Vanguard's Bogle comments

[REWahoo]

Interesting comments from Jack Bogle on the economy and on the death of both asset allocation and buy and hold investing...

"Fund managers are speculating, not investing....We trade 10 billion shares a day, with each other. And we lose. It's lunacy. The croupier wins. The day the market has no volume -- when we can say 'There were no trades on the New York Stock Exchange today as all investors were satisfied with their positions' -- that's the day I want to see before I go."

Time is on your side

 

[freebird5825]

Excellent article.
His book "Common Sense on Mutual Funds" was my very first serious investing education. I got lost in a lot of the terminology and complex data at the time, but his logic seemed very sound to me. I still re-read that book every few years, a few selected chapters, just to keep my head on straight.
I noticed the article said his health was poor. He has been keeping an appearance and writing schedule that a 30 year old would struggle with. Maybe we should clue him in on the FIRE lifestyle.

 

[NW-Bound]

Nah... People trade stocks because the grass is always greener on the other side. Besides some liquidity is good.

There have been no house sales in my neighborhood, nor any for-sale sign. I have no ideas what my house is worth. Not that I really care, as I am not selling, but without a trade, no one knows what anything is worth.

PS. I will add here that I admire Bogle for his integrity, although I have no accounts with Vanguard, nor own any Vanguard mutual fund.

 

[REWahoo]

I noticed the article said his health was poor. He has been keeping an appearance and writing schedule that a 30 year old would struggle with. Maybe we should clue him in on the FIRE lifestyle.

You'd think he might have gotten the hint back in 1996 when he had that heart transplant...

 

[bbbamI]

Well, when I figure out how much time I have left and what I should invest in....I'll have it made!

 

[freebird5825]

You'd think he might have gotten the hint back in 1996 when he had that heart transplant...

That's probably the very reason he does what he does...he was given a second chance.
Facing one's own mortality would inspire a person to make a real difference in something the person is passionate about, yes?

 

[Gone4Good]

The day the market has no volume -- when we can say 'There were no trades on the New York Stock Exchange today as all investors were satisfied with their positions' -- that's the day I want to see before I go.

I'm sure this is merely hyperbole designed to illustrate a point. But the reason indexing works is because of all the chimps who spend enormous resources researching stocks and trading strategies. It is only through the efforts of active investors that markets are made efficient. Indexers are free riders who are gaming the system, in a way. They're like those of us who pay our credit card bills off every month and cash in free rewards. Those rewards are available because some other sucker is revolving a balance at 20% interest. If everyone paid off their credit cards each month, there would be no free rewards for the small minority who have the discipline to work the system to their advantage.

Instead of castigating active investors for their foolishness, we should be thanking them for their efforts.

 

[Rich_by_the_Bay]

I noticed the article said his health was poor. He has been keeping an appearance and writing schedule that a 30 year old would struggle with. Maybe we should clue him in on the FIRE lifestyle.

He had a heart transplant.

If there is a sage around these days, he must be it.

 

[NW-Bound]

... the reason indexing works is because of all the chimps who spend enormous resources researching stocks and trading strategies. It is only through the efforts of active investors that markets are made efficient.

That has been well elaborated by Malkiel (a buddy of Bogle) in "A Random Walk down Wall St". Malkiel and Bogle cited statistics after statistics that active mutual fund managers do not consistently beat the market. One tends to have a hot streak for a couple of years, then fails miserably after that. Hence, the "efficient market" theorists advocate simply buying the index, and your chance of beating the typical active MF is pretty good.

It is generally accepted that the stock market is "efficient", meaning it is futile to trade between stocks. But I would like to go a bit further. How does one view the efficiency between asset classes, i.e. cash, bonds, stocks, gold, commodities, real estate, etc...?

If there is "global market efficiency" between asset classes, then one shouldn't bother to rebalance his AA at all, the same as one should not change his stock components inside his MF.

Call me a trouble maker, but I just want to ponder.

 

[Gone4Good]

If there is "global market efficiency" between asset classes, then one shouldn't bother to rebalance his AA at all, the same as one should not change his stock components inside his MF.

Except the "market portfolio" is indifferent to your individual tolerance for risk. We rebalance not, necessarily, to beat the market but to manage our risk profile.

 

[NW-Bound]

Except the "market portfolio" is indifferent to your individual tolerance for risk. We rebalance not, necessarily, to beat the market but to manage our risk profile.

I understand your 1st sentence, but let's talk more about your 2nd statement.

