Following are Mr. Bogle’s responses to just a few of the hundreds of emails he has received to the Ask Jack section of the site. We’ll post more as his schedule allows.<\/p>\n
Dear Mr. Bogle,<\/span> * * * * * * *<\/p>\n \n \n One of my favorite books is Bogle on Mutual Funds.\u00c2\u00a0 Even though it was published about 12 <\/span>years ago the advice is timeless. The same can be said for Common Sense on Mutual Funds <\/span>(somewhat more current).<\/span> * * * * * * *<\/p>\n \n \n Jack: * * * * * * *<\/p>\n \n \n \n
I must tell you that I have “seen the light” when I have read your excellent books (“Common <\/span>Sense on Mutual Funds” etc. and I’m waiting the new “Little Book” from Amazon in March). <\/span>Your books really opened my mind for investment mechanism. I learned that I have made all the <\/span>possible mistakes during my past private investor career… and lost money. I would like to thank <\/span>you very much for opening the road to go with my future long term investments.<\/span>
Lately I have seen you hammering quite hard Index ETF’s on your speeches and articles. <\/span>I would like to tell you that for me as living in Finland the ETF’s are the only way to own total <\/span>market indexes, like Vanguard one’s from the US market.<\/span>
Such things do not exist in Finland. With ETF’s it’s possible to do my investments thru the internet <\/span>and have my share of market growth…<\/span>
So (finally my question), used in the right way (total market index, buy and hold) ETF’s can’t be a<\/span> bad thing, or how?<\/span><\/p>\n
\nThanks for your thoughtful note.<\/span>
You’re quite right. Used in the right way, ETFs can be wonderful investments–and surely <\/span>provide a particularly great convenience to non-US investors. So buying and holding an all-market <\/span>ETF (especially a very low-cost one!) is a good thing.<\/span>
The problem I have with the ETF business (as spelled out in my brand-new “Little Book”) is that <\/span>the field is dominated (678 of 690 ETFs, to be specific) by narrowly-focused funds (single<\/span>
country, single industry group, sometimes leveraged) that are traded like hot stocks. A half century-<\/span>plus in this business has convinced me that such performance-chasing is a loser’s game <\/span>for investors (and, of course, a winner’s game for brokers, managers, and marketing <\/span>entrepreneurs).<\/span>
So glad that my books have been helpful. “Stay the Course!”<\/span><\/p>\n
I read bits and pieces that indicate that you may have made minor changes to your investment <\/span>advice since Bogle on Mutual Funds came out. In some cases new products have emerged such <\/span>as TIPS and the Inflation Protected Securities Fund. In other cases you have perhaps changed <\/span>your preference for the Total Bond fund to Intermediate Bond Index. The pie charts used as <\/span>examples in the book seem to place a value emphasis with large portions allocated to actively <\/span>managed equity income funds as opposed to a straight Total Stock fund.<\/span>
I would love to see other things addressed in an updated version of Bogle on Mutual funds <\/span>including:<\/span>
o Whether your recommendations on International Funds have changed.
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o Whether you feel REIT funds deserve a specific allocation.
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o What portion of a bond portfolio should be allocated to TIPS.
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o Comments on withdrawal percentages\/strategies in the distribution phase. <\/span>Whether the Trinity study should be used as a guide. Straight percentage vs. <\/span>initial percentage with inflationary increases.
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o Whether actively managed funds should make up 50% of the domestic equities <\/span>(as Vanguard planners currently recommend).
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o Tax advantaged investment vehicles vs. non deferred investments.\u00c2\u00a0 What mix best <\/span>accomplishes current tax advantages vs. potential repercussions in the <\/span>distribution phase.
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o Your feelings on the new Target Retirement funds.
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o Whether you feel immediate fixed annuities can\/should play a part in <\/span>asset allocation.
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o How pension plans, annuities, and\/or social security should impact asset <\/span>allocation. Example: if one is fortunate enough to have basic needs taken care of <\/span>with a combination of the three how should this impact asset allocation for stocks <\/span>and bonds?<\/span>
I could list numerous other questions or things that I would love to see in an updated Bogle on <\/span>Mutual Funds. Or an updated Common Sense on Mutual Funds if you prefer. I know you\u00e2\u20ac\u2122re very <\/span>busy these days but you would be doing an enormous service by publishing your current views <\/span>and advice.<\/span>
If you decide to proceed with an update and would like additional questions or thoughts I would <\/span>be happy to provide you with a more detailed e-mail.<\/span>
If you would prefer to write a new book rather than update one of your classics I could see it <\/span>entitled: \u00e2\u20ac\u0153Bogle on Asset Allocation- How to invest at all stages of your life.\u00e2\u20ac\u009d Or, more selfishly: <\/span>\u00e2\u20ac\u0153Bogle on Retirement Investments- How Boomers can transition from accumulating assets to the <\/span>distribution years.\u00e2\u20ac\u009d<\/span>
As you can probably tell, I would enjoy reading anything that you write and take your wisdom <\/span>very seriously.<\/span><\/p>\n
\nThanks so much for your incredibly thorough, thoughtful–and helpful–note.
