Journey Financial Blog

Morningstar 2/4/10

“…Whether you’re an indexer or not, it’s filled with simple, powerful advice that can help improve your odds of long-term financial success. Here are some of its more important lessons, as well as a couple of points where you might dare to differ from St. Jack. 

Set Reasonable Expectations
Too many investors assume past trends will continue. Bogle stresses portfolio decisions should be based on not the market’s historic returns, but rather the sources of those results. For bonds, their current yield gives you a good idea of future returns. With stocks, returns can be broken down into investment return, or the dividend yield plus earnings growth rate, and speculative return, or changes in what investors are willing to pay for $1 of earnings.

 Bogle’s revised expectations indicate stocks may be a better deal. With the 10-year Treasury yielding around 3.5%, people flocking to fixed income are bound to be disappointed. Meanwhile, Bogle guesses, “that from our current levels some combination of slightly higher earnings growth and/or slightly higher P/Es and/or a swift recovery of corporate dividends could bring the nominal return on equities–to between 7% and 10% during the decade ending in 2019.”

 It’s the Costs, Stupid

Some people lump Bogle with academics and investors who posit the market is efficient. Bogle doesn’t spend much time arguing about market efficiency, though. To him, costs trump all. He contends the logic is irrefutable: Active and passive investors together make up the market; active investors incur more fees and transaction costs; so on average, passive investors must earn a higher return.

Even if you don’t follow Bogle’s logic all the way to his conclusion that investors hoping to beat the market with actively managed funds “are leaning on a weak reed,” it’s hard to argue with the strong case he makes against high fees. The price you pay is the one thing you can control. Don’t ignore it.

 Set the Bar High for Active Funds
Ironically, the apostle of index funds laid out some good criteria for choosing actively managed funds. Bogle thinks the pursuit of winning funds is futile but is resigned to the fact that people will continue to do it anyway. So, he laid out a few simple rules for fund selection: Choose low-cost funds; don’t chase hot returns or managers; look for consistency, tax efficiency, and evidence of risk control; beware of funds with big asset bases; keep your portfolio small and simple; and invest for the long term. …” 

Timeless advice for individuals and company retirement plans.