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Jack Bogle Simplifies Investing in the Stock Market Skip to content

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Jack Bogle's Simple Advice for Investors

Vanguard founder, who died on Wednesday, made Wall Street cheaper (and safer) for the average Joe

En español | John C. “Jack” Bogle, who arguably has had a greater impact on how Americans invest their money than any other individual, died Wednesday. He was 89.

Bogle was the founder of the mutual fund giant Vanguard Group, which with about $5 trillion in assets under management is currently the second largest money manager in the world.

But perhaps Bogle’s biggest impact was as a lifelong, energetic champion of the concept of index investing — the idea that, rather than trying to beat the overall performance of the stock market by picking winning stocks, investors are better off simply buying a large basket of stocks that track the overall market, or a portion thereof.

Bogle launched the first index fund for individual investors, now known as the Vanguard 500 Index, in 1976, raising only $11 million at the time. Today, the fund has $400 billion in assets, and Americans have $3.4 trillion invested in index mutual funds of all types. More than a quarter of mutual fund stock investments are indexed, and a majority of new investments in mutual funds are going into index funds.

AARP The Magazine interviewed Bogle in our August/September 2017 issue, in which Bogle — a legend in the investing industry — talked about how safe and simple investing could be.

— George Mannes

Jack Bogle, founder of Vanguard Group, speaking at a conference.

Ken Cedeno/Bloomberg via Getty Images

John 'Jack' Bogle, founder of the Vanguard Group and creator of the index fund.

Twenty years of writing about Wall Street has taught me two key lessons:

1. Financial markets appear endlessly complex.

2. Most of that complexity is just noise.

The secret to understanding and mastering savings and investments is to keep it simple.

No one has done more to simplify Wall Street than John C. “Jack” Bogle. He is the founder of  Vanguard, the world’s largest mutual fund company, with more than $4 trillion in assets. He is also the creator of the index fund, which lets you participate in the stock market in ways far safer and at lower cost than picking individual stocks.

We recently sat down with Bogle, 88, in Philadelphia, to talk markets. Our goal: to demystify Wall Street and, in doing that, reduce the average American’s fear of finance.

Why should you care? Even if you don’t own stocks, bonds or mutual funds (roughly half of American adults do not), your future retirement dollars likely are sitting in the markets, as that is where most pensions and retirement plans are invested. You owe it to yourself to know what’s happening with your money — and how to get the most from it. 



OTTER: There’s nearly $27 trillion invested in the U.S. stock market. How much of that is owned by individuals?

BOGLE: Only about $4 trillion. The largest share—$17 trillion—is held by institutions.

Institutional investor: An organization with so much cash to invest that it qualifies for lower fees and fewer protective regulations. Institutional investors include pension plans, endowments, 401(k) plans and insurers.

So even if someone has no direct personal investments in the market, that person’s financial well-being may still be connected to stocks and bonds.

The typical pension plan is invested in the market, with the belief that those stocks and bonds will produce a certain return over time. The pension plan issuers — say, state or local governments or corporations — have the responsibility to make good on their obligation to you. But you always have to worry indirectly, because you don’t know for sure if those promises will be kept.

Most people remember times when stock prices plummeted. Understandably, some just don’t have the stomach to buy stocks. They’d prefer to put their money in a savings account, and that way they know it is all going to be there.

Stock: An investment that gives you a piece of ownership in a corporation. With one share of a 100-share company, you own 1 percent of the stock. This makes you a business participant and entitles you to some profits

You are taking a different kind of risk with a savings account. You watch your money erode because of inflation—our dollar buys less with each passing year. In recent years, inflation has been considered quite under control, but even at 1.5 percent, that means your dollar is going to erode by about 14 percent in 10 years. So investing in dollars is a loser’s game. You have to buy stocks and bonds. 

I want to be clear that you should always have some cash reserves, particularly when you are older—for illnesses, or maybe the house needs a new roof. I understand it is very difficult for retirement investors, particularly if they don’t know the ins and outs of stock investing. But if you just own the stock market at a low cost, you will do better than most.

