We're going to move right into the Q&A after just a few words, and we'll move right into the Q&A. Okay, well here I am again. I don't know if Gus is still here or not, but a funny anecdote about my work with Gus over the years. You know, when you stop being the head of the company, a lot of relationships break down.

That would never be true of Gus and me, and in February of 2009, I ran into him in the hall, and we got talking about the markets, and he said, "You know, I think this is the greatest opportunity to buy a common stock I've ever seen in my entire lifetime." And I said, "Would you say that publicly?" And he said, "Are you kidding?" So we all bear the burden of our own palability.

He comes at the issue of market returns very differently from what I do, the way I do, and almost antithetical, and yet we come out in the same place. Gus doesn't seem to be as smart as I am in so many ways, and this may be the most important thing.

He didn't put any numbers on his prediction. He just said, "Lower than the past." And so I took a look at what I said to you all yesterday, and I looked at a sort of low bearish return, assuming a bunch of things go wrong, about a 4% return on stocks in the next decade.

That's with a severely large decline in the P/E. And then I looked at what my system would predict for the next decade, because I was kind of weighing in on my impression, and that's what I had in the charts. And my system, which is also on slide 41--43, I should say.

And by the way, we're going to put those slides up on Monday on my website, so if any of you want to get them, it would be very easy to do. It's my e-book, www.johncbogle.com. There's a dot. And so you'll see in there that the system predicts a 8.1 return.

So just for the heck of an average, we're talking about a 6% return compared to a 9.1% historical. So Gus and I are going to be--if you give him a number, I'm going to guess it's going to be 7% of the mills. So we come out of the same place, but what a difference in the way we get there.

And I have a lot of quarrels with the efficient market hypothesis, and a lot of problems with the math, and that is that we talk a lot about risk. Let me put a number like 9 or 14 or whatever it is on that. That is unequivocally not risk. That is the volatility of the stock market or the volatility of your portfolio.

Now, I'm guessing all of you know this intuitively, because I'd like to have a show of hands here. Bill Bernstein is not allowed to answer this question. What is the volatility--do you know the volatility, the standard deviation of your equity portfolio? Does anybody here know that? One? One hand went up and then down.

Nobody knows that. And the index, depending on how you do it, the S&P is around 14%. That doesn't have anything to do with risk. That has to do with volatility. And the risk of the market, I'm persuaded today, is quite large, and I think the market recognizes some of that risk, but not all.

And when you think about risk, what are you really thinking about? You're thinking about the state of the world. You're thinking about war. You're thinking about the state of the economy. You're thinking about financial leverage, greatly acceptable all over the world. You're thinking about a lot of things that can go wrong--global warming, health epidemic, growing concentration and bigness of our world.

These are all big risks that we'll have to deal with over time. And I went through my whole list here. I would come up with a conclusion that when you put all this together, according to somebody named Larry Siegel, you would absolutely conclude that the world is going to hell in a handbasket.

The fact of the matter is, in history, it's always been going to hell in a handbasket. But it never quite gets there. So that's called hope, not risk. So I look at it in a very different way, and I come out about where he does. And so the efficient frontier changes.

And then there's--I've always had this argument, which you may have heard me use from time to time. If you look at that chart of justice, and there's a percentage point here and a percentage point there, and here's the risk, and here's the--I guess the return is over here, and the risk is down here.

And it kind of equates a percentage point in standard deviation, the way that line is drawn, with a percentage point in future returns. You take one percentage point more risk, you get one percentage point more return. Well, I always argue, in kind of a nasty way, that what sense does that make when an extra percentage point of return is priceless and an extra percentage point of standard deviation is meaningless?

Think about that. You're comparing the meaningless with the priceless. So be a little skeptical of all these things, even though Gus, intellectually honest, at the University of Chicago, efficient frontier model, probably comes out about the same place I do with the future returns. So we'll just have to see what happens.

I want to mention one other thing about Gus talking about threats to Vanguard, and he used complacency. And I have a different kind of threat, which is best exemplified. This is not to do with innovation in the firm. You know, all those wonderful people you saw last night. And I saw a group I didn't even know existed at Vanguard, helping to educate children at the grade school, the high school, and the college level.

It was a fabulous idea. Those lovely, young ladies. Don't make me poke. And I was so happy to meet so many crew members that I hadn't met before. These are not the big shots. These are the people who are doing the hard work of keeping this place going every day.

When you talk about, I think, one of our big risks is a different kind of innovation, and that's trying to innovate in the funds we offer. And I think that is a very bad idea. How can you bring out a new fund that you think will do better than the index?

Why would it do that? How could it do that? It can't do that. It can come and go. It creates still an additional risk. So I'm reminded of one of my favorite stories, as much as no one knows, about the fabled shredded wheat biscuit. And there was an ad in the New York Times three or four years ago, and all it has in the middle of the page is a shredded wheat biscuit.

I just put it up to the right side. This is for a full page at a time. And it says, "This is the same biscuit we've made for 100 years. It has the same ingredients. It's made with the same care. It's made with the same machinery. And it tastes exactly the same and bites exactly the same." We put the "no" back in innovation.

And when it comes to, "I think our risk is over-innovating," that probably said to anybody who's progressive, as a typical statement by an aging veteran who thinks there's only one way to do things, is, "I am an aging veteran, and I do think there's only one way to do things." What can I say?

I think that's probably enough, Mel, to open the session. And we'll turn it over to you. You can give me a couple of minutes at the end. Okay. We'll do that, Jack. I know you like to respond to questions from people who are attending, so I'll call your name out.

Just raise your hand so Jack knows who he's speaking to. This question is from Dion. He asks, "When Vanguard was developed as a mutual company, you thought other companies would follow. They haven't. Do you think they will?" Well, I'm not sure I really thought other companies would follow. I didn't see how they could follow, and I don't think they will follow, because this is a business that is basically turned from a professionally managed, as it was when I came in, very small business, where, as I said yesterday, we sold what we made.

