Bogleheads® Conference 2013 - John Bogle Q & A

00:00:00.000 | We'll try to get through as many questions as we can before we do the Karsak Chan.

00:00:17.080 | The first question is from one of our visitors from Holland, Marius.

00:00:22.240 | He says, "Dear Jack, what would you do if you today were 40 years old, living in Europe,

00:00:29.640 | and the effective cost of investing in a global index fund was 1% a year?"

00:00:37.360 | Move to America.

00:00:39.480 | It is amazing how the cost structure in the U.S. is terribly stacked against the investor,

00:00:49.020 | and this is probably the cheapest country to buy mutual funds in.

00:00:53.080 | I'm not sure that the overall brokerage system is any cheaper, but the mutual fund expense

00:00:57.880 | ratios are lower, and I can remember, we used to have to have the index fund start to get

00:01:03.520 | a little recognition.

00:01:04.520 | It took a long, long time.

00:01:05.520 | People would come in.

00:01:06.520 | I remember one group from Germany, and they said they'd want to start an index fund, and

00:01:12.680 | not quite the way they said it, but that was close, and we got a little bit of, what a

00:01:18.720 | great idea, blah, blah, blah, and they said, "Now, for it to work for us, we need to take

00:01:22.840 | 1% a year out."

00:01:23.840 | Well, I said, "You know, there goes the index fund.

00:01:24.840 | There's not any point in an index fund if you're taking 1% a year out for distributing.

00:01:30.640 | You can probably charge another 1% for managing it, and there goes all the magic."

00:01:37.000 | So they left, and I really like to let people down easily, but there's no point in beating

00:01:42.180 | around the bush either, and that is a whole offense on the efficiency with which you provide

00:01:47.400 | the index.

00:01:48.800 | So for a European investor, first that involves, I think, extremely interesting asset allocation

00:01:54.360 | problems, but I'm just talking about the central problem, which I think is the cost problem.

00:02:00.160 | The asset allocation problem is one I've tried to deal with a little bit intellectually,

00:02:06.360 | which is, I believe that it's fine to have all your money in the U.S.

00:02:10.760 | We've beaten that ground over and over again.

00:02:14.120 | Everybody tells me I'm wrong, and I need a little reinforcement.

00:02:17.880 | I hope somebody else will tell me I'm wrong this week.

00:02:20.360 | The more I hear about it, the more I'm sure I'm right, but it's easily to be -- I could

00:02:28.360 | easily be wrong.

00:02:29.360 | You know, I can't predict the future of the markets, but when you get to a European investor

00:02:35.560 | or an Australian investor, you know, they want some balance between their home country,

00:02:39.800 | I think, but not if you're in Finland, where there's only one company that's 80% of the

00:02:45.640 | Finnish market, Nokia, and so it changes from country to country, but for a European investor,

00:02:53.320 | leaving the cost aside, I'd say you probably should -- you know, even if you're, God forbid,

00:02:59.720 | in France, in the U.K., much better in terms of their economy and their prospects for none

00:03:06.440 | of this economic mess that we have all over the world, but maybe 25% in your home country,

00:03:12.040 | 25% or 50% -- I know it's a big difference -- in other international non-U.S. and 25%

00:03:19.640 | to 50% in the U.S., something like that, I think, is the intelligent thing to do, but

00:03:25.080 | I'm glad I'm not facing that option with this nice person in France.

00:03:30.280 | Or where were they?

00:03:32.760 | Holland?

00:03:33.960 | >> Holland, yes.

00:03:35.640 | >> The next question says, "Dear Jack, would you recommend an individual invest all of

00:03:47.480 | their assets into Vanguard firms, or spread the risk to one or more other index fund ventures?"

00:03:54.440 | >> Well, it's a -- basically, it's a cost-benefit analysis.

00:03:59.000 | Clearly, I would, you know, owe my own money as a vendor, and I'm not worried about the

00:04:02.520 | company going down, although to bring up an issue I did not touch on, we probably are

00:04:07.320 | a systematically important financial institution, S-I-F-I, and I think we giant fund managers

00:04:15.560 | are going to have to be -- get used to a little more government oversight, whether we like

00:04:20.600 | it or not.

00:04:21.640 | I mean, $2 trillion is a lot of money, it's 5% of the U.S. stock market, and the mutual

00:04:26.600 | fund industry is a top five firms.