What about bonds? They’re considered safer because even if the company goes bankrupt, you have that claim on the company’s assets. Stockholders, on the other hand, usually get wiped out in a bankruptcy. 

Bond: An investment that’s basically a cash loan to a government or company. The issuer pays the bondholder interest, usually twice a year, for a preset term. At the term’s expiration, the original loan is repaid. 

Dividend: A cash reward that goes to a stock investor. Let’s say a company earns $5 in profit per stock share in a year; it might choose to pay stockholders a $2 dividend and reinvest the remaining $3 in the company to spur growth. 

That’s why you want some bonds in your portfolio, for safety. But you need stocks for growth and to really get the benefits of compounding, earning not only a return on the money you invest but also a return on that return. With compounding, if you have a 7 percent return, your dollar will double in 10 years. 

Many people don’t understand why it is that stocks go up over time. Longterm returns are the product of three things, correct?

Yes. The investment return has two components—the dividend and the rate of earnings growth. Over the long term, stock prices tend to rise with earnings.

So if earnings can grow at, say, 5 percent a year, and dividends are 2 percent, you could get a 7 percent annual return. The third element is how high a price investors put on earnings, which depends on many variables, including how quickly they believe the company will grow.

That third element is what we call speculative return —h ow much are investors willing to pay to buy a dollar of earnings? At the beginning of the great bull market in 1982, it cost about $8 to buy a dollar of earnings. Today it costs $26 to buy a dollar of earnings. Stock valuations have gone up. It has been good for the holders of stocks, but it makes it problematical for investors today.

Should everyday Americans worry about this kind of situation on Wall Street? 

Price-earnings ratio: The price of a company’s share of stock, divided by annual earnings per share. A higher P/E ratio suggests investors have confidence in a company’s ability to boost future earnings.

In the short run, people get excited and stocks get way overpriced. Then a sell-off happens, the stock price goes down, and that sends [price-earnings ratios] lower. The long-term investor should pay no attention to that. The stock market is a distraction to the business of investing.

So don’t pay too much heed to the daily ebb and flow of the markets? It’s true that the ability to trade all day can lead people to buy and sell on impulse, which usually leads to lower returns.

You’ve heard the phrase “Don’t just stand there, do something”? For investors, by far the better advice is “Don’t do something, just stand there.” 

Let’s talk about mutual funds and ETFs. Why should an investor consider them over trying to pick individual companies to invest in?

The big advantage to investors is the instant diversification that comes with funds, as opposed to buying individual stocks or bonds. By spreading your bets across many different companies, you are less vulnerable to the collapse of an individual firm or the misfortune of industry. 

Mutual fund: A corporation in which investors pool their money and hire a manager to invest it in a mix of stocks and bonds, based on a preset strategy.

Exchange traded fund: A variation on a mutual fund that uses a similar investment approach; ETF shares, however, can be bought or sold on a stock exchange

For many decades, mutual funds were run by managers who picked stocks by trying to predict which ones would outperform. In 1976 you and your new company, Vanguard, launched the first index fund, which instead held all the stocks in the S&P 500. Index funds, or at least the good ones, charge much less than actively managed funds, and you have said that simple math proved indexing superior.

The cost of money management detracts, dollar for dollar, from your investment returns. Before expenses, all investors as a group will earn a return precisely equal to the return of the total stock market. As a group, we’re all average. But after the costs of investing — mutual fund fees, trading commissions, sales loads, taxes and so on — are deducted, all investors as a group will lag the market’s return by the amount of the expenses they’ve incurred. 

But the stock pickers say they are better than average. They can earn their fees and more.

Absolutely no one knows what the stock market is going to do tomorrow, let alone next year. Nor which sector, style or region will lead and which will lag. Given this absolute uncertainty, the most logical strategy is to invest as broadly as possible and benefit from the compounding dividend yields and longterm earnings growth of American — and global  — corporations.

