We all know Bogle's views on costs and indexing, but how does he feel about financial advisors? What advice does he have to offer those in the profession? Financial Planning posed 10 questions to Bogle and, as always, he was candid and passionate in his responses.
Q. There is ample evidence over the past several, volatile years that both advisors and consumers timed the market poorly. What should advisors do to control our own emotions and those of our clients?
A. My advice to advisors is the same as to consumers: Impulse is your enemy and time is your friend. Investors need to not do anything - just stand there. We will look back at recent volatility as a blip that should have been ignored. Advisors should get the right balance in clients' portfolios and stay there.
Q. Would you venture a prediction on the long-run return of stocks and bonds?
A. I think stocks will earn about 7% annually while bonds will return about 3% per year over the coming decade. The stock prediction is based on a formula I've used for a long time. Stock returns will equal dividends plus earnings growth. Dividends are currently about 2%, and I think 5% annual earnings growth is reasonable. While stock repurchases are similar to dividends, I don't put that in my formula because it's unclear whether these repurchases are completely offset by new shares issued to management through options and restricted stock. My research concludes that including stock repurchases does not improve the accuracy of the model.
The 3% bond prediction is based on the current yield. While the Vanguard Total Bond Market Index Fund is yielding only about 2%, the Vanguard Intermediate-Term Investment Grade Fund is yielding nearly 3%. I think it's appropriate to overweight corporate and underweight U.S. government debt.
Q. But isn't the total bond index fund the bond equivalent of the total stock index fund, in that it owns all U.S. investment-grade fixed-rate securities according to market capitalization? By overweighting corporate, isn't that the equivalent in stocks of overweighting small cap or value?
A. I don't think the analogy fits. The total bond market index fund follows the Barclays aggregate bond index. It comprises about 70% U.S. government and government agency debt. A large portion of that U.S. government debt is owned by China and Japan. In fact, the U.S. government itself owns a large portion of U.S. debt. Overweighting corporate debt from the perspective of all U.S.-issued debt is not the same as overweighting it from the perspective of debt owned by U.S. investors.
Q. For a long time, you've recommended against owning international stocks. Your argument states that one has substantial international exposure from owning U.S. stocks and you don't pick up the foreign currency risk. But doesn't the large performance differential between total U.S. and total international stocks over the past 10 years, as well as currency fluctuations not correlated with U.S. stock performance, argue for owning international stocks directly?
A. Let me be clear, I have never argued against owning international stocks. I just don't think one should have more than 20% of their equity portfolio in international stocks. International stocks are dominated by the U.K., France and Japan, which have large problems.
Of course, these problems are known by investors, but international stocks have additional sovereign risks and far less shareholder protection than in the U.S. Thus, international investing is riskier, and I don't think planners should put more than 20% of their client's equity exposure in international stocks.
Q. You brought index funds to the public in part for their simplicity. Is there a conflict, however, that makes it hard to charge the consumer much if they design a portfolio with a few very broad index funds?
A. There can be a conflict, but the goal of the advisor shouldn't be to beat the market by picking stocks or winning funds. Advisors add value by providing the discipline required for successful investing. They add value in areas like tax efficiency, risk management, estate planning and retirement planning.