It's a great marketing endeavor. We make what we sell, and it's gotten bigger, and largely because of public ownership, conglomerate ownership, of so many mutual fund management companies. About 80% of it has become an entrepreneur's dream, to start a mutual fund company and get rich. And when you look at what's going on in the ETF world, exchange-traded fund world, we have a lot of entrepreneurs out there.

They're in it simply to capture the next moment. They're in it to make money for themselves rather than clients. They're what Henry Kaufman called, I think I used this yesterday, financial buccaneers. That's not good for the investor. It's great for the entrepreneur, and they'll all make a lot of money, but their shareholders will not.

So if you're making a lot of money and losing to performance all the time, to the index, you really can't change. If someone were to try and get their costs down, I might have mentioned this briefly yesterday, get their costs down to Vanguard's expense ratio, which I think is a weighted number of about 15 basis points.

Well, take someone like Fidelity or T. Rose Price, or even Dodge and Cox, which are a little bit lower. They're running at about 70 basis points on Woodford's expense ratio. And if they destroyed the firm, eliminated marketing, fired the portfolio manager, started indexing, took away a little bit of Ned Johnson's 26 billion, it's a living.

They could probably get their costs down from, say, 70 basis points weighted to, let me say, 40. And what's the point of that? There's still three times what our expense ratio is. They're not competitive, and they've given up all the purchases and stuff that they have, and they're all the way up doing things.

So it's going to be very hard. And to visualize it even a little more clearly, there must be an innovator out there, not in the industry, saying, "Well, it looks like this industry has only one way to go. "It is the Vanguard way. "So I'm going to start a mutual company now.

"I want to go out and raise capital to get into the business. "It's going to take"-- let me pull a number out of the air-- "$200 million to bust into the mutual fund business. "But how am I going to get that capital? "When someone gives me $200 million, "they're going to want a 15% minimum return on that capital.

"So somehow they've got to make $30 million a year. "There's no way-- what a selling-- "I've got this new IPO, this wonderful innovation, "but it's not going to produce any money for you at all. "Invest now." So I don't know at what point competitive pressure drives people into trying to protect their market share and their cash flow when they're making money now.

And I think the honest answer to that is the people in this business see that. They see that their future prospects for significant earnings growth are gradually diminishing, but they're sitting on a great cash cow. So this cash cow will generate money to the managers, money to the conglomerates, money to the public shareholders, but they will be diminishing.

And a lot of the companies that are now owned by conglomerates-- or self-owned Fidelity, for example-- I would guess would be sold to some kind of a financial firm within, say, five years for each work period. I hate to make five-year predictions, because it's the least possible I'll be alive to see whether they came true.

So I don't even see what's happening, and it's dramatic. You saw those charts yesterday. They're doing 140% of the industry's cash flow. But other people aren't going to concede, because they're still making a lot of money. They're happy there's enough money to keep everybody rich. Capital-proof people, private company.

I think on every ranch in Montana-- well, maybe not quite every one. I'm getting a little hyperbole here. But it's going to be-- if it changes, it's going to be a very, very slow change. Well, Jack, did you get any degree of satisfaction when Fidelity tried to respond to Vanguard's index funds when it was a Vanguard-- I mean, Spartan Funds out?

You know you were responsible for that. Yeah, well, the Spartan Funds are a pretty good-- first of all, be clear on the Spartan Funds. They're the only-- Fidelity is the only fund group, only fund sponsor in the entire industry that has taken indexing seriously. They probably have-- is it 50 billion, 400 billion?

About 150 or so. 150 billion indexing. I mean, it's just a drop in the bucket. But nobody else is anywhere near that. And they charge kind of Vanguard-type prices. Every once in a while, they try and undercut. Doesn't seem to do them any good. And then they go back to trying to make a little penny here and there in their index fund.

But T. Rowe Price has an index business. They won't even tell you about it. Well, maybe they will. I call them on the phone. But they're charging 23 basis points. 23 basis points for an S&P 500 fund. I think those directors have breached their fiduciary duty to that fund.

And it just-- it doesn't work. And I think it's-- Morgan Stanley is even worse. There's a JP Morgan that charges 100 basis points. But they only charge 50 basis points and pay a 5% sales commission. Only. By the way, I don't know how that word slipped out. So it's pretty much monopoly, except for BlackRock, which is doing quite well, and State Street, which is just kind of hanging in there and has the most widely traded stock in the world.

And that's Spider. But it's not going to be a very profitable business for them. And they're pretty marginal in terms of cash flow. So it's basically come down to BlackRock and Vanguard. And we're 25% of the ETF business and 75% of the traditional index fund business. And BlackRock is probably 5% of the traditional fund business, index fund business.

And they're bigger than we are. So they're probably 35% of the ETF business. So we'll be bigger than BlackRock. And whether that will give me any satisfaction or not is another question. There are ways to use our ETS that are satisfactory and important and valuable to investors. But there seem to me to be a lot more ways to use them in a very foolish way, not so much as Vanguard.

But when you get-- we talked about this yesterday. You get this triple leverage. And then you get somebody like Wisdom Tree that had a decent idea at the beginning. And it's now basically 100% of their cash flow is in Japanese and European index funds, which you can trade to your heart's content.

And they're making a lot of money. But investors are only going to lose with that strategy because nothing is good forever. So it's probably a little dumb to say I don't see any real major competitor on the horizon. But the mathematics that I always come back to-- and you've got to look at the incentives.

You've got to look at the motivation. And no matter what they do-- and I think this is an important point-- if they can do anything, they want to compete with us. If you want to lose money, they can bring in that index fund in four or five days at a point.

But what we really have going for us is having had missionary zeal for indexing, basically not from day one. That was just an idea that goes into the investment management system back in 1975. But from, say, 1980, 1985 on, particularly in the '90s, this zeal of perpetuating the value of indexing-- books, academic articles, the kind of things I've been doing.

