can't accumulate them at the end because you've only got a year or two to write nothing works for you so start now because it's going to be a lot cheaper if you want to I don't have a good arithmetic number for you here but you know if you want to invest $5,000 a month when you're 60 years ago you'll get somewhere but if you want to invest $500 a month when you're 25 you'll have much more money right and not gonna be easy to do $5,000 or $10,000 or whatever it might be but the longer you wait the more your monthly contribution has to has to increase like this the ladder gets steeper and steeper and steeper as you get closer yeah we've always found it very effective to put it actual dollars and cents and say here's what $50 a month could look like potentially and I think that's what gets people motivated our next question is totally off topic but Lee in Bloomington Indiana says what's your favorite book on investments and I would assume she he or she means not one you've written yourself know which would be fair but well I guess I'd say there's there there are not very many of them by the way that I think ranked in that group one was certainly be burton malkiel's my friend he has expressed burton malkiel's a random walk by Wall Street it has a touch of humor a lot of data he brings it up to date probably every three years four years and that's a very good book it's hard for me to go a long way beyond that to recommend a book to someone okay that's a good one to have on a short list could be treating yeah Jed could be number 200 belong mutual funds probably yeah well you know speaking of dr. Malcolm we had a question from kg in Ohio who said do you believe the markets are efficient so he you know he's talking about the fishing markets theory and there are some people who don't believe in that or don't believe that it still holds true and if so how do some although very few consistently beat the markets well this is funny because they gave a Nobel Prize to some of these people this year and the people who believe in the efficient market kind of theory and when I started the first index fund let's be very clear in this I had never heard of the efficient market hypothesis EMH and and I didn't think it worked I mean what we must know after all this experience is the market is efficient sometimes and inefficient sometimes I mean it's inevitable and it's very difficult to have the wisdom to know the difference I mean I don't have that I mean I know a little bit about valuations my own market by prognostication I went over to reasonable at creating reasonable expectations for Morgan returns has been a highly accurate without having anything to do with them with the with the efficient market hypothesis and that is corporate returns come from dividend yields and earnings growth and changes it price-earnings you know the dividend yield when you look at the market and that's why it's not better today you know what the long-term earnings growth is probably five to six percent in the US and if price earnings multiples are over twenty the odds are probably 80% they'll be lower at the end of the decade and if they're under twelve the odds were about eighty percent they'll be higher at the X C this is not a vacuum so don't think efficient markets theories go too far and underscore has absolutely nothing to do with my creating the person next fund did I make that clear yes I think so let's take see if there's any other live questions so we have a few questions obviously we've been in a low interest rate environment and we've had a question both from Gregory and Tennessee about what to do if the Fed raises interest rates but also more generally you know what is your advice for retirees who want to create income when bonds really are not paying very much and that's from a lien in Boston Massachusetts so should people be making adjustments to try to get income well as an old saying probably going back to the 20s or 30s more money has been lost reaching for income has been lost at the point of a gun you have to stay re-emphasize this you have to stay within the confines of the market I mean you can go out there and put together a bond portfolio today that probably yields 10% now have the funds in that port for bonds in that portfolio probably won't make their next payment right you just don't know and I do think for people particularly people's retirement plans where people want to maintain their capital do not reach for yield it's a another example we use is it was a limb on a tree and if you reach out too far on that limb go out too far a limit snaps all right and you know it will work for a tiny minority but it won't work for the average person so stay within the confines of the market but I hope this isn't too commercial for them for the viewers but once you get yields in this range stocks at two bonds up maybe two and a half for three if you used some corporates and go a little bit longer in an intermediate term but not long what really matters cost mm-hm because if a stock fund think about this for a minute if a stock fund is yielding 2% and has a one and a half percent expense ratio you're going to get 1/2 of 1% so see how much of the yield you're getting and if someone's bragging about a portfolio of high yielding stocks or with above-average yields nothing the matter with that as such if you don't reach too far but if they're taking three quarters three quarters of the yield and putting it in their own pocket don't go there did I make that clear I think so too cause it all comes back to low costs let's take another live question this one might be a little blue on the brink of political but Robert asks will our country's debt ever catch up to us no it won't be worried about it and well I'm worried about the way it is today and but as the country grows as a gross domestic product running now probably 18 or 19 trillion dollars a year as that grows the ability to handle the growth in debt it becomes it's basically a wash you can keep debt in line with the country's growth I'm not sure I'm smitten with that idea but I am definitely smitten with the idea bothered about the idea the weekend someone had to take a huge reduction in debt because that would put to probably run us into a recession government spending is a very important part of the