{"id":181,"date":"2007-06-15T15:43:55","date_gmt":"2007-06-15T20:43:55","guid":{"rendered":"http:\/\/johncbogle.com\/wordpress\/2007\/06\/15\/john-bogle-responds-to-ask-jack-questions-2\/"},"modified":"2007-06-15T15:43:55","modified_gmt":"2007-06-15T20:43:55","slug":"john-bogle-responds-to-ask-jack-questions-2","status":"publish","type":"post","link":"https:\/\/johncbogle.com\/wordpress\/2007\/06\/15\/john-bogle-responds-to-ask-jack-questions-2\/","title":{"rendered":"John Bogle responds to “Ask Jack” questions"},"content":{"rendered":"

Dear Jack:<\/p>\n

I am in the process of reading your new book”The Little Book”and in your chapter on bond funds,you state that “the intermediate-term bond index fund is a truly superior performer”.<\/em><\/p>\n

I owned that fund along with the Long Term Bond Index Fund.Then last year Vanguard developed a financial plan for me in which they recommended that I sell those two funds and purchase the Total Bond Market Index Fund.I did just that and now I am concerned that I made a mistake and should have at least kept the Intermediate fund. I realize you are comparing that fund to Muni Bonds and Gov’t Bonds but I am wondering how you feel about the Total Bond Market Index Fund vs.Intermediate. Would it make sense to hold both? I also own the European Index Fund and it has done very well and I am considering buying the Total International Stock Index Fund and also keeping the European Fund. Again,does it make sense to hold both? Does it ever make sense to hold a part of a total index fund and still hold the total fund.<\/p>\n

As you can see I am confused so anything you can do to shed some light on all of this would REALLY be appreciated.<\/em><\/p>\n

I look forward to hearing from you,
\nJohn D<\/em><\/p>\n

Hi, John,<\/strong><\/p>\n

Thanks for asking about our bond funds. I like the (taxable) IT bond index fund because it provides more stability than the LT index fund, and more income than the ST index fund.\u00a0 The Total Bond Market Index Fund is fine, but I vaguely wonder about a bond fund that has 35% of its portfolio in non-bonds (i.e., GNMA securities, with their risk of being prepaid early,\u00a0 when interest rates tumble).<\/strong><\/p>\n

That said, TBMF happens to have a maturity profile that is intermediate-term on balance, and so differs from IT largely in its holdings of GMNAs and Treasurys. Their ten-year records are similar, based on the tabulation I’m sending separately (IT 6.49%, TBM 5.96%, which included a single year–2002–in which we sort of forgot to stick to index principles, costing 2.00%, or about 0.20% per year.\u00a0 I’m assured by management that such an aberration will not recur.)<\/strong><\/p>\n

As it happens your previous 50LT\/50IT strategy was a winning one, as the tabulation shows.\u00a0 Of course we have no idea which of the above strategies will work best in the coming ten years, but it’s comforting to realize that the results of all six of those shown are almost certain to differ only in degree.<\/strong><\/p>\n

There’s no particular reason NOT to hold two overlapping index funds.\u00a0 In your case, adding a similar investment in Total International to your present European would simply lower your European exposure from 100% to about 80% of your Intl holdings.\u00a0 Not much difference, for Eur is about 60% of Intl.<\/strong><\/p>\n

I don’t know nearly enough about your assets and goals to advise you, but I hope this note helps clarify the issues.\u00a0 Perhaps your Vanguard adviser can explain the reasoning behind your allocations, and discuss possible changes.<\/strong><\/p>\n

Best,
\nJack Bogle<\/strong><\/p>\n

* * * * * * *<\/p>\n

Jack,<\/em><\/p>\n

I will be attending the Diehard meeting in Washington dc in June (and previously heard you speak in Chicago last fall).\u00a0 Will be bringing my 20 yo son-who is relatively new to investing, but shows great promise.<\/em><\/p>\n