Your biggest influence on investing may be that you helped bring down costs. In the case of the index fund, there are virtually no trading costs — and the fees, in some cases, are as low as 40 cents a year on a $1,000 investment.

I call the long-term cost of fees the tyranny of compounding. Think about it this way: If you have a return of 7 percent but paid the managers and Wall Street 2 percent, you’ll make 5 percent. You don’t just lose that 2 percent; over the years, you lose the earnings you would have made if that 2 percent had been reinvested. Or think about it like this: You put up 100 percent of the cash, took 100 percent of the risk and got 33 percent of the return. You want to figure out a way to get 99 percent of the return. Low-cost index funds can do that. 

Let’s talk about diversification. A very general rule of thumb is that your percentage of investments in bonds should be your age minus 10. So a 50-year-old would have the classic portfolio of 60 percent stocks, 40 percent bonds.

Diversified portfolio: An approach to investing in which assets are spread among several investment types to reduce risk.

And when you allocate your assets, you also have to think about how much you get from Social Security. We have to fix the system, which I think can be done fairly easily. All it would take is some combination of a gradual increase in the maximum income level for wage earners paying into the plan; a change in how we calculate the annual increase in benefits to align with inflation; a gradual increase in the retirement age to, say, 69; and a modest means test, limiting payouts to those with considerable worth.

But a regular monthly payment, with the cost-of-living hedge guaranteed by the U.S. Treasury — I mean, you can’t get any better than that. 

What role do you see in a person’s investment portfolio for foreign stocks? 

In my first book, in 1993, I wrote that U.S. corporations get about 50 percent of their profits from international sources. So if you own a U.S. stock fund, you already own an international fund. Since then, the U.S. market is up about 720 percent, and the non-U.S. market — the European, Australian and Far East indexes — is up about 230 percent. And you are taking currency risk if you invest overseas.

So you were right, not advocating for overseas stocks.

But that doesn’t mean I’ll be right in the future. So given the tremendous excess of returns of the U.S. market over the past 25 years, maybe it is time for a few years of international outperformance. I would limit yourself to 20 percent of your portfolio in foreign stocks. I don’t do it myself.

Anyone thinking of investing can be tempted to try to pick the best time to “get in.” Do you believe in the dollar cost averaging approach? 

It is a way of getting the average price over time and not putting all your eggs in one “time” basket, as it were. For instance, suppose your lovely Aunt Nelly leaves you $1 million in cash. Don’t put it all to work in one day, but rather space out your investments maybe over two years. You buy more shares when the price is lower, and fewer when the market goes up. 

One investment notorious for charging outsize fees is the annuity. But it can also serve a purpose, which is to help retirees avoid running out of money. 

They’re highly complex and are sold by people who may not understand them themselves. Variable annuities are very dangerous because they can’t always deliver what they promise. Even the insurance companies that issue them are somewhat jeopardized; that happened when interest rates went up.

What type of annuity do you prefer?

I think probably an immediate annuity, which starts paying you right away. You want to know if it is a joint policy so you and your spouse are insured. Read the small print and the large print. And get advice from someone who isn’t selling it to you.

You organized Vanguard to be owned by shareholders, rather than publicly traded or privately owned. Someone estimated you’d be worth $28 billion if you’d gone that route.

That’s wonderful.

Do you have regrets you didn’t do it that way?

Oh, I don’t have regrets. I have what I need. I’ll be able to leave a little to my children and grandchildren. I’ll be able to leave a little to a foundation, and life will go on.

Where has that $28 billion gone?

Into the pockets of our shareholders.

And you started a price war that has saved billions more for investors. But we probably have further to go?

Miles to go before we sleep.

Jack Otter, interim editor in chief of  Barron’s, is the author of  Worth It … Not Worth It? Simple & Profitable Answers to Life’s Tough Financial Questions. 


— Originally published on August 3, 2017

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