Let's say both investors A and B started out with 50% in equities. Investor A never rebalances, while B occasionally buys or sells to maintain the 50% ratio.

My question:

Although investor B rebalances with the primary goal to reduce risk, over intermediate terms, would she not gain more than investor A, even if that is not her goal? Note I said "intermediate terms", because history has shown stocks beat anything else over "long terms", which may be after our death ("In the long run, we are all dead" - Keynes)



My goal of rebalancing is to have more. It means trying to buy low and to sell high. Note the word "trying", as we do not know how low is low and how high is high.

 

[unclemick]

Excellent article.
His book "Common Sense on Mutual Funds" was my very first serious investing education. I got lost in a lot of the terminology and complex data at the time, but his logic seemed very sound to me. I still re-read that book every few years, a few selected chapters, just to keep my head on straight.
I noticed the article said his health was poor. He has been keeping an appearance and writing schedule that a 30 year old would struggle with. Maybe we should clue him in on the FIRE lifestyle.

No need - he was frugal before I was old enough for my SO to call me a cheap bastard.

Out of the Naval Academy - in 94 I took my nephew aside - don't read books - but read this book - and BTW - pssst Index 500(betcha ya thought I said something else ).

Post 15 yrs in and still on course for that Navy pension.

Unfortunately his buds brainwashed him after about 10 yrs with Four Pillars and he has fallen under the evil influence of the slice and dice crowd.

heh heh heh - but he promised to hold his TSP version of Index 500 'forever.' We'll see . I'm mostly a Boglehead - sometimes glance at Bill William and admit to an old school affair with the Norwegian widow.

 

[freebird5825]

No need - he was frugal before I was old enough for my SO to call me a cheap bastard.

Out of the Naval Academy - in 94 I took my nephew aside - don't read books - but read this book - and BTW - pssst Index 500(betcha ya thought I said something else ).

Post 15 yrs in and still on course for that Navy pension.

Unfortunately his buds brainwashed him after about 10 yrs with Four Pillars and he has fallen under the evil influence of the slice and dice crowd.

heh heh heh - but he promised to hold his TSP version of Index 500 'forever.' We'll see . I'm mostly a Boglehead - sometimes glance at Bill William and admit to an old school affair with the Norwegian widow.

You're gonna love this...VG 500 Index was LH's first ever mutual fund, way back in 1999. I wrote the check for his opening stake ($3K) to get into it and he did the rest through DCA. It was our largest holding.
My cost basis in the fund began in 2004. I held onto all of it until I heard and listened to the siren call of pssssst Wellesley.
I exchanged half of my VG 500 for equal amount of Wellesley in January 09. The difference gave me my 2009 tax loss harvest plus a tiny bit more.
No bull.
So far, the exchange has proved to be a good move. I am listening...

 

[samclem]

My goal of rebalancing is to have more.

Then you shouldn't rebalance between asset classes--you should own only stocks. Rebalancing across asset classes doesn't increase returns, it decreases risk. Or, more precislely, it maximizes return for a given risk.

Rebalancing is like a complex version of dollar cost averaging (many asset classes instead of just two: cash and stocks). If you had a pile of money and wanted to be 100% in US equities after 5 years, then DCA'ing a fixed dollar amount each month would assure you bought more shares when the market was down, fewer when it was up. But, on average over the last XX years, you would have been ahead in most cases if you'd put every dollar into the market on day one, because overall the market moves up.

 

[Rich_by_the_Bay]

I second what Sam says - everything I have read says that rebalancing does little if anything for total returns, just a risk tolerance maintenance maneuver.

Indeed, if you burn through all your fixed holdings completely, then turn to stocks thereafter you get the best return of all for any usual initial stock:bond allocation. Lucia's study showed this as did a research article by Spitzer and Singh, J Financial Planning, June, 2007.

But at least in my view, especially since the recession of 2008, I will sleep better if I do at least a little rebalancing of out-of-whack holdings every year or two.

 

[NW-Bound]

Ah, but that is both true and false.

From 1990 to 2000, it was best to be 100% in stock. I was not 100% in equities then, but did not actively trade and it worked out well. If you kept selling out as stocks rose, you would not do as well.

Then, from 2000 till now, the market went berzerk. As I was semi-retired, I had time to play with my stocks. At the risk of being called a braggart, I beat the S&P by far.

So, it all depends on the nature of the stock price movement. The higher the volatility, the better gain the balancing would get you. If the market kept rising steadily, one couldn't beat being 100% in stocks. But during the "lost decade" of 2000 till now, if you kept buying, you gave it all back in the recent downturn, and then some.

