Vanguard's John Bogle: 'The Less You Watch the Market, the Better Off You'll Be'

Jennifer Barrett

If you haven’t heard of John Bogle before this week, when news broke that he passed away at 89, you’ve probably heard of the company he founded and led for decades. In 1974, Bogle created the Vanguard Group, one of the world’s largest mutual fund companies with more than 20 million investors and $5 trillion under management.

Chances are, if you have a 401(k) or an IRA, you’ve got money in a fund owned by Vanguard. The good news is that means you’re probably not paying a lot in fees to hold it. Bogle long espoused the benefits of low-cost index funds.

His firm introduced the first index fund in 1976. The Vanguard Index Trust, later renamed the Vanguard 500 Index Fund (VFINX), tracks the performance of the S&P 500 Index, one of the most commonly used benchmarks for the stock market. As of January 2019, it had more than $400 billion invested in it.

Bogle, arguably one of the most successful investors on the planet, had a pretty simple take on investing: Avoid high-cost funds. Invest in indexes. Put your money in a mix of stocks and bonds.

Back in 2016, we spoke to him about why he’s such a fan of index funds and the biggest mistakes investors make.

Your investing philosophy could be summed up by the old saying: Keep it simple, stupid. Why does simplicity work?
Bonds are there to keep you relatively safe, and stocks are there to give you an opportunity for growth. Bonds usually have less risk and volatility, and stocks have more risk and volatility.

Related: Everything You Need to Know About Investing in the Stock Market

So how should you allocate your money between them?
I’d say the starting point is 60 percent [of your portfolio] in stocks and 40 percent in bonds. But younger people should have more in stocks, and older people should have more in bonds.

Where do you start?
I believe totally in index funds.

It’s simplicity writ large. The stock market gives a rate of return that is out of our control. With an index fund, you will capture the total return, and the cost is very low. [Vanguard’s largest index fund has an expense ratio of .04 percent, or $.40 for every $1,000 invested.]

You may get the same return with an [actively managed] fund, but you could be losing at least 2 percent to trading, mutual fund sales loads, the expense ratio and other fees.

So why isn’t everyone investing in index funds?
Every investor believes they’re above average. You overrate your ability to do better than your neighbors… People believe there’s a pot of gold at the end of the rainbow.

There’s no pot of gold. And there’s no rainbow. If you can just avoid stupid mistakes, you’ll do very well.

What are the biggest mistakes investors make?
Investors believe the past is prologue. They believe if a fund has done well, it will do well in future. That is naive and counterproductive.

When did you start investing?
In 1951. I had no money. I’d just gotten through college, worked my way through Princeton. I was working all through life trying to get what I wanted to have. I went to work at Wellington Management, and it had a pension plan. Fifteen percent of my salary went into the Wellington Fund [one of the oldest mutual funds in the U.S.].

Since then, I’ve added index funds. I’m overwhelmingly an indexer.

When did you become convinced index funds could outperform others?
I wrote my Princeton thesis on the fact that mutual funds can make no claim to superiority over market indexes… My surprise is that it took 20 years before index funds really started to catch on.

There’s been a lot of money moving out of actively managed funds and into lower-cost passive funds over the last few years. Are consumers becoming more aware of fees when choosing where to put their money?
[Between 2007 and 2016], more than $1 trillion has gone into passive funds and more than $400 billion has gone out of active funds. That’s a huge shift in investor preferences. That’s unbelievable. The public is leading the way.

How much attention should investors pay to the day-to-day movements of the market?
The stock market is a giant distraction to the business of investing. The market doesn’t create value. It subtracts value because of its costs. The less you watch the market, the better off you’ll be… Looking at stock prices every day distracts you from what it’s all about.

Which is?
The market doesn’t create returns. Business does. And the more ‘helpers’ you have, the worse you’ll do because they’re all charging fees.

The stock market has been pretty volatile in recent months. Where do you see stocks and bonds going?
I say you may have to save more to reach your goals because future market returns are going to be lower [than they have been] in stocks and bonds. But a balanced portfolio will prevail.

This post was updated on January 17, 2019.

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