Bogle: Most difficult investment conditions I've ever seen
Morningstar US  |  06/11/2012Text size  Decrease  Increase  |  

Benz: If people are going through their year-end exercises with their portfolios, they might see that stocks have had a really great run; it might be time to rebalance out of stocks, which would mean moving money into bonds. What would you say to investors? Should they go ahead and do it given the meager outlook for fixed income? What's your take on that question?

Bogle: Well, I am not basically a rebalancer. In the long run, rebalancing is going to cost you because the higher-yielding, the higher-returning, asset is going to get to be a bigger and bigger part of the portfolio, and if you suppress it by rebalancing, you will almost definitely have a lower return over the long run.

In the short run, that's something else, and I think if people want to rebalance, that's fine. And I think if people think about it [not] as an annual exercise, but if your target equity ratio is at 60 per cent, think about rebalancing when it gets to 70 per cent or when it gets to 50 per cent, but not slavishly looking at, oh my god, I'm at 60.5 per cent and doing something, because there is too much other noise in the system to make that work.

So, to each his own on this. I don't myself. My personal account is about 80 per cent Vanguard municipal bond funds and 20 per cent Vanguard index funds, and in my retirement plan account, I'm about 50-50. So, I'm very comfortable there. I don't rebalance the retirement plan accounts ... for probably, let me say, 50 per cent at the beginning of the year. I don't do this with any exactitude. Maybe they are 55 per cent now. I don't see any reason to change that.

But you are correct in the implications of your question that this is a really difficult time to invest. I told a New York Times reporter on an article he wrote, [these are] the most difficult investment conditions I've ever seen. And by that I'm not talking about huge risk. I'm talking about the impossibility of getting the kind of returns we've gotten in the past. It is not going to happen, period.

That long-term return on stocks from Jeremy Siegel is around 9 per cent and nominal, and the long-term return on bonds is about 5 per cent, and I'm telling you, let's think about 7 per cent, and let's think about 2.5 per cent - half of those rates.

So, what are you supposed to do? Well, I do not think it's a good idea to take risks beyond that to increase your return, I just don't believe it. That's become an article of faith.

In our municipal bond group ... for years I was in every meeting that they ever held just to warn them, don't reach for income. So what's the first thing you are going to do? Well, most of the alternatives aren't really very palatable, from leaving the market. I do think you can maybe emphasize corporates more than Treasuries. I think that would be an intelligent thing for people to do - separate out the bond market into those two components and maybe take a little more maturity risk, which is not credit risk, just volatility risk.

But what are the other options? Well, you can cut back your standard of living - it's very hard - as my father used to say, no matter how painful. And you can also start to spend a little capital every year, but you can't do that forever. Maybe a year or two wouldn't hurt too much if the numbers weren't too large. You can, as a lot of people are talking about today, go into high-yielding stocks, but you are taking a volatility risk that you are not taking in the bond. Or you can go to high-yield bonds, junk bonds, but you are taking a credit risk. So there is a pro for every con.

Benz: Not a palatable set of decisions.

Bogle: So, I'm a "stay the course" guy. I do think importantly that we ought to be thinking more about the difference between government bonds and corporate bonds, because those spreads are very, very large compared to historical norms.

Benz: And you could see a case for overweighting the corporates.

Bogle: Yes. The corporate bond yields are pretty close to 3 per cent, and the Treasury yield is 1.6 per cent, and Treasuries are such an important part of total bond market index, the yield on that is only 1.7 per cent. And if you ... realize that that means you are going to get a 1.7 per cent return on the highest probability in the next 10 years, it just seems you shouldn't accept that. Not jumping off the deep end of the pool, but just getting a toe wet with maybe instead of 70 per cent governments and 30 per cent corporates, maybe 60 per cent corporates and 40 per cent governments or even 70/30.

Video Archive...

Growth prospects in emerging markets
20/05/2015  Emerging market guru Mark Mobius talks about bull markets and viable growth opportunities at the recent Morningstar Investment Conference in the UK.
Be selective, exercise caution
18/05/2015  While value may not seem to be in abundance there are still opportunities to be found in the local market, as Morningstar's Peter Warnes explains.
A better deal for retail investors
14/05/2015  Enduring dividend imputation is not abolished and fairer capital raisings are among the items on the policy agenda for the Australian Shareholders’ Association.
The growth outlook for Wesfarmers
11/05/2015  Wesfarmers' Richard Goyder talks about managing a diverse business and the growing number of "serious players" in the supermarket sector.
Big bank earnings wrap
08/05/2015  Morningstar's David Ellis gives investors the lowdown on the half-year results from Westpac, ANZ and NAB, as well as his view on CBA's trading update.
Where Buffett sees value
06/05/2015  Morningstar's Matt Coffina discusses Buffett's view of stock valuations, cost-cutting, and more while attending the recent Berkshire Hathaway annual general meeting.
Finding value in small companies
01/05/2015  Investing in the small cap-sector can be wealth-destroying. Therefore, it is important that investors make informed decisions.
Top global tech opportunities
30/04/2015  Australia's foremost global investor Kerr Neilson identifies global drivers and those undervalued companies that are positioned for strong growth.
Finding value in volatile markets
24/04/2015  With the Australian market at a six-year high, it is difficult to seek value but investors can still find quality companies at good prices, according to Morningstar’s fund manager of the year.
Europe showing signs of life
23/04/2015  As growth concerns linger in China and the U.S., central-bank policy in Europe appears to be having its desired effect, says Morningstar's Bob Johnson.
Key takeaways from the Murray inquiry, SuperStream
23/04/2015  The SMSF Association's Graeme Colley discusses important points from both the Murray inquiry and the SuperStream initiative, while also giving trustees tips on how to avoid unwanted "gardening leave".
Avoiding a falling stock market
14/04/2015  Want to maximise portfolio returns and minimise losses? Stick to a value approach and resist the urge to be backward looking when it comes to performance
Navigating your portfolio amid volatility
09/04/2015  Westpac's David Simon talks about rebalancing a portfolio as investors continue to confront a number of risks.
Identifying stocks that will beat the market
31/03/2015  Think risk assets deliver the greatest returns? A new paper dispels this myth and instead proves that the equities that deliver the greatest profit are the unpopular ones
Protect your portfolio from losses
25/03/2015  Risk is not volatility - risk is the potential an investor has for loss, says Oaktree's Howard Marks. Recognising this is the first step in protecting your portfolio from losing money.
Revisiting the sole purpose test
19/03/2015  It’s important that trustees are reminded about their obligations under the sole purpose test – a key requirement in SMSF compliance.
Macro trinity underpinning eurozone
12/03/2015  Three key forces have ensured strong growth from most European markets so far this year, explains Morningstar's Jose Garcia Zarate, but structural flaws still need to be addressed
Taxing times for trustees?
05/03/2015  The government may have moved to address the tax concessions into super but trustees face a number of potential taxing issues.
Trustees under the spotlight
--  SMSF Association’s Andrea Slattery talks about the growing professionalism of the industry and what it means for trustees.
An insight into 4 top managers
02/03/2015  Morningstar’s Tom Whitelaw outlines the qualities behind this year’s fund manager of the year awards.