Having somebody that's been dragged kicking and screaming into the index business compete with someone who has this missionary zeal, as if it's the Holy Writ, which is not a fair trade. So we will sustain our position, I'm quite sure, unless we over-innovate. And that would have such a small-- at the beginning, very small impact on what we do at Vanguard.

So you don't require anybody in indexing to go somewhere else. And I would not recommend that. Nothing will be better, in my opinion. Here's another follow-up question from Dion. In your wildest dreams, did you ever think Vanguard would reach $3 trillion? No. But I did, I think, back in about 1989.

You could see, almost touch, the growth in our firm. It was not going to slow down. So in 1989, it was not going to slow down very much. We had been growing at a 24% rate, annual rate. I mean, your assets double every three years. And we were doubling every three years, in fact.

And so I gave a speech to the crew and to our internal staff previously called "The Tyranny of Compounding." You know, we always talk about the miracle of compounding. What I was trying to point out was a lot of tyranny to it. So I said, look, if we continue to grow through the '90s at, say, an 18% rate or a 15% rate, because 24% is not sustainable, we're going to be a trillion-dollar company in-- I guess I said $800 billion in 1999.

And I would have gotten to this trillion a couple of years later. I probably should have repeated that exercise in 2000. But it would have come out the same way. Our growth rate now is not 24%. And it is not 18%. It's not 15%. Our cash flow growth rate is 5%, 5 and 1/2%.

That's what cash flow does. You get a lot of inflation and growth when you have very good markets. Then you get a lot of deflation and growth when you have bad markets. So the way to look at a firm's growth rate is cash flow as a percentage of assets.

And that's a very healthy growth rate. Our GDP is growing at maybe 3% a year. So if you can grow at 6%, 5%, 5 or 6%, you're going to do just fine. And of course, the dollars get so big. If you're dealing at 6% of the free trade, that's $180 billion.

And that's not too far from a little bit higher. I think our cash flow for this year is projected to be maybe $165 billion, something like that. There's a question about the bond duration. And it says, do you think shorter duration bond funds, two to three years, would be a better choice or stay with intermediates and heavier on corporate bonds?

Yes and yes. Maybe I ought to amplify that. Shorter duration is not a good bet, period. Because the long run of the bond yield is determined by the coupon. And the long bond's yield is probably a percentage point and a quarter, something like that, more in the intermediate term.

And two percentage points more in the short term. Maybe even three. So you will do better in the long bond. I just have been around so long. I can't look at the numbers in the abstract without saying how will people react if interest rates go to 4% and that long-term bond drops by 40% back, which is roughly what would happen, very roughly.

And I think most people could not handle that. So no matter how good the long run is, we all have a little, we're influenced by the short run. The long run, God knows how long it is. And if you have a retirement plan, you think, gee, I'd better do something about this.

I can't handle those losses. So it's the psychosomatic or behavioral effect that worries me. So what I do myself is do, well, in my personal account, limited term uni and intermediate term uni, about half and half. So it gets me to a duration of probably maybe four years, something like that.

And does that sound right, Mike? He's a good man. Why don't you say exactly four? - And on my corporate, I have some mostly short term. We don't have limited term on the corporate side and the index side. And I'm a little down on this. I told you yesterday, I'm a total bond marketer.

I just think that's too much in the way of government, too much in some abstract way. Can I prove that? No, I cannot prove it. And my big booster, David Swenson from Yale, thinks the only bond he should know is the owner-government bond, Treasury bond. And I think in the real world, that's just not enough return.

The amount of risk, I'm talking real risk and not standard deviation, is quite small. And you will do significantly worse than the Treasury bond if you have corporates. The low default rate, maybe the corporate return will be less than the coupon, but not enough to get it down to the Treasury rate.

These are all expectations born of too many years of experience, perhaps. So I'd say yes, stay short duration. Don't overemphasize government. It troubles me that Treasuries and mortgage-backed, Treasury-backed mortgage-backed are 70% on the bond index. And I just think that's too much. And I've tried to get Vanguard to change it, but you can imagine what they think when they get a letter from me saying, "You know, we're doing the bond thing wrong." (audience laughing) I've started it that way.

I don't need anybody to advise me. I'm not sure I've looked enough, but the returns were so high, and the yields were so high when I started that bond index fund, first bond index fund in 1986. It just seemed like a no-brainer. And the yields were so high, the risk was, let me say, 7%, 8%.

It didn't look so stark. When you get to 2% and 3%, that's a 50% difference. So, or you look. Lord Keynes said, you know, that's not what you said the last time you talked to us. And Lord Keynes responded, "When the bats change, I change my mind." (audience laughing) - Well, Jack, the comeback on that from a lot of people is that you take the risk on the equity side.

You want your bonds to be your safe harbor. And there's nothing safer than treasuries. And so why do you think that the 70% in a government bond is too risky when we're talking about looking for balance in bad times? - Well, you have to think a little bit about what that 70% is all about.

You know, what is the proper ratio? What is the normal government bond, treasury, infinity bond for U.S. investors? We've got huge amounts of treasuries that are owned by China and Japan. And if you take them out of the program, you're gonna all of a sudden have bonds that maybe, I don't know the exact number, but let me say 40% of the portfolio.

What does it matter what China and Japan are doing in terms of your portfolio? So if you look at other portfolios, pension fund portfolios, for example, they're gonna be more like 35% government. I'm not saying that's right. And I am saying, I'm making a judgment, which is a fragile judgment.

And like everything I've ever done in my entire life, it could be wrong. But I have a feeling, and I think it's a duty to express it. - I don't know about that. - Because the point is, just remember, an extra percentage point of return is priceless. - And I think you touched on this, but the question is from Cameron Bennett.

