The Bogle Interview: Big Picture, Big Challenges
The editors of the Journal of Indexes sat down for a chat with Vanguard Founder John Bogle to discuss his long career and his views on the current market.
Matt Hougan, president of ETF Analytics, IndexUniverse (Hougan): What key advice would you provide to investors who are worried about today's markets? What would you tell them to do, drawing on all your experience?
John Bogle, founder, The Vanguard Group (Bogle): Well, I'm an optimistic conservative—so I'd be careful. As I look ahead, I think reasonable expectations are for about a 7 percent return on stocks, and about a 3.5 percent return on bonds, counting longer maturities and a greater weighting toward corporates, which are only 25 percent of the bond market index.
That means you'll double your money in stocks over the next decade and make 50 percent on bonds if those expectations are realized. I wouldn't write off stocks, despite all the scare talk. But it's going to be a bumpy ride. Everybody should be fully aware of that. They should be investing for a decade.
Anyone that's buying stocks thinking about what's going to happen next year is a fool, to be quite blunt about it. Buying stocks—owning stocks—is a lifetime endeavor. And as Mr. Buffett says—and I feel particularly strongly about this in the context of an index fund—my favorite holding period is "forever."
Hougan: Do you think a traditional broad-based bond index has enough weight in corporates?
Bogle: I don't think it does. I mean, obviously it does for all investors because that's the bond market. All those bonds are owned by U.S. investors. It's approximately 70 percent Treasurys, agencies and Treasury-backed mortgage banks, and 30 percent corporate. And that ratio is not that different from what it was when I started the bond index fund in 1986. It's surprisingly lower today, but not much.
A Treasury is now, according to somebody, rated AA. I don't believe that, by the way. But even so, the yields are low: The spread between Treasurys and corporates is 2-2.5 percent. It's hard for me to believe the default rate on Treasurys vs. corporates is that wide. And so, as long as the default rate is less than that, you're making a better choice in corporates.
I think we ought to be thinking more about corporates in a very-low-interest environment than we should about the total bond market. I love the Total Bond Market Index Fund. I started it. But it's not the answer to all things for everybody. If people are pinched for yield, I'd recommend they have a higher weighting in a corporate bond index fund.
Jim Wiandt, founder and CEO, IndexUniverse (Wiandt): Burton Malkiel sees a very bad environment for bonds in the U.S. right now, particularly Treasurys. People are effectively going to be, he thinks, earning less yield than inflation, which is kind of where the government is aiming things right now. What are your thoughts on that?
Bogle: In the bond market, today's yield is the best predictor we have for the returns over the next 10 years. Certainly the 10-year Treasury doesn't look like a very good deal—and yet it seems to do better and better every time there's an international crisis. It's the first place people run. That, however, is not going to go on forever.
I agree with [Malkiel] up to a point. You can probably get a 3.5 percent yield on higher-yielding equities, but you can also get 3.5 percent on a diversified bond market portfolio.
[Are high-yielding equities] a better strategy? Only time will tell. But if everybody is doing it, look out.
They're not stupid choices. But I still would not abandon a bond position for a stock position, even with higher yield.