We'll try to get through as many questions as we can before we do the Karsak Chan. The first question is from one of our visitors from Holland, Marius. He says, "Dear Jack, what would you do if you today were 40 years old, living in Europe, and the effective cost of investing in a global index fund was 1% a year?" Move to America.

It is amazing how the cost structure in the U.S. is terribly stacked against the investor, and this is probably the cheapest country to buy mutual funds in. I'm not sure that the overall brokerage system is any cheaper, but the mutual fund expense ratios are lower, and I can remember, we used to have to have the index fund start to get a little recognition.

It took a long, long time. People would come in. I remember one group from Germany, and they said they'd want to start an index fund, and not quite the way they said it, but that was close, and we got a little bit of, what a great idea, blah, blah, blah, and they said, "Now, for it to work for us, we need to take 1% a year out." Well, I said, "You know, there goes the index fund.

There's not any point in an index fund if you're taking 1% a year out for distributing. You can probably charge another 1% for managing it, and there goes all the magic." So they left, and I really like to let people down easily, but there's no point in beating around the bush either, and that is a whole offense on the efficiency with which you provide the index.

So for a European investor, first that involves, I think, extremely interesting asset allocation problems, but I'm just talking about the central problem, which I think is the cost problem. The asset allocation problem is one I've tried to deal with a little bit intellectually, which is, I believe that it's fine to have all your money in the U.S.

We've beaten that ground over and over again. Everybody tells me I'm wrong, and I need a little reinforcement. I hope somebody else will tell me I'm wrong this week. The more I hear about it, the more I'm sure I'm right, but it's easily to be -- I could easily be wrong.

You know, I can't predict the future of the markets, but when you get to a European investor or an Australian investor, you know, they want some balance between their home country, I think, but not if you're in Finland, where there's only one company that's 80% of the Finnish market, Nokia, and so it changes from country to country, but for a European investor, leaving the cost aside, I'd say you probably should -- you know, even if you're, God forbid, in France, in the U.K., much better in terms of their economy and their prospects for none of this economic mess that we have all over the world, but maybe 25% in your home country, 25% or 50% -- I know it's a big difference -- in other international non-U.S.

and 25% to 50% in the U.S., something like that, I think, is the intelligent thing to do, but I'm glad I'm not facing that option with this nice person in France. Or where were they? Holland? >> Holland, yes. >> The next question says, "Dear Jack, would you recommend an individual invest all of their assets into Vanguard firms, or spread the risk to one or more other index fund ventures?" >> Well, it's a -- basically, it's a cost-benefit analysis.

Clearly, I would, you know, owe my own money as a vendor, and I'm not worried about the company going down, although to bring up an issue I did not touch on, we probably are a systematically important financial institution, S-I-F-I, and I think we giant fund managers are going to have to be -- get used to a little more government oversight, whether we like it or not.

I mean, $2 trillion is a lot of money, it's 5% of the U.S. stock market, and the mutual fund industry is a top five firms. I think this latest report, the government said this, top five firms with 50% of the assets in the fund industry, and that kind of -- and they're almost all index firms, by the way, all except IMCO, and you could argue they were a close-to-index firm anyway when you get to the bond area, and their correlation is probably 95 or something like that, very high, because they tend to be in the bond area.

And so we have to be very, very much aware of all that, and still, you know, if you want to have, let's say, half of your money in Vanguard and half somewhere else, first I'm hard-pressed to tell you where to put the other half, and second, you're probably going to have higher costs, so is that higher cost going to be worth the -- maybe sleeping at night better feeling?

And, you know, honestly, if I had money in some other mutual fund group, I would sleep less well at night. I'm an insider at Vanguard, or sort of an insider, or a former insider, or a quasi-insider, or a virtual insider, or some kind of an outsider, I'm not sure which, but I'd say no problem.

We all have the same, basically, protections, custodianships, and I'd say, given the character of our company, you should be able to be comfortable that there aren't going to be ethical barriers or breaches, or ethical breaches that jeopardize the value of your securities, or administrative burdens that will, say, not give you liquidity when you need it, although I worry about -- you know, I worry about just about everything, I guess, but I worry about the value of liquidity in the mutual fund industry.

