Jack Bogle's Advice : Buy the market. Hold for the long term. Keep costs low.

Wall Street Journal ^ | 09/02/2006 | HOLMAN W. JENKINS JR.

[SirLinksalot]

'First of All, I'm an Honest Guy'

Jack Bogle's advice: Buy the market. Hold for the long term. Keep costs low.

Jack Bogle, founder of Vanguard, has earned his fame as the man who taught the small investor how to make the stock market work for him. He'll also be remembered as the guy who left $20 billion on the table.

The story has been told of how, as the young president of Wellington Management Co., he lost a power struggle and was relegated to running the back end of one of the early mutual fund companies. It was ordained that he would have charge of record keeping, shareholder communications and other paperwork functions; his ex-colleagues would be in charge of investment management and distribution. He was obliged to sign a legal paper promising to honor this division of labor. "I knew I had to expand the mandate for this to be any fun," he recalls today. His solution was to seek the directors' permission to start an index fund, arguing that it didn't violate the taboos because it was "unmanaged" and because it would carry no sales charge, or "load." "I persuaded the directors we weren't taking over distribution, we were eliminating distribution," he says, recalling the triumph.

Now this was corporate warfare of a very high form, I suggest. You might even call it devious. "Would you mind using 'disingenuous' instead of 'devious,' " he says with a small smile. "I confess to wanting to achieve what I can achieve. I would never, I don't think, do it by foul means. But I would give a broad interpretation of what is fair."

An index fund seeks simply to hold the stocks of a given market index, in this case the Standard & Poor's 500, and mimic its performance.

[gcruse]

Indexing is probably the closest investment strategy to perfect for most of us. It's just not exciting. I'll take on a little more risk in exchange for a little more excitement.

[Protagoras]

The "buy and hope" strategy has cost more people more money than all the other stuff combined.

[gcruse]

Depends on when you buy and what you're hoping. Since it's inception, IIRC, the stock market has returned an average of ten percent a year. Good luck on beating that under the mattress.

[Protagoras]

Depends on when you buy and what you're hoping.

Sure does, and if you are buying common stocks and hoping that holding them through all market conditions will gain you 10% per year, you will need a lot of luck or a shrink.

Since it's inception, IIRC, the stock market has returned an average of ten percent a year.

IIRC?

Good luck on beating that under the mattress.

Mattress? Who suggested that?

[gcruse]

IIRC

If I recall correctly. I've read a number of investment books. I think that figure comes from A Random Walk. It's been a long time.

Actually it's a little better now, presumably because of the dot.com thing.  My ten percent figure was probably taken around 1995.  Here you go.

US Stock Market Average Annual Returns	"Time in the Market" Versus "Timing the Market," 1963-1993

Source: Ibbotson Associates

Source: University of Michigan

If you want absolute safety for your money, under the mattress is one way to go. Governments fail, after all. The highest return for the lowest risk, IMO, is the index fund, as I said.

[Protagoras]

IIRC

What does it stand for? I have been in the investment business for 38 yrs and I don't know what it stands for.

What if you started investing in 1999? What would your rate of return be now?

If you want absolute safety for your money, under the mattress is one way to go.

There is no such thing as absolute safety. And the mattress assures a loss if there is any inflation whatsoever.

The highest return for the lowest risk, IMO, is the index fund, as I said.

I disagree. Holding an index fund in all market conditions is not low risk. That's my opinion, and I get paid for mine.

[Tijeras_Slim]

If I Recall Correctly.

[VRWCmember]

The "buy and hope" strategy has cost more people more money than all the other stuff combined.

I'm not sure what you mean by that. For the most part, index funds for people with a long investment horizon (greater than 10 years) provide a good return and at fairly low risk. The "managed" funds rarely outperform the market-index funds. Peter Lynch's funds have typically performed well, often beating the index funds. He also however emphasizes buying not based on the "experts" recommendations but by recognizing good values before the "smart money" managers even begin paying any attention to the stock.

[VOA]

Bogle's recent book was pretty good.
He detailed the hijinks of the tech-boom market era; including some
things I hadn't picked up on by just watching/reading MSM.