If you care to share, what is your personal asset allocation and why? - Okay. And believe it or not, I just actually changed it. For the first time in many, many years. Let me go back a little bit in time with you to an interview I had with Don Phillips at Morningstar in, I think, the spring of 2000.

Could have been the fall of 1999. Could have been a little bit later. Right around the high of the stock market. And he asked me about my asset allocation. And I said, well, right then, it was about 65% stocks, 35% funds. I'm a conservative person. And at that time, bond yields were 8% and stock yields were 1%.

And I said to him, we looked this up in my interview on the Morningstar board a little while ago. And I said, you know, with stocks selling at 30 times earnings and yielding 1% and bonds yielding 8%, there's really not a chance in the world that over the next decade, stocks will do nearly as well as bonds.

And then I asked myself rhetorically, then why am I holding any stocks at all? And did something about it. Very rare for me. I just don't fuss around with changing. So I went from, in very rough terms, and I combined various retirement plan accounts, personal accounts, trust accounts, to get this number.

But I reduced, I wouldn't dare down the stock market. I'm not smart enough to do that. That would have been called for then. You would have been smart to do it. But I'm just not smart enough to do it. So I reduced it in very rough terms and this is out of memory too, but I know where it came out.

I reduced my equities from about 65% of my portfolio to about 40%. And I was very happy with that. That occurred in the '90s. I didn't see any rebalance, but I did not rebalance at the end of the, I'm sorry, at the end of 2010. So I've stuck with that.

And gradually, because of changes in the stock and bond market relative to one another, I got to about 55% recent present position, 55% equities, 45% bonds. And these are combining taxable and retirement plan accounts. It's a crude number, but it will get the point across. And not precise. I don't do precise in any way.

It doesn't matter. And I decided at the beginning of the year, as I looked around this risky world out there, all the things that are going on, international conflicts, problems in the U.S., the financial system, the kind of thing, the world's financial system, possibility of war, even more subtle things like the role of technology in price competition.

Everybody knows that technology has changed the dimensions of price competition in this country. And it's been in favor of consumers, and therefore against the interest of producers. The producers of the companies are making money. And you see this in Walmart, for example, and it's recent earnings. So I put them all together, and I thought I really want to go down from 55% equities to about 45%.

And I found it very difficult to do because in my personal account, I have such gains on the index funds I bought 20 years ago. So I started to have a big tax burden, and the amount of money involved is probably a 27% or 28% capital gains tax. And so I've got to say, "Well, if the market's going to go down, "27% or 28%," I'd admit to you, I'd stop and do lower basis.

And I didn't think that was very likely, but I still did a little bit in my personal account. And that hedge fund got down to 50/50. And then in my retirement plan account, we're still going to charity anyway, so I'm having a funny way of looking at things, but I thought if everything else failed, I could always draw money out of it, so I'll be able to consider it there.

I'll reduce another 5 percentage points, and so forth and so on. So now I'm 45, 45, 55, 45 in stocks, and 55 in largely short-term and long-term bonds. So that's the story. - This is not an investment. We have a question, but it's about your management style and your productivity.

It's from Janet Heffernan. "James, how does your office management style "contribute to your productivity, "and what time of the day do you find "to be the most creatively productive?" - Well, let me try the last one, which of course has no answer. What time of day do I find to be the most creative?

Well, I have this funny mind. I can attest to this. I'm thinking of everything all the time. (audience laughs) That's a lot of thought, and it's pretty true, and I'll come in every morning with a half-dozen new ideas, and Mike and I will explore them and look at what the data looks like.

I mean, I trust my judgment, but I'd like to see data on a whole variety of things. It's so far-fetched, you wouldn't even believe it. I had one of them to give you an idea where my mind is working. I met with some Australians when coming out of the galley, and I was gonna meet the head Australian chief investment officer at ANZ the next morning.

So these fellows were sitting with a Vanguard rep, and it happened to be a nice day. They were outside, and the outside portion, outside of our galley, is almost totally shady, but all the way over, coming back on the right side, there was this bright sun coming through. And so I had a nice chat with these guys, and I said, "I don't know what you're doing "sitting in the sun like this.

"I mean, it's the only-- "you're gonna get burned up or something." And then I said, "You know, it reminds me "of that quote from Shakespeare, "'I'm too much, he the sun.'" As soon as I got back, the officer said, "Mike, check that one out for me. "See how right I was." Mike failed me.

So that night, I did it myself. I Googled, "I'm too much, he the sun." It's Hamlet, Act I, Scene 3, and contains, which I never knew until I looked it up on Google, not just "too much in the sun," Hamlet being, feeling he was too much in the spotlight after his father was murdered, but also his uncle had murdered his father.

You know the story. And so it was a pun on "I'm too much in the sun," S-O-N, from this guy. So I learned a little bit. Mike learned a little bit. And when the Brit came in, I mean, the Aussie came in the next morning, I let him have all barrels.

So, is this useful? Is this productive? No, this is crazy. It's a sign of a mind that didn't ferment perfectly. And so, I don't have a simple answer to these questions. That thing's popped me. I was sitting into it in an investment company. I'll give you another more correlative example.

Many years ago, probably 20, I was sitting in the audience at the Investment Company Institute, a general membership meeting, a little bored, and I started thinking. And I thought, you know, we have a short term municipal bond fund, an intermediate term, but the short term is really too short.

So I write down a limited term meeting. The next day, I came in the office, gathered my little staff around, probably four people, and said we're going to start a limited term municipal bond fund. That's how the process worked. And, you know, it seems crazy. It seems stupid. It seems arrogant.

Rarely do I consult with anybody, as I've told you in a couple other contexts. But it all seemed to work out well. And it says something, I think, and I'm not sure about any of this, but something about the individual compared to the consensus. I wanted to start an insured municipal bond fund.