But then, I am not saying what no one doesn't already know. I simply forgot that the most recent decade experience gave the balancers a huge advantage. For me, it was more luck than skill, I will admit that much.

Now, the real question of course is what lies ahead.

 

[freebird5825]

He had a heart transplant.

If there is a sage around these days, he must be it.

He looks really good here, in an interview done at the end of May 2009.
Morningstar Video

 

[FinanceDude]

He had a heart transplant.

If there is a sage around these days, he must be it.

Well, Warren Buffet's still my sage.........

 

[DblDoc]

Ah, but that is both true and false.

From 1990 to 2000, it was best to be 100% in stock. I was not 100% in equities then, but did not actively trade and it worked out well. If you kept selling out as stocks rose, you would not do as well.

Then, from 2000 till now, the market went berzerk. As I was semi-retired, I had time to play with my stocks. At the risk of being called a braggart, I beat the S&P by far.

So, it all depends on the nature of the stock price movement. The higher the volatility, the better gain the balancing would get you. If the market kept rising steadily, one couldn't beat being 100% in stocks. But during the "lost decade" of 2000 till now, if you kept buying, you gave it all back in the recent downturn, and then some.

But then, I am not saying what no one doesn't already know. I simply forgot that the most recent decade experience gave the balancers a huge advantage. For me, it was more luck than skill, I will admit that much.

Now, the real question of course is what lies ahead.

With 20:20 hindsight you can demonstrate increased/decreased returns for rebalancing by choosing your timeframe and interval. A prior you cannot know future stock or bond returns so you are left with risk management as the only guaranteed outcome.

DD

 

[DblDoc]

Well, Warren Buffet's still my sage.........

I admire his method but cannot emulate him so Bogle it is...

DD

 

[FinanceDude]

I admire his method but cannot emulate him so Bogle it is...

DD

Can't argue with that.......

 

[Rich_by_the_Bay]

I wouldn't ignore either one of them if they offered me advice, but Bogle is a bit more the philosopher. His book about "ENOUGH" won't go down as great literature, but it is refreshing to hear that message from a money guy.

 

[ziggy29]

I wouldn't ignore either one of them if they offered me advice, but Bogle is a bit more the philosopher. His book about "ENOUGH" won't go down as great literature, but it is refreshing to hear that message from a money guy.

Yes, of course, but his fame and fortune didn't come from the "usual money guy" advice. His fame and fortune was made by swimming against that tide.

 

[NW-Bound]

With 20:20 hindsight you can demonstrate increased/decreased returns for rebalancing by choosing your timeframe and interval. A prior you cannot know future stock or bond returns so you are left with risk management as the only guaranteed outcome.

DD

Now, that brings up the next question.

It is true that it was not possible to predict a priori the dotcom and tech bubble in 2000, nor the housing and financial stock bubble in 2007. However, as the events unfolded, was it not possible, if not to profit from these bubbles, to at least avoid them?

If one saw that the financial stocks were going to break - as the events unfolded last year - would it not be possible to at least avoid this sector, instead of suffering their decline in the S&P index? Couldn't one buy the S&P sans financial stocks and home builders stocks and various other stocks that were housing related?

As another example, most of us recognized that the housing bubble inflated to ridiculous levels. We could not short a house - I wanted to, but there was no mechanism to do it - but at least we did not camp out in front of the RE sales office to be put in for a lottery to buy one of their houses. We are still hurt indirectly by the bubble burst, but not directly because we refused to participate in the game.

Of course, it would be even better to profit from the fools' game. Sir Templeton had been known as a value investor, hence wouldn't touch tech stocks with high PE ratios. Yet, in 2000, he couldn't contain himself watching the tech bubble being inflated, so shorted some dotcoms and made $85M for himself. As he said "I want to help people. When they clamor to buy, I will sell to them".

No offense intended to any boglehead here. As mentioned earlier, I just want to be a bit mischievous to stir up some discussions.

 

[ziggy29]

It is true that it was not possible to predict a priori the dotcom and tech bubble in 2000, nor the housing and financial stock bubble in 2007. However, as the events unfolded, was it not possible, if not to profit from these bubbles, to at least avoid them?

Well, it might be anathema to hard-core Bogleheads, but I think the meltdowns of 2000 and 2008 may have made some people who considered themselves "good buy-and-holders" a little more aware of market valuations with respect to their future AA.