00:04:28.600 | I think this latest report, the government said this, top five firms with 50% of the

00:04:33.240 | assets in the fund industry, and that kind of -- and they're almost all index firms,

00:04:37.320 | by the way, all except IMCO, and you could argue they were a close-to-index firm anyway

00:04:43.000 | when you get to the bond area, and their correlation is probably 95 or something like that, very

00:04:49.000 | high, because they tend to be in the bond area.

00:04:52.200 | And so we have to be very, very much aware of all that, and still, you know, if you want

00:04:58.920 | to have, let's say, half of your money in Vanguard and half somewhere else, first I'm

00:05:03.240 | hard-pressed to tell you where to put the other half, and second, you're probably going

00:05:06.680 | to have higher costs, so is that higher cost going to be worth the -- maybe sleeping at

00:05:12.200 | night better feeling?

00:05:14.200 | And, you know, honestly, if I had money in some other mutual fund group, I would sleep

00:05:18.920 | less well at night.

00:05:21.160 | I'm an insider at Vanguard, or sort of an insider, or a former insider, or a quasi-insider,

00:05:26.600 | or a virtual insider, or some kind of an outsider, I'm not sure which, but I'd say no problem.

00:05:37.640 | We all have the same, basically, protections, custodianships, and I'd say, given the character

00:05:44.520 | of our company, you should be able to be comfortable that there aren't going to be ethical barriers

00:05:51.080 | or breaches, or ethical breaches that jeopardize the value of your securities, or administrative

00:05:58.440 | burdens that will, say, not give you liquidity when you need it, although I worry about -- you

00:06:03.960 | know, I worry about just about everything, I guess, but I worry about the value of liquidity

00:06:08.520 | in the mutual fund industry.

00:06:10.520 | You know, maybe if we were less liquid, we would have more long-term holders, for example.

00:06:15.560 | I mean, the promise of liquidity, as we all know, is something that not everybody can

00:06:20.120 | have at the same time, and so when you get to our level, particularly in something like

00:06:25.400 | municipal bonds, where the markets are very not-so-darn liquid, and so you do have those

00:06:34.440 | kind of problems, and could have those kind of problems if Vanguard were by far the largest

00:06:38.120 | municipal bond manager, and I should have the answer to this question.

00:06:42.520 | I don't, but I require them to have a 15% liquidity reserve at all times, because we

00:06:49.160 | had such a cost advantage that we still had a competitive yield, having 15%, basically,

00:06:54.920 | in very short-term, and this was cash-ready, just in case, and that came up in 2007 when

00:07:01.560 | we had a crisis in the municipal bond market.

00:07:03.880 | Ian McKinnon, who ran our bond funds, was in the hospital at the time, so I was running

00:07:08.920 | the bond funds, and I was, you know, the portfolio managers, basically reporting to me during

00:07:14.200 | this period.

00:07:15.240 | That was an awful period, because the bond market was falling apart, our shareholders

00:07:19.400 | wanted a lot of liquidity, and we had to provide it, and that's the first thing you do.

00:07:23.960 | You say, "We're going to have the liquidity," and no matter what, I can remember the bond

00:07:28.680 | managers, they'd handle one more anecdote, come in and saying, "Well, you know, Goldman

00:07:33.160 | Sachs is bidding, we have to sell some bonds, and Goldman Sachs is bidding $95.5 for these

00:07:38.040 | bonds, and they're worth $98, and what should I do?"

00:07:40.840 | And I said, "The answer is very easy, but I've been thinking about, sell them.

00:07:44.680 | Sell them, because that's the going market, that's what you can get for them, you have

00:07:47.640 | to have the cash, there's no way around that, and believe me, if I know Goldman Sachs is

00:07:51.560 | bidding $98.5 today, they'll be bidding $95 tomorrow, so get them the heck out of there."

00:07:57.400 | And so we survived that crisis, and that's where the whole idea of the Swiss Army came

00:08:01.160 | up for the first time, and training people at Vanguard to be the guys that would think

00:08:09.480 | about answering the phones just a little beneath them, perhaps, and just, they were always

00:08:13.880 | ready, we had, we were all trained to handle telephones, so we didn't get lines backed

00:08:19.080 | up and all that, and they also learned something very important, particularly the portfolio

00:08:23.960 | managers, that there were human beings who owned their funds, and it wasn't just some

00:08:28.200 | big numbers game, and I think that was at least an equal part of it as compared to being

00:08:33.320 | ready for an emergency, which of course, when you're ready for an emergency, that doesn't

00:08:37.160 | usually happen, so we've been from 2007, no, 1990s, that year was that crisis, I guess

00:08:47.080 | 1987, 1987 when all this happened, when we were much smaller, but it was still a big

00:08:51.800 | problem, and that's when the Swiss Army began, and I think that's been a good thing for us,

00:08:56.680 | so much is electronic now, compared to telephone, that probably is less necessary, but I think

00:09:01.800 | the training of letting people know that there are human beings on the other end of that

00:09:06.280 | telephone is absolutely central to everything I believe about company philosophy.