You know, maybe if we were less liquid, we would have more long-term holders, for example. I mean, the promise of liquidity, as we all know, is something that not everybody can have at the same time, and so when you get to our level, particularly in something like municipal bonds, where the markets are very not-so-darn liquid, and so you do have those kind of problems, and could have those kind of problems if Vanguard were by far the largest municipal bond manager, and I should have the answer to this question.

I don't, but I require them to have a 15% liquidity reserve at all times, because we had such a cost advantage that we still had a competitive yield, having 15%, basically, in very short-term, and this was cash-ready, just in case, and that came up in 2007 when we had a crisis in the municipal bond market.

Ian McKinnon, who ran our bond funds, was in the hospital at the time, so I was running the bond funds, and I was, you know, the portfolio managers, basically reporting to me during this period. That was an awful period, because the bond market was falling apart, our shareholders wanted a lot of liquidity, and we had to provide it, and that's the first thing you do.

You say, "We're going to have the liquidity," and no matter what, I can remember the bond managers, they'd handle one more anecdote, come in and saying, "Well, you know, Goldman Sachs is bidding, we have to sell some bonds, and Goldman Sachs is bidding $95.5 for these bonds, and they're worth $98, and what should I do?" And I said, "The answer is very easy, but I've been thinking about, sell them.

Sell them, because that's the going market, that's what you can get for them, you have to have the cash, there's no way around that, and believe me, if I know Goldman Sachs is bidding $98.5 today, they'll be bidding $95 tomorrow, so get them the heck out of there." And so we survived that crisis, and that's where the whole idea of the Swiss Army came up for the first time, and training people at Vanguard to be the guys that would think about answering the phones just a little beneath them, perhaps, and just, they were always ready, we had, we were all trained to handle telephones, so we didn't get lines backed up and all that, and they also learned something very important, particularly the portfolio managers, that there were human beings who owned their funds, and it wasn't just some big numbers game, and I think that was at least an equal part of it as compared to being ready for an emergency, which of course, when you're ready for an emergency, that doesn't usually happen, so we've been from 2007, no, 1990s, that year was that crisis, I guess 1987, 1987 when all this happened, when we were much smaller, but it was still a big problem, and that's when the Swiss Army began, and I think that's been a good thing for us, so much is electronic now, compared to telephone, that probably is less necessary, but I think the training of letting people know that there are human beings on the other end of that telephone is absolutely central to everything I believe about company philosophy.

I think this question relates to, if I remember correctly, an article in the Financial Times, Victoria asks, "Jack, are we parasites?" Well I could have talked about that earlier, but that's where these diversions come in, and intrude on my day, and make me push things aside to respond, and there was a very, I think, naive article by a UK money manager, saying that indexing was parasitical, because it took advantage of the efficient markets created by active managers, so we didn't contribute to the efficiency, but we capitalized on it, and first place, that has nothing to do with me today, but I've never believed totally in efficient markets, I believe sometimes yes, sometimes no, long run almost certainly yes, short run almost always no, but I did take the guy on, he mentioned me, and he mentioned Vanguard, about being the fomentors of this parasitical behavior, but I took him on, and actually, I changed the question a little bit, and I said, "Look, a parasite, there's this host body over here, and the parasite is taking something out of it, and in this business, we're all parasites, no question about that, we're a parasite that takes six one-hundredths of one percent out of the host body, that's the market return, and you, sir, are a parasite that takes two and a half percent out of the host body, and if you don't think that's important, compound it over, wow, so we had a little back and forth, he wrote back, I didn't answer his third thing, but I felt better after having done it, the FT has always been extremely kind to me in my ideas, and it's kind of nice, I have some, maybe a little bit financially snobbish friends who won't read the Wall Street Journal, won't read the New York Times, they read only the FT, and it's a good paper, and I like to joust, and they're always asking, everybody's always asking me for articles about this and that, and sometimes I do it, and sometimes I don't, and if I can tell you, can I give you one more anecdote, this was the most fun one, so my granddaughter is coming into the office to have lunch with me, and at ten o'clock in the morning I get a note from the op-ed page editor, Taku Banshanaria, his name is, the one at that time in the journal, and he said, this little, had a title with no message, don't you dot, dot, dot, hate the books, and I wrote back to him and said, of course I do, it's a whole bunch of self-important people getting together to reinforce each other's misguided ideas, so he said, can you give me a thousand words on it, and I said, sure, when do you need it, and he said, three o'clock this afternoon, and I was not about to cancel lunch with my granddaughter, believe me, so I drafted up something real quickly, why I wasn't going to Davos, and then I came back from lunch after she left, lovely young woman, hate to see her go, lunch was over, and edited, and got it in by three o'clock, because it had to be in time for the European edition, and so it got a lot of criticism, it was fun to write, probably one of the best things I've ever written, actually, and it ended up by saying, well, one reason I'm not going to Davos is I wasn't invited, and the other reason is I don't know how to get there, but I didn't read that President Clinton was flying over for the final session, so if he reads this and offers me a ride in his plane, I will be there, so I hope you're allowed to have a little fun in this business, I certainly had my share, sorry to take that time, go ahead, Mel.