[Protagoras]

Thank you, I was clueless.

[gcruse]

"That's my opinion, and I get paid for mine."

You've been posting on FR (that's FreeRepublic) for seven years and still don't know what IIRC is? And you charge for stock advice? Heh. I think my case for index investing and the bypassing of paid advisors just got made.

[Tijeras_Slim]

Thank you, I was clueless.

Not compared to some of the folks on the evil oil company threads. :)

[VRWCmember]

What if you started investing in 1999? What would your rate of return be now?

Do you mean "what if you STARTED INVESTING in 1999" or do you mean "what if you invested for one time in 1999"?

If you started investing and you were heeding the advice of Bogle and others who focus on long-term investment strategies, your investments in an S&P500 index fund would have begun purchasing larger shares as the value of the index declined from 2001 to 2003, and then the value of those shares in the index would have grown in value. So even though the value right now is approaching the peak that it had in 2000, it would be difficult to calculate what the total return is right now without knowing how much was invested over the investment period and how the dividends were reinvested. Also, if you started investing in 1999, then today (7 years later) is a bit early to be measuring your returns against long-term investment advice. If you were starting out with only a 7-year investment horizon, then you should be focused on a portfolio balanced between equity funds and income funds (e.g. bond funds), which would result in a lower expected return but also less volatility.

[Protagoras]

If all ten year periods were equal, you would be on the right track, but they aren't.

You can manipulate numbers any way you want to show the result you desire.

It isn't about managed vs index either. Those numbers also can show what you want.

BTW, Peter Lynch quit. He was smart, he knew he was the beneficiary of one of the longest and most powerful bull markets of all time and for him, it would all be downhill after that.

Holding equity postions in a bear market is a sure way to beat the averages,,,, on the downside.

The trend is your friend. As long as you get off the tracks when the train is coming at you.

[VRWCmember]

Short-term bull and bear trends are part of an overall upward growth trend in the market as a whole. Not all 10-year trends are equal, but a with a long-term investment horizon, one should have significant equity investment in the portfolio.

[Protagoras]

You can take satisfaction from knowing acronyms on a website, I'll take mine from the net profit in the accounts of my clients.

I don't get paid for stock advice, I get paid for performance.

[Sam Cree]

*

[Protagoras]

Ok, so you want to dollar cost average in retrospect,,I'll just leave that lie where it is.

In the mean time, if you invested 100 dollars in an index fund in 1999, (I assume you can find a good one using hindsight,) what would your return per annum on that amount be right now?

How about 100 invested in 1929 before the crash? How long would it take you to be whole again?

Buy and hold is a fools game. It can be very profitable IF you are lucky, and disater if you aren't.

And if you bought the wrong index fund in 1999, like millions did, you would be almost penniless.

[LiberationIT]

Here's a couple of interesting funds I found while doing some research recently; Amana Mutual Income (AMANX, 1 yr 13.55%, 3 yr 20.82%) and Amana Mutual Growth (AMAGX, 1 yr 11.4%, 3 yr 20.69%.)

Both are 5 star rated by Morningstar, both no load, both fairly low expenses (yes there is a 12b-1 fee, I hate those;) and both have their investments guided by (drum roll please) Islamic Principles.

Some holdings; USX, FPL, Duke Energy, UPS. Here's one profile from the Fidelity web site;
The investment seeks current income consistent with Islamic principles. The fund normally invests at least 80% of assets in income-producing equity securities; 20% of assets may be invested in non-income producing securities for use in covered option writing. It may invest up to 10% of assets in foreign securities. Consistent with Islamic principles, the fund may not make investments which pay interest. In addition, investment decisions are approved by the North American Islamic Trust; industries such as liquor, wine, casino, pornography, and gambling are not approved for investment.

I'm not a fan of these types of funds, including the so called socially responsible funds, but I do find those returns somewhat appealing, and, I find the Islamic endorsement off putting. Nevertheless, it's interesting to study and try to figure out what's happening.

Thoughts anyone?