economy and it shouldn't go on forever it probably should not have gone on as far as it has going on strike there probably it should not have gone on as far as it go on and this country is not leading the world in ratio of debt to GDP but we're not that we're not as badly off as many many of our fellow nations and we are also much more sweet we remain one of the most strongest economies in the whole world particularly the developed world and as for emerging markets well they're a little shaky I wouldn't get too carried away with them good old USA now you take say well BOGO is just this jingoist that may be true so take that into account in your investment decisions uh-huh we've talked a little bit about commodities and precious metals absolutely no reason to hold a precious metals fund or precious metals in it in a otherwise well diversified portfolio and that's coming from Craig and Pleasanton California no no okay no no no but I'll make one exception if you have a significant amount of wealth and are concerned about the possibility of severe inflation in the future he would not be the end of the world to put maybe 5% of your money you know you know in a precious metal gold fund I don't like commodities because they don't have mean Gold is basically Universal in the financial system I don't like that advice very much but it comes along with another piece of advice and that is a lot of people think the stock market is a great place to express their gambling instincts and that is a wonderful way to gamble but a terrible way to accumulate a retirement fund or fun to educate your children so I say put your money into two sections one is serious money account and one is a funny Money account and these commodities and so on gold would be in the funny money account and my own recommendation would be to limit the funny money account to 5% or maybe at the outside 10% if you just have to do something but don't do what soar ruins everything else and who knows you make you may get lucky you may buy the next Apple but I wouldn't count on it can also play the lottery our next question is from Barry so Barry would like to know do you ever talk shop with other financial wizards like Warren Buffett well I have a wonderful relationship with Warren Buffett I'll make this short but my first one night when we both were out of the state securities Commissioners meeting and stent in San Diego California about 30 years ago it Salomon Brothers that he was deeply involved in was in deep trouble and he was out there trying to explain it all to the California Department of securities and there we were sitting waiting for a newspaper in the living room in the waiting room and in the hotel and I recognized him he seemed to know who I was which surprised me and I said to him would be who he said he I actually sort of spoke up on I said you know you're probably like I am waiting for the papers to arrive and if you'd like to chat if you'd like to chat a little bit and I'd love to chat with you and our friendship really began there and it was certainly enhanced when I made sure I was the one that was the billionaire the morning paper but that we've been in touch over the years he he plugs for the one of a better word recommends highly our index funds he recommends my books he has a this trust fund he's leaving for his wife that he has directed me 90 percent invested in the S&P 500 and he uses the Vanguard S&P 500 years the Vanguard S&P 500 in his so far with only a year a half or two years to go in an ordinary successful bet that he will be a hedge fund manager who thought he could beat the S&P 500 I think Warren is about 44 50 percentage points ahead way ahead so and he'd be very nice he he wrote wonderful blurbs for my books and he's easy enough to reach if you if I wanted to call oh my god I don't really have any reason to but we're in touch periodically and I've been out to Omaha I had dinner with him it says a lot of fun he's a wonderful person I think a lot of our viewers would love to be at that dinner today well well I saw somebody paid four million five hundred and sixty-seven some some some to have lunch with him and he just took the four and ran and ran it up four five six seven eight nine whatever and topping a previous bid for the lunch four three four five six seven eight nine three million four I assume that was for charity yeah well you know people have let people buy lunches with me Rebecca and so far I think the high bid is two thousand dollars did I do this for cherien yeah I was going to say of Herman we have a question in from Herman who says can anyone be an expert at market Tommy so he would just talked about Warren Buffett who people think of as a you know the world's great stock picker so is it possible well I suppose anyone can but this is a group by definition cannot they can't won't get out the top and get it at the bottom when you look please understand viewers that if you're if you're getting out of the market at the hot top somebody else is getting in the market at the top right you know you're selling your stocks somebody else is buying them this is not complicated so it's just it's just not a good idea but Warren Buffett is not really a market timer at all he as everybody knows his great record really truly great record was created very very beginning back in the 40s and 50s with before the 40s actually Berkshire Hathaway and a Warren like a great disciples of Benjamin Graham and Warren told me himself the Benjamin Graham became an indexer as the Kaz the character of the market changed and as you know valuable security analysts when they were doing it by themselves could pick out good values but when everybody has security analysts all over the place no competition equalizes there's a certain amount of efficiency built into that not perfect but but pretty good so you know time if you want oh but I'd put that part of your account in the money in the funny money right um speaking of trading I wanted to ask question from Preston in palo alto california who asked what was what is the effect of high frequency trading he's reading Michael Lewis's book on individual investors and portfolio value well a curious thing about it is it probably is helpful and it's helpful because high frequency trading and all these other crazy things that go