You've got all the time you need, John, Glenn says, I agree with Jack's critique of the total bond index tracking, how likely is it to change, and if not, what funds should we add to our portfolio to get better corporate exposure? Well, good question, and I want to emphasize that I may be a little bit of a purist on this, the differences are not large between us, I'd say the index properly weighted, we had things like 25% of all treasuries were held by China and Japan, a little bit from the UK, I think, and so why are they counted when the idea is how are you going to perform relative to your neighbors, let's call it US pension, retirement plans, and US investors generally, they just aren't part of that equation, and people can disagree with that, fine, but that's my position, and then they have a lot of shorter term treasuries, that I think are much more accurately kind of in the short bill or very medium, less than short term government bonds, and they're in the index, why would anybody want to be that short, that said, the differences are not huge, that doesn't mean you shouldn't be striving for perfection even though you'll never get there, but the option is, I think, and I actually did this when the spreads got so wide, a very rare move for me to make, I moved a fair amount of my money out of total bond market into corporate intermediate term index, and that's done fine, all those gaps of 2008 have been pretty much ironed out, I'm not sure it matters that much anymore, but I just leave it in there, so there is an option of corporate intermediates, and I'm trying to think here, and I'm probably slipping a little bit, it could be fund run by Welling and active, but it's an index fund, it's got a correlation of 98 or 99 for the index, whether we call it active manager or not, and that's, I want to double underscore, when you talk about ETFs starting to have more and more active management, every single one except, I think, one so far is a bond fund, and active management of bond fund is day and night different from active management of the stock market, bond fund, the tolerances are like this, between active and index, and equity fund, the tolerances are more like this, between the nine or around that, so that's what you can do if you want to do it, although I think we need to lend a hand to the investor, who probably many of you in this room are dying for more income, and yet my philosophy is, if you're in the bond market, don't reach for more yield than the bond market is prepared to provide you with, it's like to use a very trite example, like crawling out on a limb, and you crawl out further and further and you're fine, and then all of a sudden, one step too far, snap, a vigorous metaphor, and so, do it a little bit if you want to, I don't, I'm not a significant exception in my opinion, that I have done, but basically, the market returns a certain amount, and you just have to accept that, don't reach for more, it's a little bit like somebody, the analogy I've used, someone's lost the first seven of the eight races on the card, I think there are eight races on the card, if you go to the race tracks, and you take every penny you have, betting it on a long shot, in the eighth race, what you may recoup, the odds do not favor you, so try and stay within the simplicity, low cost index, bond stock, and the like.

