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...

Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 3
20/07/2017  Insights on Australia's housing market, China's effect on domestic banks, and cyber-security readiness, in the final instalment of Brian Hartzer's interview with Morningstar's David Ellis.
Telstra won't be blown away by headwinds
17/07/2017  While it faces what Morningstar equity analyst Brian Han describes as a whirlwind of negatives, he suggests investors shouldn’t hang up on Telstra.
Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 2
13/07/2017  Westpac CEO Brian Hartzer joins Morningstar banking analyst David Ellis to discuss digital disruption, regulatory change and Australian banks' social license.
The home-truths of investing
12/07/2017  Look for companies that sit outside the cycle; heed the lessons of history; and remember the power of compounding, says Bennelong's Neale Goldston-Morris.
Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 1
06/07/2017  Brian Hartzer, CEO, Westpac joins Morningstar senior analyst David Ellis to discuss his role leading Australia's oldest bank, how Westpac can continue to grow value, and its commitment to sustainability.
Self-managed super is not Do-it-yourself
03/07/2017  There are a few common pitfalls in running a self-managed super fund that mean trustees shouldn't go it alone entirely, says BT Financial Group's head of financial literacy, Bryan Ashenden.
Investing to protect on the downside
30/06/2017  There are investment strategies you can adopt to mitigate volatility-linked fear and uncertainty in markets, explains Roy Maslen, chief investment officer – Australian equities, AllianceBernstein.
Don’t overdo benchmark consideration
28/06/2017  Being benchmark agnostic is the most effective approach to fixed income investing, according to Anujeet Sareen, portfolio manager, Brandywine Global.
Factor-based investing using ETFs
26/06/2017  Investors should consider style-exposures--such as value, defensive or yield-- they would like in their portfolios, explains Jonathan Shead, head of portfolio strategists – Asia Pacific, State Street Global Advisors
Volatility plays to active manager strengths
--  The climate of political volatility in the US holds important implications for investors and the funds they invest in, particularly around Donald Trump's ability to pass legislation through Congress, says Pimco's Libby Cantrill.
Is the FTSE 100 Facing Another Market Crash?
16/06/2017  Ten years on from the pre-crisis FTSE 100 high, Morningstar UK's Emma Wall examines how UK stocks have fared
How to guard against retirement threats
16/06/2017  As retirement approaches, even the best-laid plans can go awry, as Tim Steffen tells Christine Benz, Morningstar US.
PIMCO Global Credit Fund
07/06/2017  The PIMCO Global Credit strategy receives a Morningstar Analyst Rating of Silver due to its sizeable and highly capable credit research team.
PIMCO Income Fund
07/06/2017  Morningstar's Tim Wong looks at the strengths and competitive advantages of this Silver-rated strategy.
3 pockets of opportunity in fixed income
07/06/2017  The head of PIMCO Australia portfolio management explains his views on active management in fixed income and outlines where he sees most value in this space.
Trump administration biggest macro threat for investors
05/06/2017  Even as European political volatility subsides, the US Government remains a considerable threat to financial markets, says Colleen Barbeau, director of equity portfolio management, Franklin Templeton.
Antipodes Global Fund: Class P
01/06/2017  Antipodes constructs this portfolio based on three major objectives--capital preservation, inclusion of attractively priced businesses, and investment resilience.
Investors Mutual WS Future Leaders Fund
01/06/2017  Investors Mutual Future Leaders is a capable strategy focused on investing in Australian companies outside the top 50.
Why the time is right to invest in India
25/05/2017  Indian stocks rallied after the appointment of Narendra Modi as Prime Minister--but then subsequently fell. UK-based investment manager Jonathan Schiessl says now is the time to buy.
When should you pay active fund fees?
23/05/2017  When is it worth paying higher fund fees for active fund management? The single most important factor effecting a fund's relative performance is its price.