Here is my question. I greatly appreciate making your collected wisdom available on the Web.\u00a0 However, the files available on your sites are quite formidable.\u00a0 Could I ask you to select a few that a person new to investing should read?\u00a0 I would like my son to read these before coming to the meeting-I would also gladly buy whatever book of yours you would recommend.\u00a0 However, I must admit it would be be difficult to expect a college student with a summer internship to complete\u00a0one of your books\u00a0before the June meeting!!<\/em><\/p>\n

Early in the days of the WWW I came across the following statement:<\/em><\/p>\n

“Finding information on the Web is like taking a drink from a fire-hose!”<\/em><\/p>\n

I appreciate\u00a0you are quite busy, and thank you for whatever insights you may offer.\u00a0Looking forward to meeting you.<\/em><\/p>\n

Bob K<\/em><\/p>\n

Hi, Bob,<\/strong><\/p>\n

Thanks for your kind note.\u00a0 And looking forward to meeting you and your son at Diehards in DC!<\/strong><\/p>\n

I’m probably, in your words, the Great Information Firehose of investing, and I’d shamelessly recommend my original Common Sense on Mutual Funds, still, despite its 1999 publication date, holding a top 1\/10 of 1% ranking at Amazon after all these years.\u00a0 I also like Malkiel’s Random Walk, Schultheis’s Coffee House, and the Bogleheads Guide, especially for new investors.\u00a0 (CSMF may actually be a bit complex for such souls.)<\/strong><\/p>\n

And my new Little Book ought to be great for your son (my own grandson, age 13, is actually reading it!), for it’s a short and simple read, easily digestible in a couple of hours and therefore well within your son’s time constraints.<\/strong><\/p>\n

Hope the ideas help.<\/strong><\/p>\n

Best,
\nJack B<\/strong><\/p>\n

* * * * * * *<\/p>\n

Dear Mr. Bogle,<\/em><\/p>\n

First of all, I want to thank-you for founding Vanguard and for promoting indexing.\u00a0 I have had an account with Vanguard\u00a0for about five years.\u00a0 After spending\u00a0many years of investing in managed funds and individuals stocks, \u00a0I have learned my lesson about the power of indexing.<\/em><\/p>\n

This week I read your new book “The Little Book of Common Sense Investing,” in which you make a compelling case for limiting stock investments to an\u00a0all stock market index.\u00a0 It is a wonderful book with a\u00a0clear and powerful message.<\/em><\/p>\n

My question relates to pages 205-206 of the book.\u00a0 While you favor the all-US stock and bond market approach, you\u00a0state that\u00a0adding\u00a0a total international stock index fund (of no more than 20%)\u00a0is a reasonable alternative.\u00a0 With three such index funds in a portfolio (All-US Stock Market, All-US Bond Market &\u00a0Total International Stock Index), is there a need for rebalancing on a periodic basis?\u00a0<\/em><\/p>\n

I have heard many investment advisors talk of the need to rebalance a portfolio on a\u00a0yearly basis\u00a0\u00a0to maintain the original asset allocation.\u00a0 I wonder if rebalancing\u00a0is inconsistent with the\u00a0premise of indexing and whether the power of indexing means that the investor should continue to make investments based on the original investment formula, regardless of how the funds\u00a0\u00a0have performed in the past rather than constantly changing the mix\u00a0of new investments to maintain the original the original\u00a0investment balance.\u00a0 I would greatly appreciate your views on\u00a0whether rebalancing hurts or helps the benefits of indexing.<\/em><\/p>\n

Thank-you very much and best wishes,
\nRJM\u00a0<\/em><\/p>\n

Hi, Mr. M,<\/strong><\/p>\n

Sorry it’s taken me so long to respond to your thoughtful note.\u00a0 Busy!<\/strong><\/p>\n

We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind.\u00a0 Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually.\u00a0 That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary.<\/strong><\/p>\n

We also did an earlier study of all 25-year periods beginning in 1826 (!), using a 50\/50 US stock\/bond portfolio, and found that annual rebalancing won in 52% of the 179 periods.\u00a0 Also, it seems to me, noise.\u00a0 Interestingly, failing to rebalance never cost more than about 50 basis points, but when that failure added return, the gains were often in the 200-300 basis point range; i.e., doing nothing has lost small but it has won big.\u00a0 (I’m asking my good right arm, Kevin, to send the detailed data to you.)<\/strong><\/p>\n