00:09:14.840 | I think this question relates to, if I remember correctly, an article in the Financial Times,

00:09:20.040 | Victoria asks, "Jack, are we parasites?"

00:09:25.720 | Well I could have talked about that earlier, but that's where these diversions come in,

00:09:30.680 | and intrude on my day, and make me push things aside to respond, and there was a very, I

00:09:38.920 | think, naive article by a UK money manager, saying that indexing was parasitical, because

00:09:46.760 | it took advantage of the efficient markets created by active managers, so we didn't contribute

00:09:51.960 | to the efficiency, but we capitalized on it, and first place, that has nothing to do with

00:10:00.280 | me today, but I've never believed totally in efficient markets, I believe sometimes

00:10:06.440 | yes, sometimes no, long run almost certainly yes, short run almost always no, but I did

00:10:14.520 | take the guy on, he mentioned me, and he mentioned Vanguard, about being the fomentors of this

00:10:20.040 | parasitical behavior, but I took him on, and actually, I changed the question a little

00:10:25.480 | bit, and I said, "Look, a parasite, there's this host body over here, and the parasite

00:10:29.800 | is taking something out of it, and in this business, we're all parasites, no question

00:10:34.600 | about that, we're a parasite that takes six one-hundredths of one percent out of the host

00:10:41.640 | body, that's the market return, and you, sir, are a parasite that takes two and a half percent

00:10:47.480 | out of the host body, and if you don't think that's important, compound it over, wow, so

00:10:54.840 | we had a little back and forth, he wrote back, I didn't answer his third thing, but I felt

00:10:58.760 | better after having done it, the FT has always been extremely kind to me in my ideas, and

00:11:06.440 | it's kind of nice, I have some, maybe a little bit financially snobbish friends who won't

00:11:10.600 | read the Wall Street Journal, won't read the New York Times, they read only the FT, and

00:11:15.640 | it's a good paper, and I like to joust, and they're always asking, everybody's always

00:11:19.880 | asking me for articles about this and that, and sometimes I do it, and sometimes I don't,

00:11:25.400 | and if I can tell you, can I give you one more anecdote, this was the most fun one,

00:11:31.240 | so my granddaughter is coming into the office to have lunch with me, and at ten o'clock

00:11:35.320 | in the morning I get a note from the op-ed page editor, Taku Banshanaria, his name is,

00:11:42.520 | the one at that time in the journal, and he said, this little, had a title with no message,

00:11:49.320 | don't you dot, dot, dot, hate the books, and I wrote back to him and said, of course I

00:11:56.760 | do, it's a whole bunch of self-important people getting together to reinforce each other's

00:12:01.880 | misguided ideas, so he said, can you give me a thousand words on it, and I said, sure,

00:12:10.280 | when do you need it, and he said, three o'clock this afternoon, and I was not about to cancel

00:12:15.560 | lunch with my granddaughter, believe me, so I drafted up something real quickly, why I

00:12:21.560 | wasn't going to Davos, and then I came back from lunch after she left, lovely young woman,

00:12:30.040 | hate to see her go, lunch was over, and edited, and got it in by three o'clock, because it

00:12:35.880 | had to be in time for the European edition, and so it got a lot of criticism, it was fun

00:12:42.680 | to write, probably one of the best things I've ever written, actually, and it ended

00:12:47.240 | up by saying, well, one reason I'm not going to Davos is I wasn't invited, and the other

00:12:54.680 | reason is I don't know how to get there, but I didn't read that President Clinton was flying

00:13:00.840 | over for the final session, so if he reads this and offers me a ride in his plane, I

00:13:05.720 | will be there, so I hope you're allowed to have a little fun in this business, I certainly

00:13:12.600 | had my share, sorry to take that time, go ahead, Mel.