So my friend Jeremy Duffield said, "We're going to do a survey "and see if anybody wanted one." Nobody wanted an insured municipal bond fund. I said, "We're going to start "an insured municipal bond fund." We had a lot of trouble out in the Pacific Coast. Washington State Power Authority went bankrupt.

And I thought it would just be a good idea in the abstract. So we started. It's been a big success. Now, one of the great things about a very small company run by a dictator-- I mean, I'm sorry. That's really the way it was. I just--you know, I don't know if anybody will own up to this, but it was that way.

And there's something to be said for that if you're trying to do something that no one has done before. When you get big, it's much more difficult to do. You go through a process, process, process. Judgment, as I mentioned, takes a back seat. So I guess it's just-- I'm not sure it's healthy, by the way.

At least some of my thought process involves things other than investing. I'm not sure enough. And at least I try and keep spending a good amount of time with my family and mine. I'm not sure I do a great job on that, but I do an adequate one. And I think everybody understands.

And so it's-- idea generation is much more impulsive and much less processed than anybody can imagine. And, you know, you tell this to a consultant who's going to tell you some damn thing like part of the expression. If you can measure it, you can manage it. Of all the idiotic comments ever made.

I mean, is it all about measuring things? I mean, really? What about people? How do you measure character? How do you measure integrity? How do you measure loyalty? Oh, we have some tested measures, they say. I don't believe any of those measures. And so I'm afraid I'm showing you reluctantly.

Well, not so reluctantly. My very worst side. - Jack, the number one topic that we had on the forum, questions for you, and from the members here and from the board members, was about your thoughts and views on international investing, which you talked about yesterday. But an interesting question on that was from Lissy.

I'm sorry, it's stated, of course. It says, "If you were born "on the same day in Japan "and grew up as Jack Shigahara, "for example, "but you still had the same "fervor for home country buys "and equity investing as you do "at Jack Vogel, "born and raised in America." - Oh, that's so easy to answer.

Japan is not America. America has the most diversified economy in the world, the greatest innovation, the greatest entrepreneurship, the greatest productivity, the greatest technology base, the greatest protections for shareholders, and ownership of private property of any company in the world, not last but I will make a possible exception of Great Britain and Switzerland.

These things are vital. These things underlie America. None of them underlie Japan. I mean, they're barely getting out of the imperial age over there. They have terrible demographics, as Gus mentioned this morning. They have a very structured economy where you go up these little chairs and sing the company song, "Oh, My God." (audience laughing) I'm vocalizing.

But I'm actually having a good time. (audience laughing) - This next question is from Brian. He says, "There have been recent studies "that propose starting retirement withdrawals "at a lower stock-bond mix "and later raising the stock-bond mix "after you have avoided "the stock market volatility risk "in the initial phase of retirement.

"What do you think about this proposal "versus a more traditional "get-more-conservative-as-your-age approach "to the mix at the time "of the stock market volatility risk?" - Well, to begin with, I think it's appropriate to challenge the age-based kind of work. And to be clear, I have never said this is some kind of geometrical thing that you do automatically.

I say it's a good place to begin. Think about your age. Think about your bond position equaling your age. Why? Because the yield on bonds, the income yield, the interest rate on bonds is higher than the dividend yield on bonds and stocks. So as you get older, you'll want more protection and you'll want more income.

So that kind of logic permeates the idea. And that's a decent logic as far as it goes. But the fact is, we know so little. Rob Arnott, not exactly my dearest friend in the business, who runs the RAFI, R-A-F-I, Research Association, R-A-F-I, and does the smart beta kind of thing with his fundamental indexing thing, which has not proved itself at all yet, but he's only had 10 years.

(audience laughing) I did not have to say that. But I don't think there are easy answers. And I do think, and I struggle a lot with this. Now, intellectually, I do think there's a difference when I started talking about that and bought yield for maybe 7% and stock yield for maybe 2%, not the extreme 50 or 2000.

I do think we have to think to ourselves that the idea is to get more income by having bonds when you're older. And the dividend yield on stocks is 2.1%, and the best you can do on a reasonable, high-quality bond portfolio is maybe 2 3/4 or 3%. I think we have to challenge our assumption that there's not a lot that's permanent in this field.

I don't know how. I don't have the answer to that. I don't know if we'll be able to change the way we do our target date funds. But I'm a little suspicious, and I wonder if those life strategy funds, just pick one and have a permanent ratio, is not a bad idea.

And then I would add this. What do we know about rebalancing? It's a little related to that. And we know that it is an unwise thing to do for a long-term investor, because when you rebalance, you're selling the higher-returning asset, usually common stocks, and buying the lower long-term return asset, bonds.

So the more you rebalance, the less wealthy you do, compared to just hanging on to the stocks and keeping a higher and higher position. And just leaving the bonds in the lower return, the smaller and smaller portion of the portfolio. That's not a mantra for me. It's something that we all want to think about.

And times change, conditions change, interest rates change. So basically the answer is there is no answer. But I do think that the target date approach is a reasonable approach. I think it should be compared to the life strategy approach, which is a firmly conservative growth income objective, serious objective.

Probably, I don't even know, but 30% equities, 50% equities, 70% equities, or something like that, maybe even a little higher, is another way to do it. There's no guarantee in any of this. There is a behavioral element, comfort level, if you will, that if you get older, you know, I know this feeling.

I didn't even talk about this when I talked about the difference between an older age income, for example, and lower risk. But there's also this human factor. You know, we get a little bit crotchety and nervous when we get old. I don't, but everybody else does. - We're talking just on the life strategy funds and the target date funds.

Do you have any idea, when an investor looks, let's say a retiree looks, and they're looking, thinking, being conservative and income, the life strategy income fund is 40% equity, or the life strategy target, the target date income fund is 30% equity. Do you have any idea why Vanguard has the same income in portfolios that are 10% more in equity?

