The world’s most famous indexer says it’s sensible to adjust total bond market indexes away from their heavy government tilts.
John Bogle, Vanguard’s founder who built a second career as an author and the conscience of American capitalism, is still vigorous and relevant at the age of 84. As always, Bogle counsels investors to keep their focus on the long term, and to try to look past the near-term distractions in markets.
Total returns will always be the sum of earnings growth and dividend yield, plus whatever yield the bond market is serving up. Regarding the paltry bond yields that still prevail since markets crashed five years ago, Bogle reckons investors would be wise to work around the overweight in government debt that now characterizes the Total Bond Market Index.
He stressed that even ardent indexers like himself should always be focused on improving indexes, and he does that in the bond market by taking on a bit of extra risk and yields by including corporate debt in his retirement account and tax-free municipal debt in his nonretirement account.
ETF.com: So what now Mr. Bogle, after Vanguard and after all the books you’ve written?
John Bogle: I'm going to do everything I can to get a federal standard of fiduciary duty enacted. It’s not going to be easy and it probably won't happen in my lifetime. Also, I’m going to continue being a missionary for indexing until the day I die. But by indexing, I mean all-market indexing and no trading.
ETF.com: And by indexing, you also mean market-cap weighted indexes, as opposed to some of these other methodologies, like from Rob Arnott?
Bogle: Yes. Those indexes haven't proved anything in six or seven years. The Arnott fund [the PowerShares FTSE RAFI US 1000 Portfolio (PRF | A-87)] has done a little bit better, maybe 50 basis points better than the total Total Stock Market Fund [Vanguard Total Stock Market ETF (VTI | A-100)]. But it’s 15 to 20 percent more volatile, so you would kind of expect that.
In other words, those types of funds are in the process of proving what we all know to be true over the long run, and that is, if you're willing to take more risk, you may generate some extra return. Although I don’t run this firm, let me say this: Should we be jumping on that bandwagon? I for one hope not. Those things are going to come and go.