00:13:15.240 | You've got all the time you need, John, Glenn says, I agree with Jack's critique of the

00:13:21.560 | total bond index tracking, how likely is it to change, and if not, what funds should we

00:13:27.960 | add to our portfolio to get better corporate exposure?

00:13:31.240 | Well, good question, and I want to emphasize that I may be a little bit of a purist on

00:13:37.000 | this, the differences are not large between us, I'd say the index properly weighted, we

00:13:44.440 | had things like 25% of all treasuries were held by China and Japan, a little bit from

00:13:51.480 | the UK, I think, and so why are they counted when the idea is how are you going to perform

00:13:57.480 | relative to your neighbors, let's call it US pension, retirement plans, and US investors

00:14:04.280 | generally, they just aren't part of that equation, and people can disagree with that, fine, but

00:14:09.320 | that's my position, and then they have a lot of shorter term treasuries, that I think are

00:14:13.320 | much more accurately kind of in the short bill or very medium, less than short term

00:14:20.760 | government bonds, and they're in the index, why would anybody want to be that short, that

00:14:25.480 | said, the differences are not huge, that doesn't mean you shouldn't be striving for perfection

00:14:31.560 | even though you'll never get there, but the option is, I think, and I actually did this

00:14:37.160 | when the spreads got so wide, a very rare move for me to make, I moved a fair amount

00:14:41.880 | of my money out of total bond market into corporate intermediate term index, and that's

00:14:52.200 | done fine, all those gaps of 2008 have been pretty much ironed out, I'm not sure it matters

00:15:00.680 | that much anymore, but I just leave it in there, so there is an option of corporate

00:15:05.320 | intermediates, and I'm trying to think here, and I'm probably slipping a little bit, it

00:15:09.880 | could be fund run by Welling and active, but it's an index fund, it's got a correlation

00:15:14.120 | of 98 or 99 for the index, whether we call it active manager or not, and that's, I want

00:15:19.560 | to double underscore, when you talk about ETFs starting to have more and more active

00:15:26.120 | management, every single one except, I think, one so far is a bond fund, and active management

00:15:33.720 | of bond fund is day and night different from active management of the stock market, bond

00:15:39.000 | fund, the tolerances are like this, between active and index, and equity fund, the tolerances

00:15:44.520 | are more like this, between the nine or around that, so that's what you can do if you want

00:15:50.120 | to do it, although I think we need to lend a hand to the investor, who probably many

00:15:58.680 | of you in this room are dying for more income, and yet my philosophy is, if you're in the

00:16:05.880 | bond market, don't reach for more yield than the bond market is prepared to provide you

00:16:12.040 | with, it's like to use a very trite example, like crawling out on a limb, and you crawl

00:16:18.520 | out further and further and you're fine, and then all of a sudden, one step too far, snap,

00:16:26.680 | a vigorous metaphor, and so, do it a little bit if you want to, I don't, I'm not a significant

00:16:37.240 | exception in my opinion, that I have done, but basically, the market returns a certain

00:16:43.480 | amount, and you just have to accept that, don't reach for more, it's a little bit like

00:16:51.240 | somebody, the analogy I've used, someone's lost the first seven of the eight races on

00:16:57.720 | the card, I think there are eight races on the card, if you go to the race tracks, and

00:17:02.280 | you take every penny you have, betting it on a long shot, in the eighth race, what you

00:17:07.640 | may recoup, the odds do not favor you, so try and stay within the simplicity, low cost

00:17:16.840 | index, bond stock, and the like.

00:17:20.840 | Here's a related question from Dan Smith, and he says, "Total bond is what it is, and

00:17:25.880 | the index of tracts is what it is, and my circumstances have not changed, how do I decide

00:17:32.200 | whether or not to hold my positions as long as I live, to put it one way, or hunker down

00:17:39.240 | in the Mark Lee's aggregate to put it another?"