Here's a related question from Dan Smith, and he says, "Total bond is what it is, and the index of tracts is what it is, and my circumstances have not changed, how do I decide whether or not to hold my positions as long as I live, to put it one way, or hunker down in the Mark Lee's aggregate to put it another?" Well, basically, I'd go for hunkering down, we are, these relative yields will change, the one thing we do know is, today's yield has a 91% correlation, and will continue to have a 91% correlation, more or less, with the returns you'll get over the next 10 years, so if you buy a government bond today at 3% and a corporate bond at 4%, 4.5%, the odds are very high that you'll get a 4.5% return over the next 10 years, or a 3% return over the next 10 years, and so it favors getting a little more aggressive on the yield side, that said, we all have, I try and say that it's impossible to do, the idea of human behavior, you know, is how will investors react, and I'm afraid that once you get a little opportunistic, and reach out for something else, you'll be much too sensitized, much too insensitized to the prices that the bond fund has, and bond funds have gone down a lot, although, you know, the reality is they haven't gone down nearly as much, I mean, you read these scare things, this is a very important point, these scare things in the paper about what a terrible year this is for bonds, and I can tell you in my own experience, the way I do it, my bond portfolio has gone down 0.9% this year, and that's because I have half of them, Nunes are my direct holdings, tax free Nunes, and the limited term fund is down 0.1%, and the intermediate term, I don't do long, because it's behavioral reasons, you know, I don't want to mess myself up, is about 1.8%, so you put 50/50 in, you can see it's going to be over 0.9, and that's a turnover for me, and I wish I'd ever been in stocks, I always wish things like that, I always wish I'd ever been the best performing asset, but my magic, such as it may be, is I never act in those beliefs, and that's really an important thing, and don't let your behavior overcome, and you know, the lows in February, a little bit like the story I told you about Gus last night, I was scared, why wouldn't I be scared, I mean, everybody must be scared, so when you're scared, and say, you know, I really ought to do something about this, I go back and read my books, they put me to sleep a little bit, but.

Jack, we have a comment here, on your comparison of active versus index funds, all in cost, included transaction costs only for active funds, don't index funds have some smaller transaction costs? Yeah, that's a good question, and it's true, they do, but they are so small, that they, you can't find them in the performance funds, if you look at the Vanguard index funds, and you subtract our stated expense ratio, from the return of the index, you get the return of the fund, there are, the evidence says, zero actual cost, and they're so small, they don't even come out to 0.1%, and that's very intuitively satisfactory, there are ways to do the trading, Gus is very good at that, has been, we know staff and people who are very good at it, and most index funds are the same way, there isn't much magic indexing anymore, we used to certainly be by far the best indexer, but everybody picks up the secrets, you know, there's no such thing, not like the Coca-Cola formula, which probably is worthless anyway, there's a parenthetical for you, but yes, there are costs, but they are so small, they are not evident in the data.

Jack, this, it says, in common sense, your 10-year forecast used average earnings growth, plus current dividend yield, for consistency, why not use average dividend growth? You could use average dividend growth, instead of earnings growth, it doesn't give you as good a result, as accurate a result, because companies' payoff ratios change, so if someone wants to argue that, it's the more pristine formula, and that's actually what we call the Gordon formula, fairly well known in academia, the market value relative to the future cash flow, and this is, they call my thing the Bobo model, the Bobo variation on the Gordon model, I happen to like the earnings growth better, there's a great intellectual defense, isn't it?

But it works in the data, and I think it's easier to follow, and you don't have to worry about changing payouts, which have changed a lot on the way down over time, but they're both approximations, and they're pretty good approximations, it's amazing to me how well that formula has worked, not formula for what the market will do, but formula for establishing reasonable expectations, I think I mentioned earlier, and what the markets will do, and none of this stuff is perfect, and I think we all ought to be aware of the fact that if you're looking for precision in any of these things, please don't look to me for it, I don't have any precision, I have a directional idea, I have a strong idea of what creates value in the marketplace, that is to say, earnings growth and dividend yields, and that's about it, and that's all you can control, but if it does work, it calls attention to being skeptical of what the market is doing for those fundamental returns, investment returns, earned by corporate America, and that's why I say, and I'll repeat it once more, I think I said it last night, I'll repeat it again today, we're probably repeating it to our dying day, which I hope is not today, and that is, the stock market is a giant distraction to the business of investing, or to put it in a way I did to these professors down in Southampton and Bermuda, just trying to remember the exact formulation I used for them, about the stock market is a derivative, and the stock market is a derivative of corporate value underlying, created by corporate America, so think about the stock market, the stock price is a derivative of the value of the corporation, or the value of American business as a whole, and that gets you into the whole area of derivatives, what sense do they make, and the magnification of returns, which you saw on those charts, magnified way up, magnified way down, and ignore it, because you know it's going to be in the long run zero, that's the nature of things, so am I dogmatic about this, you better believe I am, does Lenny doubt, anybody want to raise their hand, oh by the way, can I ask a question, we've had a little discussion about, and I talk about this in my financial analyst journal article, about how to charge advisory costs, outside financial advisory costs, against accounts, against the returns that investors earn, and you kind of end up trying to approximate it, but I just want to ask you all, I'll express it in a simple way, and then just give me one second to explain, I'd love to see a show of hands of how many of you consider yourself do-it-yourself investors, and if you're not, how many of you consider yourself, you need an investment advisor, and there's a lot of ground between those two, the pure do-it-yourself means you get started, and you don't have somebody telling you anything to do, but your fellow bogleheads, however you feel, and the other is, you rely on an advisor to tell you everything, so I'd like to see a couple of hands, a number of hands that are available, how many of you consider yourself do-it-yourself, wow, the message is getting across, and how many would say they need significant help, I presume that excludes the help I'm giving you this morning, thank you, I'm not amazed at the dominance of do-it-yourself, but I am amazed that she seems to be unanimous.

