Most Popular ArticlesJune 2, 2009
Bogle is increasingly nervous about target date funds, for a number of reasons. “The fact that you are going to retire in 2015 means different things to different investors, such as the extent of their social security benefits,” he said. “It’s a little bit too clever a solution. Investors can just rebalance once a year and only when proportions get markedly different from their targets.”
Bogle said he is “not amused by a race to the top for equity allocations (which are based on Monte Carlo simulations, which I don’t trust). As markets go up, firms raise their target allocations of equities. That is irresponsible.” Bogle said target date funds should use index funds or very low cost funds.
Investors should not use absolute return funds under any circumstances, Bogle said. “Nobody can give you an absolute return; it implies an absolute positive return. It is greatly oversold.”
As for 130/30 funds, Bogle said they “don’t advance the ball.” Bogle noted, sarcastically, that these managers don’t have enough smarts to buy stocks but are smart enough to know what to sell. “This is the kind of gimmickry we have had too much of in the mutual fund business. It leads you down the primrose path that there are better answers than the tried and the true,” Bogle said.
“The index fund must be the gold standard. My question is why does the industry create all these lead ingots?” Bogle said. He believes it is for marketing purposes, because things get hot, and sometimes they do well. “I am an apostle of simplicity and low cost,” Bogle said.
His skepticism of ETFs is increasing. He said there are few differences between the Vanguard total stock market ETF and the corresponding fund. ETFs may do a little better and be a little more tax efficient. But ETFs have been abused by those who trade them actively, and the difference in performance gap (noted above) between fund and ETF investors is substantial. “We are not serving investors; ETF investors do badly relative to mutual fund investors,” he said.
Bogle’s latest crusade is helping investors who “give far more credence to past returns in the stock market than they deserve.’ He said it is the sources of the returns that determine the future, and investors should rely on reasonable expectations based on those sources of returns. “There goes Monte Carlo simulations, which are based on past returns,” Bogle said. Monte Carlo simulations that rely on outdated assumptions of 4.5% stock yields will produce erroneous forecasts. Instead, investors should “construct returns based on relate P/E levels.”
Paraphrasing the English poet Coleridge, Bogle called past returns “but a lantern on the stern.”
Last month Bogle celebrated his 80th birthday, and is intent on fighting what he called “a wonderfully lonely battle.” He is not looking for a fight, and “if everyone was fighting this battle I’d be bored. There are some standards we have abandoned in the investment field.” In addition to tackling the problem of reliance on past returns, Bogle said he will continue to fight battles over pension plan abuses and imperfect structures of retirement plans. When he gets done with all of them, he will think of something else to fight.
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