- No. I started those funds, and I didn't know that. There is, in all my bragging about the number of things that are on my mind, everything is off my mind. And I'd actually be very surprised at that. I'd like you to check that out for me, okay? Or do you know it's true?

- I'm not sure. - That's the first time you've ever answered that. - I know what a strategy is. - So we'll check it out. It seems very funny. Because at 10%, you know, if they get a 10 percentage point difference, and you multiply it by the expected stock return and the expected bond return, and it really doesn't change your risk or your return very much if you have 10% more left.

I think sometimes we're too darn mathematical. And it's basically, what are you comfortable with? What do the numbers tell you to do? How much do you think your risk is? How much money do you have at stake? Someone has a huge amount of money at stake. It could be very different.

Someone's struggling for every penny, so they don't have to call on their kids when they retire, or when they get 10 years into retirement. So none of this is easy. And that's why anything that is too formulaic kind of worries me. And yet, okay, gross return minus cost equals net return.

That sounds kind of formulaic to me. So I guess what I'm saying is anyone that uses my formula is okay, but anyone that uses other people's formulas probably ought to be careful. I am trying to make, by the way, a serious point there, and that not everything can be converted to numbers.

Read my book called Don't Count On It. - Jack, I may have misquoted those numbers. I think I was trying to be conservative versus the target date retirement. - Well, see, that would depend on which retirement. - Right. The target retirement income fund is the final fund of everything.

- But you'd be picking a particular target date retirement age to get that 30%. I don't know what that is. - No, but all funds end up in the target retirement income fund, which is maybe 30%. - The target retirement doesn't have an income fund as such. It's just a gradual scaling of the equity ratio.

- Yeah, but I think they call it the target retirement income fund. - Well, they should stop that. We'll check those out. - We'll move on, because I'm totally in trust memory of those two. Question from Nisi. What do you make of predictions that investment returns going forward will be lower than we're used to?

I think we all know your answer to that. Do you think that they will be lower than normal for longer? - Let me say a couple things about that. When you look at things in 10-year average, and let me use my central number, which is the 6% future return for the bottom line stock.

Start with the knowledge certain that it's not going to be 6, 6, 6, 6, 6, 6, 6, 6. It's going to be plus 20 and minus 40, and it's going to jump all over the place. So that in itself kind of gives a lie to thinking about things at the time continuity.

The reality is that this could all be, and Gus kind of hinted at this, I think, or maybe you came close to hinting at it. We got a good solid 40% market decline, and all would be well. And if you think about it for a minute, and I don't think too many of you here are in this category, certainly I'm not, but if you're building a fund for retirement, pray for a 40% market decline, not just Sunday, but Monday, Tuesday, Wednesday, Thursday, Friday, and Saturday, because you'll be investing at lower prices for years.

So we have this kind of funding bias that market highs, rising markets are good and falling markets are bad, and the fact of the matter is that everybody must know that rising markets are good for sellers and bad for buyers, and falling markets are good for buyers and bad for sellers.

There's this eternal equation, and nobody can challenge that anymore than they can challenge the growth of retirement. Just so you get the full point, finance qualities of debt retirement. - Jack, you said, the first two words you said in your opening remarks the other night were "Taylor, where am I?" I have a message for you from Taylor.

It says, "Dear Jack, no one in the mutual fund industry "has a greater combination of character, "practical experience, knowledge, inventive genius, "wisdom, perseverance, management ability, "literary ability, kindness, modesty, "and a desire to help others. "What are your most important words of wisdom "to give to your own mind?" - Well, first of all, my wife would agree with all that.

(audience laughing) She said, "Who's he talking about?" (audience laughing) As always, my wife is right. (audience laughing) We'll be celebrating our 60th wedding anniversary next September, and so I don't want to do anything to disturb her, I don't argue about that. (audience laughing) I think advice really is simple.

Look at investment principles, know what the game is about, understand where the sources of return, it's one of my big themes, promote your bonds and stocks, and just try and figure out how much risk you can tolerate. You know, it's easy to put in a questionnaire, "What would you do if the market went down 50%?" And people say, "I guess it wouldn't bother me at all." Well, that's a bare-faced lie.

It's easy to contemplate 50% decline and say, "Fine, I know it's gonna come back." Then it goes down 50%, you're on your way out the door. So it's behavior, it's who you are, and always be who you are. Life is too short to be anybody else. But take into account the fundamentals.

You know, listen to what people like me are telling you that are reasonably unbiased about future market returns. And conservative, I would always lean to the conservative, because you will then be in the awful position of over-saving, which is so much better than being in a position of under-saving when that great retirement date comes.

And then I would add, and I'll throw a little anecdote here, that I had this expression, "Don't peek, don't peek, P-E-E-K, "at your 401(k) envelope when it comes in, "or your IRA envelope when it comes in, "every month in your anecdote. "Just throw the darn thing in the wastebasket." And keep doing that until you retire.

And when you retire, open the envelope. But be sure and have a cardiologist. Because you're going to have a heart problem, and you won't believe what you've accumulated. And the anecdote part of this, and every once in a while, you find out, yes, in spite of the odds, somebody is actually reading this stuff, and somebody is getting the point.

And I've been doing that for a long time, and I got a letter from an airline. Todd was just retired, not so long ago. Long letter, and a couple of long follow-ups. And his first letter began, "Dear Mr. Bogle, "I have just opened the envelope." It gave me such gratification.

- You know, it's interesting, because the next question was from Backpacker, and it says, "You've said that investors "shouldn't peek into the portfolio here. "Say once." I believe your exact words were, "Don't peek, don't peek, "don't peek." "This helps them save a course, "and when they look at their portfolios "right before retirement, "they'll be floored by how much they've saved.

"How does that work in practice, though? "Don't investors need to monitor their portfolio "to rebalance, maintain the aging bonds, "and watch what's wrong?" - Well, you've got to distinguish between the real world and the hypothetical world. I mean, you know, read "The Tortoise and the Hare." It's a great story, and it's a better story for an investor.