My personal conclusion.\u00a0 Rebalancing is a personal choice, not a choice that statistics can validate.\u00a0 There’s certainly nothing the matter with doing it (although I don’t do it myself), but also no reason to slavishly worry about small changes in the equity ratio.\u00a0 Maybe, for example, if your 50% equity position grew to, say, 55% or 60%.<\/strong><\/p>\n

In candor, I should add that I see no circumstance under which rebalancing through an adviser charging 1% could possibly add value.<\/strong><\/p>\n

Use your own judgment, but perhaps these comments will help.<\/strong><\/p>\n

Best,
\nJack<\/strong>
\n* * * * * * *<\/p>\n

Dear Jack,<\/em><\/p>\n

First off, I want to thank you for all you have done over the years for
\nsmall investors. If nothing else, your demonstration of the long-term
\neffects of investment costs have given some of us the confidence to
\nbreak away from our high-cost brokerages and shift our funds into
\nbroad-based index funds. I made this change myself about six months
\nbefore I read the “Little Book,” and I have never looked back.\u00a0<\/em><\/p>\n

Since I keep lending the “Little Book” out, I can’t refer to it
\nspecifically, but as I recall, you suggest that index investors may
\nexpect continued long-term returns in the 10% range, in line with
\nhistorical results. I noticed that your friend William Bernstein
\nanticipates in the Four Pillars that future returns, based on the
\nGordon Equation, are unlikely to be much above 6 percent. Is this
\ndifference in outlook primarily attributable to methodology, or time
\nspan (you primarily cover the last century, whereas Bernstein pretty
\nmuch goes back the the dawn of civilization!)?\u00a0<\/em><\/p>\n

Realizing that neither of you is in the predicting business, I’m not
\ninclined to make too much of this. Both of you are simply making the
\npoint that in the aggregate, investors will make the market return
\nminus expenses. But I am curious.<\/em><\/p>\n

Carl C<\/em>
\nHi, Carl,<\/strong><\/p>\n

Thanks for your kind words!<\/strong><\/p>\n

When you get your copy of my “Little Book” back, you’ll see that my projection for equity returns is about 7%, not history’s 9 1\/2% nor Bill Bernstein’s 6%.\u00a0 The reasoning is in the book, but comes down simply to “rational expectations.”\u00a0 (Of course, sometimes the market is irrational, as in the late 1990s through early 2000.)<\/strong><\/p>\n

We shall see!
\nJack<\/strong><\/p>\n

* * * * * * *<\/p>\n

Dear Mr. Bogle,<\/em><\/p>\n

I’m recently divorced, in my 5th decade, and determined to fly independent!<\/em><\/p>\n

My answer is simple:\u00a0 My divorce-inherited after-tax and IRA money is currently in mutual funds that I want to convert into\u00a0respective S&P 500 Index Funds.\u00a0 Do you see any problem with timing or diversification? Should I invest some of my IRA money in bonds, and if so, can you recommend a few common sense index funds that would be appropriate, and a percentage .. I’m thinking 20% at the most.<\/em><\/p>\n

I read your book “The Little Book of Common Sense Investing” and you confirmed what I thought the day I took over my former’s mutual funds.\u00a0And you were right about\u00a0another issue — advisors do NOT want to discuss\u00a0commissions or fees by numbers, percentages, and just what that means to investor return.\u00a0<\/em><\/p>\n

Thanks for reading this and I look forward to hearing from you.<\/em><\/p>\n

Julie H.<\/em><\/p>\n

Dear Ms. H,<\/strong><\/p>\n

Belated thanks for your note.\u00a0 Busy!<\/strong><\/p>\n

While I understand your questions, I don’t know nearly enough about your assets, your goals, or your risk tolerance to give responsible answers.\u00a0 But you’re right–advisors are expensive, and index funds–stock and bond alike–are “the way.”<\/strong><\/p>\n

Best,
\nJack<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

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