00:17:43.880 | Well, basically, I'd go for hunkering down, we are, these relative yields will change,

00:17:52.760 | the one thing we do know is, today's yield has a 91% correlation, and will continue to

00:17:58.680 | have a 91% correlation, more or less, with the returns you'll get over the next 10 years,

00:18:04.360 | so if you buy a government bond today at 3% and a corporate bond at 4%, 4.5%, the odds

00:18:10.920 | are very high that you'll get a 4.5% return over the next 10 years, or a 3% return over

00:18:17.160 | the next 10 years, and so it favors getting a little more aggressive on the yield side,

00:18:24.280 | that said, we all have, I try and say that it's impossible to do, the idea of human behavior,

00:18:31.000 | you know, is how will investors react, and I'm afraid that once you get a little opportunistic,

00:18:36.360 | and reach out for something else, you'll be much too sensitized, much too insensitized

00:18:42.760 | to the prices that the bond fund has, and bond funds have gone down a lot, although,

00:18:47.720 | you know, the reality is they haven't gone down nearly as much, I mean, you read these

00:18:51.160 | scare things, this is a very important point, these scare things in the paper about what

00:18:55.320 | a terrible year this is for bonds, and I can tell you in my own experience, the way I do

00:19:02.040 | it, my bond portfolio has gone down 0.9% this year, and that's because I have half of them,

00:19:10.840 | Nunes are my direct holdings, tax free Nunes, and the limited term fund is down 0.1%, and

00:19:23.720 | the intermediate term, I don't do long, because it's behavioral reasons, you know, I don't

00:19:31.160 | want to mess myself up, is about 1.8%, so you put 50/50 in, you can see it's going to

00:19:35.800 | be over 0.9, and that's a turnover for me, and I wish I'd ever been in stocks, I always

00:19:42.120 | wish things like that, I always wish I'd ever been the best performing asset, but my magic,

00:19:49.000 | such as it may be, is I never act in those beliefs, and that's really an important thing,

00:19:56.440 | and don't let your behavior overcome, and you know, the lows in February, a little bit

00:20:04.280 | like the story I told you about Gus last night, I was scared, why wouldn't I be scared, I

00:20:11.000 | mean, everybody must be scared, so when you're scared, and say, you know, I really ought

00:20:15.320 | to do something about this, I go back and read my books, they put me to sleep a little

00:20:25.240 | bit, but. Jack, we have a comment here, on your comparison of active versus index funds,

00:20:35.480 | all in cost, included transaction costs only for active funds, don't index funds have some

00:20:43.080 | smaller transaction costs? Yeah, that's a good question, and it's true, they do, but

00:20:48.360 | they are so small, that they, you can't find them in the performance funds, if you look

00:20:54.120 | at the Vanguard index funds, and you subtract our stated expense ratio, from the return

00:20:59.560 | of the index, you get the return of the fund, there are, the evidence says, zero actual

00:21:06.600 | cost, and they're so small, they don't even come out to 0.1%, and that's very intuitively

00:21:11.880 | satisfactory, there are ways to do the trading, Gus is very good at that, has been, we know

00:21:15.880 | staff and people who are very good at it, and most index funds are the same way, there

00:21:19.880 | isn't much magic indexing anymore, we used to certainly be by far the best indexer, but

00:21:25.080 | everybody picks up the secrets, you know, there's no such thing, not like the Coca-Cola

00:21:29.960 | formula, which probably is worthless anyway, there's a parenthetical for you, but yes,

00:21:37.800 | there are costs, but they are so small, they are not evident in the data. Jack, this, it

00:21:45.480 | says, in common sense, your 10-year forecast used average earnings growth, plus current

00:21:51.240 | dividend yield, for consistency, why not use average dividend growth? You could use average

00:21:57.960 | dividend growth, instead of earnings growth, it doesn't give you as good a result, as

00:22:02.280 | accurate a result, because companies' payoff ratios change, so if someone wants to argue

00:22:06.920 | that, it's the more pristine formula, and that's actually what we call the Gordon formula,

00:22:12.120 | fairly well known in academia, the market value relative to the future cash flow, and

00:22:18.680 | this is, they call my thing the Bobo model, the Bobo variation on the Gordon model, I

00:22:24.760 | happen to like the earnings growth better, there's a great intellectual defense, isn't

00:22:28.280 | it? But it works in the data, and I think it's easier to follow, and you don't have

00:22:35.880 | to worry about changing payouts, which have changed a lot on the way down over time, but

00:22:40.120 | they're both approximations, and they're pretty good approximations, it's amazing

00:22:44.760 | to me how well that formula has worked, not formula for what the market will do, but formula

00:22:51.480 | for establishing reasonable expectations, I think I mentioned earlier, and what the

00:22:56.680 | markets will do, and none of this stuff is perfect, and I think we all ought to be aware

00:23:02.520 | of the fact that if you're looking for precision in any of these things, please don't look

00:23:07.720 | to me for it, I don't have any precision, I have a directional idea, I have a strong