The next question is very timely, Jack, it says, given the very low level of interest rates and the bull market of bonds for the last 30 years, can you tolerate the assertion that a person in his late 50s should have no allocation to bonds in his portfolio? Well, they're in economics versus emotions, the economics would suggest that no bonds is the correct decision, because we know the stock market returns, or we have reasonable expectations, that's all we can do, stock market returns will be about 7%, I think I mentioned this earlier, which will double your money in a decade, and then bond returns will be about 2.5%, I think maybe I used 3 before, which will get your money up 35%, so you've got three times as much money in stocks as bonds, and if stocks let you down, I just doubt very much that they will let you all the way down below that 2.5% or 3% on bonds, it would take an unusual combination of circumstances, or some kind of a crash, and then there's the issue of, we live in, everything is a risk, we know that, and uncertainty cannot be eliminated, but we know that there are certain uncertainties out there that would destroy the value of both stocks and bonds, as if bonds would be exempt, and if a meteor strikes the earth, it really wouldn't matter whether you own Vanguard or Fidelity, I don't think, I'm still hanging on to my Vanguard, but that's the economic side, and if you profoundly believe that, do that, and pay attention, as I mentioned before, very importantly, to the income stream you get, and not to the variation in price, because that gets you into the emotional side, and so when your emotions start to affect your behavior, we had another 50% market decline, I said something like this earlier, I'm going to use 40%, but whatever it is, you're going to want to change from an all-stock portfolio, with some little protection, an anchor to windward, call it whatever you will, dry pallets, and that's probably the worst timing in mind to do it, so if you think you can exempt yourself from emotional problems, I would say that's a good basis for investing, just go all the way, now, a lot depends on your time horizon, it's one thing if you're 22 years old, and one thing if you're 111, like yours truly, or something, but very few of us can really isolate our emotions from the economics of investing, so I'd say if you really feel like that, and it might be, let's say, 60/40 is a kind of conventional balance, and you really believe in equities, you know, make it 85/15, you'll get most of the return out of your stocks, the return on your portfolio out of your stock, but you'll still have that little comfort level that things fall apart, so economics, all stocks, emotions, maybe 85% stock.

Jack, this next one is based on a quote that you supposedly made, and I'll just read some of the highlights, but it's relating to the general state of the mutual fund industry, specifically regarding money market funds, you supposedly stated that if the money funds got in trouble, that other funds would chip in to make the funds hold, so this question is, Mr.

Borough, if you were running Vanguard, and money market funds got in trouble, would you assess the holders of Wellington and Windsor, or other Vanguard funds, to bail it out? Well, I'll give you sort of a hedged answer, unequivocally, no. Do I make my position clear? I follow up to that, it says, if you wouldn't do that, would you just let it go down?

Well, let me say, my whole framework for money market funds is here is an instrument that can help a lot of people, a better way to save than money in the bank. Yes, the yield is nothing right now, or essentially nothing, but no one will be that way forever, but the asset value of money market funds fluctuates, and to conceal that asset value fluctuation by holding to its so-called dollar price is, I think, leaving the public with a misleading impression of what they own.

So I would say, let the fund share value fluctuate, and then the marketplace will work, if someone thinks they're now moved to a $10 asset value, instead of a $1, and so it goes to $9.98, $9.96, whatever it might be, or $10.03 or $10.04, and whatever it might be.

