Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.
John C. Bogle is the founder of the Vanguard Group of mutual funds and president of its Bogle Financial Markets Research Center.


Discussion

Hasan Sarwar from CT posted 4 months ago:

I have lot of admiration and respect for Mr.Bogle and do own multiple Vanguard Index funds. He mentions many funds reverting to mean. Though not a mutual fund, BRKA or BRKB
have outperformed S&P for a very long time.
Expenses, zero!


Jerry Durham from TN posted 4 months ago:

Mr.Bogle has a very sound knowledge about investing. I am very fortunate to have my 401(k) plan through Vanguard. My plan offers both index funds and active funds as options. Although my investments are mostly in index funds, I also use a couple of active funds to balance out my portfolio. Although the index funds have lower expenses, the two active funds I use have expense ratios of approx. 0.35-0.45 which is still very inexpensive. I feel that a mix of index and active funds will give me a greater chance for investment success. Of course other fund companies charge much higher expenses than Vanguard and that could make a major difference in returns!


George Bradshaw from NC posted 4 months ago:

How can you argue with an investment guru?


Homer Milford from NM posted 4 months ago:

A really great article. How can I save it for my grandchildren? I am serious and at my age not much into computers. Shortly after I retired eleven years ago I did a long calculation on my 43 years of stock market performance and I just equaled the Dow Jones. I could have saved 8 to 10 hours a week with an index fund (22,360 hours by 2003). The moral of the story is that unless you are in the market more for kicks than profits you should be in index funds


Agostino Schito from MD posted 4 months ago:

I am new to investing and still trying to understand all point of views. My 401K with Charles Schwab is managed by their adviser program where they invest in all available funds (there are not many available). My returns are lower that the S&P but my adviser says that we are more "diversified" and in the long run it will be better.
I would like to take over the management of my investments but here is what I don't understand. If the strategy suggested here is the best possible how do we justify the higher performance of the model shadow stock or model fund portfolios as defined here at AAII? Do we agree that the active AAII investing approach is superior compared to the "boring" index strategy? If we agree on this principal why would we discount any other actively managed fund or strategy?


Anne from Virginia posted 4 months ago:

Great article of simple wisdom.

Regarding Agostino's question about AAII active investing,here are my interpretations
1/ AAII published 10 yrs return from 2013 of its Model Fund Portfolio as 9.6% compared with 8.3 % for Vanguard 500 Index
2/ However these returns are calculated without considering all the costs mentioned by Mr Bogle in the article here.

I am a novice and would like to hear from AAII and other members if my understandings are incorrect.

Thank you in advance


Charles Rotblut from IL posted 4 months ago:

Hi Anne,

All of our model portfolios are actual portfolios. The return information we show reflect all costs incurred.

-Charles


Charles Rotblut from IL posted 4 months ago:

Hi Homer,

Near the top of the article, on the left hand side, you will see a link labeled, "Download printable PDF." If you click on that link, an electronic copy of the file will appear. Scroll your mouse over it and you should a disk icon appear. Click on that, and you can save the file to your computer. You can then share it with your grandchildren.

If you still have problems, please contact member services and ask them to send you a ".pdf" copy of the article.

-Charles


Jeffrey Thompson from KY posted 4 months ago:

Mr. Bogle remarks that you should buy the S&P 500 and leverage it 3-to-1. What is meant by leveraging this investment?


William Penczak from TX posted 4 months ago:

I think I know what Mr. Bogle meant by leveraging 3 to 1 (taking more risk to improve potential gains threefold, but chancing that losses will increase threefold). However how does one do that? What is a mechanism in the market for doing it?


Thos Mcphillips from FL posted 4 months ago:

Thanks for a great article. I've been reading and listening to J.Bogle for over 50 yrs and I'm a life member of AAII and grateful to both.

T.P. McPhillips CFP (ret.)


Thomas Mason from IL posted 4 months ago:

I've been investing in the SSR portfolio since near its beginning and have enjoyed and benefitted from it - both financially and educationally. I also have invested in the Shadow Stock and Fund Portfolios, although I haven't stayed on top of them as conscientiously as I have the SSR.

Here are my questions for Charles - What are the most efficient, broad market index funds and what diversification choices do we need to make even among index funds (exchange, micro vs small vs large cap, etc.)? Are there bond equivalents or do funds like PTRAX and BOND serve that purpose?


Gail Stevens from SC posted 4 months ago:

What does he mean by leverage 3 to 1. How should i do that and with what Vanguard funds. I have Vanguard Total World and Total Bond


John Steinmetz from CA posted 4 months ago:

I hope this discussion will continue and Mr Rotblut will respond to the questions.


Rajendra Bhatnagar from VA posted 4 months ago:

I am greatly impressed by Mr Bogle's view on safe and reliable investment for the long term. I wonder why AAII model Funds Portfolio has a number of Guggenhelm equal weighted ETFs instead of simple Index funds.

I will love to hear from AAII experts about this strategy. Do they agree with Mr Bogle?


Alvin Hawk from AL posted 4 months ago:

GREAT ARTICLE. I HAVE JUST RECEIVED A BOOK OF
ME BOGLE. I OWN MORE THAN ONE OF THEIR FUNDS.