00:23:13.400 | idea of what creates value in the marketplace, that is to say, earnings growth and dividend

00:23:18.120 | yields, and that's about it, and that's all you can control, but if it does work,

00:23:23.640 | it calls attention to being skeptical of what the market is doing for those fundamental

00:23:29.480 | returns, investment returns, earned by corporate America, and that's why I say, and I'll

00:23:35.480 | repeat it once more, I think I said it last night, I'll repeat it again today, we're

00:23:39.960 | probably repeating it to our dying day, which I hope is not today, and that is, the stock

00:23:47.240 | market is a giant distraction to the business of investing, or to put it in a way I did

00:23:51.880 | to these professors down in Southampton and Bermuda, just trying to remember the exact

00:24:00.680 | formulation I used for them, about the stock market is a derivative, and the stock market

00:24:09.000 | is a derivative of corporate value underlying, created by corporate America, so think about

00:24:14.760 | the stock market, the stock price is a derivative of the value of the corporation, or the value

00:24:19.960 | of American business as a whole, and that gets you into the whole area of derivatives,

00:24:24.520 | what sense do they make, and the magnification of returns, which you saw on those charts,

00:24:29.320 | magnified way up, magnified way down, and ignore it, because you know it's going to

00:24:34.120 | be in the long run zero, that's the nature of things, so am I dogmatic about this, you

00:24:38.920 | better believe I am, does Lenny doubt, anybody want to raise their hand, oh by the way, can

00:24:44.840 | I ask a question, we've had a little discussion about, and I talk about this in my financial

00:24:51.240 | analyst journal article, about how to charge advisory costs, outside financial advisory

00:24:59.240 | costs, against accounts, against the returns that investors earn, and you kind of end up

00:25:05.960 | trying to approximate it, but I just want to ask you all, I'll express it in a simple

00:25:11.880 | way, and then just give me one second to explain, I'd love to see a show of hands of how many

00:25:15.880 | of you consider yourself do-it-yourself investors, and if you're not, how many of you consider

00:25:23.800 | yourself, you need an investment advisor, and there's a lot of ground between those

00:25:28.360 | two, the pure do-it-yourself means you get started, and you don't have somebody telling

00:25:32.520 | you anything to do, but your fellow bogleheads, however you feel, and the other is, you rely

00:25:39.320 | on an advisor to tell you everything, so I'd like to see a couple of hands, a number of

00:25:43.720 | hands that are available, how many of you consider yourself do-it-yourself, wow, the

00:25:51.080 | message is getting across, and how many would say they need significant help, I presume

00:25:59.720 | that excludes the help I'm giving you this morning, thank you, I'm not amazed at the

00:26:09.320 | dominance of do-it-yourself, but I am amazed that she seems to be unanimous.

00:26:15.000 | The next question is very timely, Jack, it says, given the very low level of interest

00:26:19.160 | rates and the bull market of bonds for the last 30 years, can you tolerate the assertion

00:26:24.840 | that a person in his late 50s should have no allocation to bonds in his portfolio?

00:26:31.800 | Well, they're in economics versus emotions, the economics would suggest that no bonds

00:26:38.520 | is the correct decision, because we know the stock market returns, or we have reasonable

00:26:43.080 | expectations, that's all we can do, stock market returns will be about 7%, I think I

00:26:47.320 | mentioned this earlier, which will double your money in a decade, and then bond returns

00:26:51.480 | will be about 2.5%, I think maybe I used 3 before, which will get your money up 35%,

00:26:56.520 | so you've got three times as much money in stocks as bonds, and if stocks let you down,

00:27:02.840 | I just doubt very much that they will let you all the way down below that 2.5% or 3%

00:27:08.920 | on bonds, it would take an unusual combination of circumstances, or some kind of a crash,

00:27:15.000 | and then there's the issue of, we live in, everything is a risk, we know that, and uncertainty

00:27:21.640 | cannot be eliminated, but we know that there are certain uncertainties out there that would

00:27:28.040 | destroy the value of both stocks and bonds, as if bonds would be exempt, and if a meteor

00:27:34.200 | strikes the earth, it really wouldn't matter whether you own Vanguard or Fidelity, I don't

00:27:40.200 | think, I'm still hanging on to my Vanguard, but that's the economic side, and if you profoundly

00:27:51.400 | believe that, do that, and pay attention, as I mentioned before, very importantly, to

00:27:55.720 | the income stream you get, and not to the variation in price, because that gets you