on in our market have reduced securities transaction cost to the lowest level we have ever seen in the history of the financial markets so if an individual comes in he's at although he's going to come in at a lower cost and buying stock there's a lot about high-frequency trading that deeply troubles me I don't get enough information about it I don't like the idea of dark pools I think the Sun should shine and everything that goes on in the trading markets this fella who worked with on the stock rapid trading thing has just gotten permission to start an exchange which will make it it it's amazing to think of the as in his system of 350 millisecond delay and it's printing a prices and that solves the problem 350 milliseconds so he I don't think we need to concern ourselves about it I would like to know how much of that sharp pricing is done between two high-frequency traders as compared to two investors because if two investors are there and one of them pays an extra penny to buy a stock and the other one gets an extra penny well that just comes out in the wash but new investors any good or any harm but I'm afraid I have a deep suspicion the middleman is taking a larger cut than we know and we'll just have to find that out they're very profitable firms speaking of middlemen we've had a number of questions both through Twitter and when people registered about the fiduciary standard rule and you've been pretty outspoken about that so can you just share at a high level some of your thoughts around that maybe and maybe help define what it is for people who might not be following this well first let's define fiduciary duty means and it's the highest duty under known under the law but do she Airy Duty means serving the person that has employed you putting their the interest in this case of the investor first before your own and it's the Labor Department has come out with this requirement that both investment advisors registered investment advisors and stockbrokers observe a federal standard of fiduciary duty putting the client first that standard whether it's adequately observed or not is something else again but was always applied to financial advisors registered investment advisors now it's applied the brokers who only had two very loose what do you call suitability standard and so and this only applies it's kind of amusing it only applies to retirement plan investors so here we have at least a theoretical situation where as a broker out there and he has coated red over here retirement plan investors put their interests first and their non retirement investment plan clients over here he says do whatever you want with them that seems unlikely to happen the system will equalize and I do hope the SEC which should have the primary responsibility for this anyway Securities and Exchange Commission will have that Boucherie standard apply to all everything in the financial business and I would even extend it to money managers who are not under a fiduciary standard I mean they are theoretically but it's not like a federal statute says fiduciary D so putting the clients second I mean I I said to someone doesn't seem like a great response to your client when your client asks you about this to say well I'm putting myself first and your second but it's close this is the great thing about being owned by our clients we don't have those issues so mr. Bogle we have actually gone over time obviously thousands of questions and tweets laughed maybe we can get you to answer a few tweets after the end of the broadcast but I did want to give you the opportunity to have some final thoughts and you know you can share them right with the shareholders that are watching if you'd like I surely I've I've had a great time in this business almost unimaginably great well I've accomplished something that has not been done before the idea of index fund investing is kind of taking over the world and it is taking over the world that's going to continue by the way I warn my actively managed competitors they're going to have to do something somewhere to protect themselves but the whole core of everything we do here most notably and easily measurable in indexing is putting the client first and giving you your fair share of whatever market returns develop they may be good and they may be bad and I warn you that only an index fund is not a free ride to prosperity under all circumstances when when the markets are bad and they will be bad from time to time particularly in the short run the index fund will give you your fair share of those bad returns so don't think of it as a miracle think about as an intelligent policy that puts you in the focus of the system and fortunately we've given Vanguard structure we're able to deliver on that promise a mutual company in which the shareholder comes first last and always or as I would put it into more simple way you'll recognize the cadence Vanguard is a company of the investor by the investor and for the investor and you all are those investors and I thank you deeply for your kind comments about me I thank you for your confidence in me and in Vanguard my goodness and we thank you so much for all that you've done for this company mr. Bogle thank you so much for joining us for this hour we're going to have to do this again my pleasure not to not give me a couple days okay and thanks to all of you for tuning in and watching I think you'll agree this has been a wonderful webcast we will be sending out replays and video highlights to you with transcripts in just a few weeks and we would really appreciate if you'd fill out the survey at the bottom of your screen you'll see a little red icon you can click on that and fill out a survey we'd love to hear what you thought of this now next week you can join me here again and we'll be actually talking about the global economy with our chief chief economist and you can sign up for that right now using the green widget where we have our research listed as well so I hope you'll join us again next week from all of us here in Valley Forge thank you again for joining us and we'll see you next time you

Channel: Steve Harenberg

Views: 62,021

Keywords: vanguard, webcast, webinar, bogle, jack bogle, john bogle, 65, 65 years

Id: byNIu6e7Sbs

Length: 69min 43sec (4183 seconds)

Published: Sat Jun 18 2016