But it's overdrawn, it's hyperbolic, and none of us are tortoises or hares. So the question is, how much of us is a tortoise, and how much of us is a hare? You read these things about how all people are divided into two classes. Are you kidding me? I'm looking at 220 people or something here, and not one of them.

I mean, this group is divided into 220 different classes. And so, you have to recognize people's individuality, and you have to recognize the difference, and I'm not sure I'm good at this, by the way, the difference between kind of a little hyperbole to make a point and hoping that people understand it's like an ideal or a fable or a moral that you adjust around to deal with who you are yourself.

And that scene is a little bit like one of my commencement speeches in one of my books. I guess it's in "Don't Count On It." "If this above all that I own itself be true, then thou canst not be false to any man." Shakespeare probably would have said, "Man over man or woman." And that's also from Hamlet, for those who care.

And so, the idea that there's some answer, you know, young people, crew members will often come to see me and say, "I'd love to come and meet you." And I do my best to accommodate them. And they basically, if I can simplify the conversation, say, "Okay, what's the secret?

What's the secret?" And you get to be the head of a $3 trillion company or whatever we were when I last ran it. And I say, "Look, you have a lot of assets that I do not have, and I have a lot of liabilities that I do not have.

We're different people. Every person's secret is different. So just learn what you can. Watch others. Watch what they do. See what you can identify. Do what you can. But for God's sake, be true to yourself." And so, you know, I don't have this kind of Confucian sort of wisdom.

But I do have a certain kind of wisdom that calls for perspective. And maybe I shouldn't use the word "modesty," but I'll say "modesty" in the extremity of my views on a human being. And so we all struggle on different family circumstances. I mean, they're so different. Everything is so different.

When someone says, "I can tell you what the rule is," the rule is there is no rule. I mean, there's common sense. There's mathematics. There's what stage of life you're at. It's family. What your objectives are to leave money to your children or make enough money for yourself to have a comfortable retirement.

There are abstract goals, but ultimately are measured with a dollar sign and a certain number of digits. So I know, you know, I'd love to have some really... Do we have a "why" sentence, Mike? Could you give me a "why" sentence that I should give you? Stay the course.

That's good. This next one is from Jane. Since Vanguard has publicly maintained that HFT high frequency traders are needed as market makers, given that Fidelity and other large fund companies are starting their own dark pool, why isn't Vanguard joining them to potentially get the best price for the customer?

Is there a disadvantage of placing trades in an internal dark pool first before going to external exchanges? Well, that's actually particularly in this day and age, kind of out of my pay grade. I don't know exactly how we do it. The idea that we are doing other than best execution and maximum shares volume at a given price or close to a given price is, I think, eternal.

And that has to be the rule for a firm like Vanguard. And the extent to which we use dark pools, I imagine we use them, but I don't know. And how you even define a dark pool is a little bit funny in itself. So I just have to bagel off.

It's the first question I've been asked in two days, so I really have to bagel off the answer. This is an interesting question. It's not investing related, but I've always wondered why Mr. Moto decided to keep Vanguard headquarters in Malibu, as opposed to moving to one of the money center cities.

Well, the answer to that is pretty easy. I'll give you a little anecdote to go with this, too, which very few people know. And that is for a whole lot of reasons, including Philadelphia taxes. We were in Philadelphia at Wellington from 1928 to 1974. And early in '74, we decided we could get better real estate prices, better workforce, eliminating Philadelphia wage tax, and therefore being able to recruit a better workforce on a financial basis.

And so we moved out to what do we call it? Right around the corner from the Chester Brook building we had. And a small building. And then when the company blew up, it was sold. So we then built the building in Chester Brook, and we got a little bit bigger.

And that was back in '74 was the first one, then we moved to Chester Brook in 1983. So we got out of Philadelphia, number one, primarily for tax reasons. Even when we got out of Philadelphia, we had a big problem with the Pennsylvania taxes. They had a very peculiar way of taxing investment companies that was finally unacceptable to us.

So we could have moved to a county without any personal property taxes, say, I'm not sure what the county is, a county maybe where Harrisburg is, and solve the whole problem. But nobody wanted to go to Harrisburg. So I decided we would change the law. People think big. So I got a really good lobbyist, former Governor Ernie Fine.

And when I say a good lobbyist, I mean someone that is totally above board. Not a contingent fee guy, we pay them the normal legal fees. Great contacts out there. I said to the people, we're going to have to leave the state unless they change the law. And within about a year, oh by the way, I should tell you, this will also tell you more about me if you want to know.

On Pennsylvania, there were probably six companies in Pennsylvania, smaller than we were, but some of them were decent sized. And they said, we'll work with you on this, we'll help pay the bills. And I said, no you will not. We're going to do this all on our own, happy to pay the bills, but I don't want anybody mucking up the process around here.

So we did it all by ourselves, and they got the benefit too. We then got a unanimous passage of a bill that eliminated these taxes in Pennsylvania. Did away with the plaque in probably 1976 roughly. And the unanimous, the Senate unanimous in the House was signed by the Governor, it was then Dick Thornbury.

And all of a sudden the tax problem is gone. The taxes would have cost us now about 10 basis points a year. So add that to 17 basis points of expense ratio over 15, and you get the same 25 basis points. It was just unacceptable, it would not be something the fiduciary could afford to do.

So when all else fails, change the law. I have a follow up question to that. Do you feel that being in Melbourne, as opposed to one of the money centers, helped to keep the distinct culture of Vanguard? Well, I guess it helps in a way. First, we have a much better ability to draw people from the community, from the counties around Vanguard, counties and towns around Vanguard, and don't have to deal with the problem of Philadelphia population, which is basically a measure of far too much poverty.

Far too much poverty. And you get, and I'm sad to say this, a better workforce, although it's still possible for you to get a workforce from Philadelphia, and we still do it. They come out in the train. Mike comes out in the train himself most of the time. Philadelphia is president now.