00:28:01.480 | into the emotional side, and so when your emotions start to affect your behavior, we

00:28:08.280 | had another 50% market decline, I said something like this earlier, I'm going to use 40%, but

00:28:12.600 | whatever it is, you're going to want to change from an all-stock portfolio, with some little

00:28:17.240 | protection, an anchor to windward, call it whatever you will, dry pallets, and that's

00:28:21.480 | probably the worst timing in mind to do it, so if you think you can exempt yourself from

00:28:26.040 | emotional problems, I would say that's a good basis for investing, just go all the way,

00:28:35.720 | now, a lot depends on your time horizon, it's one thing if you're 22 years old, and one

00:28:40.200 | thing if you're 111, like yours truly, or something, but very few of us can really isolate

00:28:51.160 | our emotions from the economics of investing, so I'd say if you really feel like that, and

00:28:56.600 | it might be, let's say, 60/40 is a kind of conventional balance, and you really believe

00:29:03.000 | in equities, you know, make it 85/15, you'll get most of the return out of your stocks,

00:29:08.760 | the return on your portfolio out of your stock, but you'll still have that little comfort

00:29:12.280 | level that things fall apart, so economics, all stocks, emotions, maybe 85% stock.

00:29:23.400 | Jack, this next one is based on a quote that you supposedly made, and I'll just read some

00:29:29.000 | of the highlights, but it's relating to the general state of the mutual fund industry,

00:29:33.080 | specifically regarding money market funds, you supposedly stated that if the money funds

00:29:42.520 | got in trouble, that other funds would chip in to make the funds hold, so this question

00:29:50.360 | is, Mr. Borough, if you were running Vanguard, and money market funds got in trouble, would

00:29:56.120 | you assess the holders of Wellington and Windsor, or other Vanguard funds, to bail it out?

00:30:05.320 | Well, I'll give you sort of a hedged answer, unequivocally, no.

00:30:11.880 | Do I make my position clear?

00:30:14.440 | I follow up to that, it says, if you wouldn't do that, would you just let it go down?

00:30:20.120 | Well, let me say, my whole framework for money market funds is here is an instrument that

00:30:26.680 | can help a lot of people, a better way to save than money in the bank.

00:30:30.200 | Yes, the yield is nothing right now, or essentially nothing, but no one will be that way forever,

00:30:37.080 | but the asset value of money market funds fluctuates, and to conceal that asset value

00:30:44.200 | fluctuation by holding to its so-called dollar price is, I think, leaving the public with

00:30:51.000 | a misleading impression of what they own.

00:30:53.800 | So I would say, let the fund share value fluctuate, and then the marketplace will work, if someone

00:31:00.680 | thinks they're now moved to a $10 asset value, instead of a $1, and so it goes to $9.98,

00:31:07.960 | $9.96, whatever it might be, or $10.03 or $10.04, and whatever it might be.

00:31:14.440 | Just treat it like a normal fluctuating value asset with very small fluctuations, and then

00:31:19.240 | you don't get runs, because the price is adjusting, and investors who, what happened the last

00:31:25.560 | time, as everybody, I think, knows, is the, they were trying to maintain, this is the

00:31:34.200 | Met, father and son, brothers, what's it called, institutional index fund, or something like

00:31:39.480 | that, and all these institutions could see what was happening when Lehman collapsed.

00:31:45.720 | They had a huge amount of Lehman paper, over 1%, I think, and all of a sudden, Lehman collapses,

00:31:50.680 | and everybody knows that it's not yet in the asset value, but it will be tomorrow.

00:31:55.400 | See, you get out of today's price, these people are not stupid, these institutional managers.

00:31:59.400 | The poor public is going to be a step behind, because you've got to be watching these things

00:32:03.320 | like a hawk, as corporate treasurers have to do, and are supposed to do, so you get

00:32:09.080 | this cascading effect, and you want to be the first to go, and you can get a dollar,

00:32:13.880 | even though they're giving you a dollar for something worth, let me say, 99 cents or 98

00:32:18.200 | cents, and that means for the half of what they're left in the fund, it's not 98 cents,

00:32:22.840 | but 96 cents, so I think it's an industry that was built on the wrong premise, and one

00:32:31.880 | of mine, I tell people to be quite blunt about it, but I'm thinking about writing one more

00:32:38.280 | book, I won't lose this tongue-in-cheek, and it's going to be the largest book I've ever