Brian Casiday from CA posted 4 months ago:

I think William Penczak's analysis as to what Bogle meant by leveraging, but I also have his question as to how to do it. Does Bogle simply mean "take $10,000 cash, borrow $20,000 from a source outside your brokerage account, and buy $30,000 worth of the S&P 500"? If that's what is meant, it's a different concept than what is usually meant by "leverage" in the investment world. Would love an explanation. Thanks.


Charles Rotblut from IL posted 4 months ago:

Regarding leveraging the market 3-1, Jack talked about ETFs that do it earlier in the article. ProShares Ultra S&P500 ETF (SSO) is designed to give you 2x the return of the S&P 500, for instance. You could also get leverage by using futures or options strategies. Alternatively, your broker might let you buy shares of the S&P 500 SPDR ETF (SPY) on margin.

The general idea is that you are putting more money at risk than you would by simply buying a traditional index fund. Costs and tracking errors make it harder to maintain 3-1 leverage in reality.

Jack's point was that conceptually since stocks realize the largest capital gains of any asset class, there is a mathematical argument for maximizing your exposure. But as he also points out, it's tough to do so from a behavioral standpoint.

I'd take a look at your portfolio decisions during the last two bear markets to see how willing you were to stick with stocks. If you were scared about your stock positions then, you should be very cautious about using leverage now. Leverage is great when the market is moving in your favor and awful when the market turns against you. Throughout history, leverage has cost many investors a significant portion of their wealth.

-Charles


Joseph Plesh from FL posted 3 months ago:

More information is required on Equal Weighted Index funds. Vanguard doesn't offer any and it would be nice to know why.



Chris Simber from NJ posted 3 months ago:

Great article...Anything Mr. Bogle says is worth noting, and anything that he writes is worth reading. But alas, far too many still think that they can time or beat the market.


Richard Brand from CA posted 3 months ago:

I am a great admirer of Mr. Bogle and have been AAII member for many year


Mike Hoffman from MN posted 3 months ago:

Joseph in FL, Equal weighting would likely be considered smart beta which Jack talks about as not a good idea. I do own the RSP equal weight s&p 500 as I believe history shows small beats big capitalization in returns. This does seem to revert to the mean when markets drop as small caps often don't have the dividend protection that big caps do.


Etf as Buy and Hold from HI posted 3 months ago:

If Etf is used to buy and hold, would it be more efficient ie lower costs then having to pay the annual percentage to the mutual fund equivalent?


Charles Rotblut from IL posted 3 months ago:

HI,

Jack says in the article, "If you want to make a lump-sum investment in an all-market ETF, an S&P 500 ETF, a total stock market ETF, a total bond market ETF, a total international ETF perhaps, or an emerging markets ETF, owning the ETF structure is not a big mistake."

-Charles


Dave Gilmer from WA posted 3 months ago:

Charles,
Can you correct this statement so I can understand exactly what JB was saying:

"But I would that say if you do, take a look at it after five years."

Found it just above what I think is the first reference to ETF's in the body of your third question.

dg


Charles Rotblut from IL posted 3 months ago:

Dave,

Jack was referring to actively managed funds and how their long-term performance reverts back to average.

-Charles


Donald Barkman from TN posted about 1 month ago:

I liked the article a lot and generally agree with what it contains, but there are some logical slights of hand in it.

"...it is a foregone conclusion that active investors, in aggregate, will underperform index investors." (end of 1st paragraph) While this is true, none of us is an "aggregate investor." We are each, discrete investors. The rule that applies to the aggregate does not necessarily apply to the individual. To wit, in a race, all the runners will, in the aggregate, have the average time; some however, will finish in the front and some in the back. It depends on skill. So, if you are in fact knowledgeable and conscientious in your investing practices, you should individually be able to outperform the aggregate. That's a tall order which is why for most of us, adopting Bogle's approach does make sense.

Next error. "The first rule investors should understand is that what goes up must come down, and what comes down must go up." Not entirely so. Again, this is true for the aggregate market in regressing to the mean (e.g., P/E ratio). However, the situation for individual equities may be different (although his point is about mutual funds where it is more accurate). If you have a well-managed firm, there is no reason its profit margins cannot stay elevated and its stock continuously improve over time. That's not to say that it will not have price fluctuations around some central, upward moving mean, or have an oscillation around its mean P/E ratio, but it is not doomed to regress to the performance level of all other firms. Unfortunately, well managed firms in a complete sense (products, leaders, succession, strategies, capitalization, etc.) are not necessarily abundant. Hence Bogle's position that most of us cannot beat the average by picking winners in the market any more than we can at the track.

Next up...Trading ETFs. The comment about SPY trading $15 billion a day being "turnover" is a bit misleading. In the sense of inventory turnover of shares in SPY itself, that might be true, but in the sense applied to portfolios it is not. Most of the time "turnover" in this type of discussion relates to the buying and selling of the equities or individual investments held in a fund. SPY holds the S&P 500 mix of equities and they only change when firms enter or exit the index. That's very low portfolio turnover.

All in all, the article comes out in what I think is the right place, but it is not without its rhetorical embellishments.


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