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With my new “Little Book” (my sixth) now in the stores, I’m thinking–but only vaguely; writing <\/span>is hard, demanding work–about my next major project. I’m being pressed to do a new edition of<\/span> Common Sense on MFs, though my heart (a different one than when I wrote it) belongs to Bogle <\/span>on MFs. However it comes out, your suggestions for an update are right on the mark. ETFs and <\/span>value-weighted indexes would also be on the list, though I cover both in the new book. (“Ay, <\/span>there’s the rub.”)
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When that particular d-day comes, I’ll darn well call on those additional ideas you have, and <\/span>deeply appreciate your offer.
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As well as your generous appraisal of my work!<\/span><\/p>\n
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First, congratulations on celebrating another birthday for your new heart. I wish you many <\/span>more.
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The reason I am emailing you is to introduce myself. I am on a quest to transform the mutual <\/span>fund industry, much like you have spent your life doing.
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I started a money management business that piggybacks off the work that you have done, and <\/span>sprinkles in some of Buffett\u00e2\u20ac\u2122s tenets as well.
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I started my career by earning an MBA at Columbia Business School, and then worked on a six <\/span>billion dollar large cap value. While working there, I learned first hand why the majority of <\/span>mutual funds underperform the index. I learned that mutual funds don\u00e2\u20ac\u2122t underperform due to <\/span>lack of intelligence or hard work. They underperform because they are structured to do so. <\/span>Warren Buffett has said that as he looks back over the course of his investing career, he gets <\/span>around one good idea per year. A typical mutual fund, on the other hand, typically has 100 or so <\/span>ideas at any one time. Factor in market efficiency, and the majority of those ideas are mediocre <\/span>at best. Trading in and out of mediocre ideas is a quick way to underperformance. On top of <\/span>that, mutual funds are usually well diversified, which flies in the face of Buffett\u00e2\u20ac\u2122s insistence on <\/span>circle of competence. It is very rare to find a manager, or a team of managers, who are both <\/span>experts in every sector and who are also good investors. Thus, mutual funds are usually <\/span>investing in sectors where they do not have an edge. Again, investing outside of your circle, in an <\/span>efficient market, is a recipe for underperformance. There are some other reasons, such as cash <\/span>holdings, but you know the drill.
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What I learned:
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I learned that I get just a small handful of good investment ideas per year. These are ideas where <\/span>I find myself saying \u00e2\u20ac\u0153Holy cow! I can\u00e2\u20ac\u2122t believe the stock market is acting like this.\u00e2\u20ac\u009d Again, these <\/span>are rare moments for me, but they do come. In my quest to beat the market indexes (which is the <\/span>only way to provide value for my clients, as I believe that many money managers are foregoing <\/span>their fiduciary duty by managing money as they do), I have combined the brilliance of the index <\/span>with selective active management. In a nutshell, I start by placing 100% of client funds in the <\/span>index itself. For this service, I do not charge a management fee (how can I charge someone for <\/span>doing what they can do themselves?). From there, I search long and hard for an exceptional <\/span>investment. When I find one, I determine the correct allocation (ballpark around 3% of assets) <\/span>for the newly found security. If I believe 3% is the right position size, I sell 3% of my index <\/span>holdings, and place the funds in the new security. I then continue to search for more stocks to <\/span>buy. I launched my fund in November of 2005, and currently I have 3 active positions which <\/span>make up a little over 10% of my fund. The rest of the assets are in a S&P 500 index fund. I <\/span>charge my clients if and only if I outperform the S&P 500. If I do outperform, I take 33% of the <\/span>outperformance. While 33% may sound steep, it would take a truly monster year to garner the <\/span>1%+ that most mutual funds charge, and they are charging even if they under perform. As of <\/span>December 31, 2006, I have returned 20.22% vs 18.80% for the index, after fees (inception date is <\/span>11\/03\/05).
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One more thought: Selling a stock is a big problem for most money managers. When they wish to <\/span>sell off a position, they need a new idea on-call. New ideas are hard enough to come by, but <\/span>needing them on-call as a place to invest the sale proceeds is very difficult, and often leads to <\/span>poor investments, further depressing returns. For my fund, I always have a place to invest sales <\/span>proceeds, and that is in the index itself. In theory, my worst investment should be the index, <\/span>which will outperform most active managers.
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Anyway, I thought you would like to know how your work and ideas have influenced me, and my <\/span>work.<\/span><\/p>\n
\nNow that my heart is 36 years plus one month old, it’s probably time to answer your wonderful <\/span>note!
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I love your investment philosophy. While I’m pretty much entirely indexed (all Vanguard, <\/span>including our index-like muni funds), I recognize that few investors will follow that narrow <\/span>strategy. Indeed I basically endorse what you’re doing (perhaps a bit too cynically!) on page 202 <\/span>of my new “Little Book.” (I should quickly that the “yes” regarding commodities on page 203 is a <\/span>typo. I wrote “no” and the printer–doubtless a commodity speculator!–reversed it. To be fixed in <\/span>the next printing.)
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As Warren B notes about waiting for the outstanding investment opportunity, it’s like being a <\/span>batter in a baseball game where no balls or strikes are ever called–you just until that poor, tired <\/span>pitcher (“Mr. Market,” in a sense) finally throws a ball that you can hit out of the park. <\/span>Your reinvestment strategy is all common sense, and your fee structure is a model of fairness and <\/span>fiduciary attitude.
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I’m confident that you’ll serve your clients well. “Press On, Regardless!”<\/span><\/p>\n