Just treat it like a normal fluctuating value asset with very small fluctuations, and then you don't get runs, because the price is adjusting, and investors who, what happened the last time, as everybody, I think, knows, is the, they were trying to maintain, this is the Met, father and son, brothers, what's it called, institutional index fund, or something like that, and all these institutions could see what was happening when Lehman collapsed.

They had a huge amount of Lehman paper, over 1%, I think, and all of a sudden, Lehman collapses, and everybody knows that it's not yet in the asset value, but it will be tomorrow. See, you get out of today's price, these people are not stupid, these institutional managers. The poor public is going to be a step behind, because you've got to be watching these things like a hawk, as corporate treasurers have to do, and are supposed to do, so you get this cascading effect, and you want to be the first to go, and you can get a dollar, even though they're giving you a dollar for something worth, let me say, 99 cents or 98 cents, and that means for the half of what they're left in the fund, it's not 98 cents, but 96 cents, so I think it's an industry that was built on the wrong premise, and one of mine, I tell people to be quite blunt about it, but I'm thinking about writing one more book, I won't lose this tongue-in-cheek, and it's going to be the largest book I've ever written, it's called "Mistakes I Have Made," and the reality is, as I look back on those mistakes, that almost all of them were made for marketing reasons, for marketing reasons to make the thing look more attractive, or to jump on the bandwagon of a trend like real estate, or specialty funds, and that kind of thing, and it was just an unfortunate and opportunistic, and words I don't like to use about myself, and I've lived and learned from that, going back to the first merger in 1966, with the Boston Group, and we started the first money market fund with a $10 asset value, I mean, I was really speaking from the book that I just told you about, in "Fluctuated Ways, Let's Show the World It Fluctuates," and nobody wanted it, there were all these funds for the $1 asset value, that was the mode, and so reluctantly, but I did it, it was my decision, no one else's, and so we changed to a $1 asset value, so my instincts led in the right direction, and it has not cost us anything, I don't regard our money market fund as a big mistake, but I do hope that some group of statesmen in this business will get together and say, "Look, the value fluctuates, how bad is it to recognize that, and if a lot of people don't want their money market funds, well, that's just too bad, we're going to do it right, and let them put the money in some CD somewhere, or something like that, and that's going to be painful, much more painful for Fidelity than it is for us, although we have a decent-sized money market fund in the business, I guess about $200 billion, I don't know exactly, and so there's a point at which you have to do what is right for the marketplace, for the economy, and if it's painful, well, there's a lot to be learned, I'll take a little bit from this slide.

It would also be painful for the investors, because many investors use the money market funds for their checking accounts, so every time they wrote a check, it would be a taxable amount, so how do you address that situation? Well, it's the easiest thing in the world, I hate that excuse, did I make myself clear?

I have a tax-exempt, short-term bond fund, it's basically a money market fund, actually I use limited term a little bit longer, and it's basically a money market fund with a floating asset, net asset value, and so I get a little statement saying, "Here are the gains, here are the losses, here are the wash sales, and put this little number right down here in your tax return." Well, what's the matter with that?

It's a simple one number, easy to understand, easy to calculate, not easy for us to calculate, but Vanguard, and I presume other people, calculate it for you, and it's no different from having an equity fund, and you get a little 1099 that says here's what your income was, and here's what your capital gains were, if any, and so I don't see that that's a problem.

I can see it might be a minor irritation, and actually my moral value has kind of slipped here a little bit, but before we ever got into that kind of an accounting system, I still used the short-term, or the limited-term Unibond fund, and I knew every year I had some gains and some losses, and I didn't know how to take into account wash sales, because when you put money in, you're taking money out, that always comes up, and when you're getting paid, the dividend, that can even come up, and I didn't know quite what to do, I didn't have any numbers, so I guessed, I put in my tax return, $138 from long-term capital gains, and the next year I put in $272 from short-term capital losses, and the next year, I don't know what I put in, but I was never challenged, I wasn't trying to cheat, I just didn't know, but within a couple of years of doing that, we got the whole tax thing straightened out, it's complicated from a computer standpoint, but simple from an investor standpoint, so I don't have to guess anymore, and guess what, the gains were $138, the losses were $274, whatever one wants to say about it, so it's, I think, a trivial inconvenience.