And so I think we have a better workforce. Whether it's some intellectual, are we free from the influence of Wall Street, whether you're an indexer, free from the influence of Wall Street anyway. So I'd say we could have gone to Harrisburg. We could be in, I don't know, Pittsburgh.

Oh God, no. Sorry about Pittsburghers. And I think being outside the city is kind of, it sounds great, but then you're away from all that funny influence and all that trading blah blah. I don't think it matters that much. And so what keeps us going is not necessarily being in Malvern, or as I still say, Valley Forge.

What keeps us going is two great innovations. One is mutual structure, which is easier to do in Pennsylvania once the laws have changed. And the idea of indexing. And any firm that has done that, like we had done, I don't think it would really matter whether they were in Syracuse, an interesting place to be, I guess, or not.

I think it's mostly a workforce issue. We have really good people working here. I was really impressed last night, other than 114 selfies by actual talent with the wonderful young people that we recruit here. I think it helps them in that way, workforce way. I'm not even sure of that.

In fact, this next thing is not a question, it's more a nice comment from Miriam. And I want to pass this along. It says, "I just received my beautiful hardcover 2015 edition of John Bogle on investing the first 50 years for Walnut Publishing. Martin's dedication states, and especially those Bogle heads of the internet, that dedicated and loyal cadre of Vanguard.org to give me strength to carry on my mission.

It's incredible to think that we, as foreign members, give him the strength to carry on his mission. Perhaps we could thank him for his dedication to his national land and work with Bogle heads that meant to him." And I really reject that dedication. I probably should not, but that hasn't stopped me yet.

A little anecdote. And that is, there was a Bogle head who died before the reunion came. He had a farm out in Valley Forge. The Bogle heads came out there for, I guess, Bogle Heads 2 or 3. 2. And so it was easy for me to come out there.

People are still telling stories about my taking home a half a sandwich I didn't finish. By now. And then the next year we decided to invite him to come to the campus for a visit. And I was told, "You would not be allowed on campus." And, uh, I won't even get into that.

That seemed ridiculous to me. I didn't know quite what to do about it. I was trying to figure out what to do about it. But I truly would have done something if Kevin was with me. And we made signs welcoming the Bogle heads. He was standing out there in the driveway to welcome you in.

"They're not coming in here." Well, it happened that the day before you came there was an article in the Philadelphia Enquirer about the Bogle heads. They had photographs and that kind of thing. And all of a sudden management changed its mind. They said, "Okay, they can come in." And they said, "However, we don't really like the fact that you blackmailed us into this." They thought I had placed the article.

I wish I had that power. But I did not. And did not. But then we had a really nice meeting. And then the next year we got a little bit of religion. Hal was kidding me about this a few minutes ago. A little bit of religion. And we got little paper cups with popcorn in them.

It was delicious, wasn't it? Oh, yeah. And then the next year, I think it was mainly Glenn Reeves. One of the... fairly new at Vanguard. He said, "Come on, let's welcome them. They're important to us. Let's give them the full treatment. And boy, I saw last night... Aren't you overdoing it a little bit?" So that little turnaround I think shows you not what I think, because everybody knows what I think about all of you, but what the company thinks is an important asset.

I imagine we had some reader there at Vanguard who reads your comments full-time because you're a valuable resource. When something goes wrong and you put it up on your board, we listen. And I still get letters from shareholders. I still write back handwritten letters to every single one of them.

I have to pass them on to somebody else because I don't have any... I can't get access to our shareholder records to find out who's right or who's wrong. But I give them personal attention. And I think the biggest single thing we've got to be careful of here is to make sure we don't forget the coin of grace I've used 10,000 times.

Be honest to God down to earth human beings who are our clients and who are our crew members who serve those clients, each one with its own hopes and fears and financial goals. And we don't forget... I was up at Harvard Business School, and one of the wise acres in the class said a few years ago, "What's all this about human beings?

Why do you have a chapter or section in your book Common Sense on Mutual Funds on human beings? What's that all about?" And I said, "You can quite say it this way. Look, pal, who do you think we're investing all that money for? You know, it's not some big abstract probably a trillion dollars.

It's people. Humans with their own needs. And if we ever forget that, either with respect to our crew or with respect to our clients, that would be all of the things that take a long time to happen. All of them are the kids of death. So how do you keep humanity in the picture?

You know, I'm doing my best every day to do it. I may not be here forever, although sometimes I entertain the contrary side of that proposition. Jack has to leave at 40 days. He wants to say a few words. Okay, well, let me say very quickly. I don't think I've ever had more fun than Bogo Hits 14.

You're all so gracious and kind. So thoughtful of me. I won't comment about the selfies. I've done a little count, and one of you has not got a picture of themselves with me. You will identify yourself. I'll meet you out in the lobby later on. So, it's just been a thrilling experience, and last night more and more bringing out and meeting the wonderful young people that we have over there.

And they sort of, in spite of the fact that I don't even know how they recognize me, there's a lot of hero worship and a lot of appreciation and a lot of joy from these young people about the situation in which they find themselves at this stage of their career.

So this has been a wonderful time. I want to thank you for that. Number two, I thank you for my walking stick. And, uh, the motto when we gave it to Jack is "If you can lean on us, we support you." And, uh, so that's a nice touch, and I certainly want to thank Mel for his leadership of this thing, and also this whole group of you.

And not only Mel and Marlene, but Ted and Linda, Paul and Linda I should say, Gail Cox, of course Gail Cox, uh, Mel and Kathy, and I think maybe Ed and Patty were so great. Uh, you know, you're kind of becoming old pals, and uh, we get together once a year.

It's a little bit, a little bit like a family holiday. And, uh, that's a big part of me doing this over and over again for years. And, uh, so, thank you all from the bottom of my heart.