00:32:41.960 | written, it's called "Mistakes I Have Made," and the reality is, as I look back on those

00:32:49.160 | mistakes, that almost all of them were made for marketing reasons, for marketing reasons

00:32:55.960 | to make the thing look more attractive, or to jump on the bandwagon of a trend like real

00:33:00.040 | estate, or specialty funds, and that kind of thing, and it was just an unfortunate and

00:33:08.680 | opportunistic, and words I don't like to use about myself, and I've lived and learned from

00:33:13.640 | that, going back to the first merger in 1966, with the Boston Group, and we started the

00:33:22.360 | first money market fund with a $10 asset value, I mean, I was really speaking from the book

00:33:28.280 | that I just told you about, in "Fluctuated Ways, Let's Show the World It Fluctuates,"

00:33:33.480 | and nobody wanted it, there were all these funds for the $1 asset value, that was the

00:33:37.800 | mode, and so reluctantly, but I did it, it was my decision, no one else's, and so we

00:33:44.520 | changed to a $1 asset value, so my instincts led in the right direction, and it has not

00:33:49.080 | cost us anything, I don't regard our money market fund as a big mistake, but I do hope

00:33:53.080 | that some group of statesmen in this business will get together and say, "Look, the value

00:33:59.800 | fluctuates, how bad is it to recognize that, and if a lot of people don't want their money

00:34:05.400 | market funds, well, that's just too bad, we're going to do it right, and let them put the

00:34:09.880 | money in some CD somewhere, or something like that, and that's going to be painful, much

00:34:15.480 | more painful for Fidelity than it is for us, although we have a decent-sized money market

00:34:19.720 | fund in the business, I guess about $200 billion, I don't know exactly, and so there's a point

00:34:26.520 | at which you have to do what is right for the marketplace, for the economy, and if it's

00:34:32.440 | painful, well, there's a lot to be learned, I'll take a little bit from this slide.

00:34:39.080 | It would also be painful for the investors, because many investors use the money market

00:34:45.160 | funds for their checking accounts, so every time they wrote a check, it would be a taxable

00:34:49.000 | amount, so how do you address that situation?

00:34:53.240 | Well, it's the easiest thing in the world, I hate that excuse, did I make myself clear?

00:35:00.680 | I have a tax-exempt, short-term bond fund, it's basically a money market fund, actually

00:35:07.000 | I use limited term a little bit longer, and it's basically a money market fund with a

00:35:11.240 | floating asset, net asset value, and so I get a little statement saying, "Here are the

00:35:15.880 | gains, here are the losses, here are the wash sales, and put this little number right down

00:35:19.640 | here in your tax return."

00:35:21.240 | Well, what's the matter with that?

00:35:23.400 | It's a simple one number, easy to understand, easy to calculate, not easy for us to calculate,

00:35:29.720 | but Vanguard, and I presume other people, calculate it for you, and it's no different

00:35:34.440 | from having an equity fund, and you get a little 1099 that says here's what your income

00:35:38.600 | was, and here's what your capital gains were, if any, and so I don't see that that's a problem.

00:35:44.360 | I can see it might be a minor irritation, and actually my moral value has kind of slipped

00:35:50.840 | here a little bit, but before we ever got into that kind of an accounting system, I

00:35:56.280 | still used the short-term, or the limited-term Unibond fund, and I knew every year I had

00:36:01.080 | some gains and some losses, and I didn't know how to take into account wash sales, because

00:36:05.480 | when you put money in, you're taking money out, that always comes up, and when you're

00:36:10.680 | getting paid, the dividend, that can even come up, and I didn't know quite what to do,

00:36:15.320 | I didn't have any numbers, so I guessed, I put in my tax return, $138 from long-term

00:36:22.600 | capital gains, and the next year I put in $272 from short-term capital losses, and the

00:36:28.280 | next year, I don't know what I put in, but I was never challenged, I wasn't trying to

00:36:33.320 | cheat, I just didn't know, but within a couple of years of doing that, we got the whole tax

00:36:39.000 | thing straightened out, it's complicated from a computer standpoint, but simple from an

00:36:43.640 | investor standpoint, so I don't have to guess anymore, and guess what, the gains were $138,

00:36:48.600 | the losses were $274, whatever one wants to say about it, so it's, I think, a trivial

00:36:55.720 | inconvenience.

00:36:58.440 | [BLANK_AUDIO]

Bogleheads® Conference 2013 - John Bogle Q & A

Chapters