Whenever Vanguard founder Jack Bogle speaks, I listen. He has spent more time thinking about how to help the average investor than I have been alive. I found this recent Bloomberg interview covered a lot of topics regarding portfolio construction. Here are my notes, I have paraphrased what is not in quotes:
- “The best thing you can do for yourself is to make your choice [of a long-term strategy], keep it simple and stick with it.”
- The traditional 60/40* balanced fund is still a fine, simple choice for a portfolio. He prefers that over a target-date fund. (*60% stocks, 40% bonds)
- For the stocks portion, a traditional total US stock market fund is fine. You can add a little international stock exposure, but you don’t need it. The long-term returns for foreign companies will likely be similar but with increased currency risk.
- For the bond portion, a traditional total bond fund is fine. Higher yield won’t come without higher risks.
- Even if valuations are currently high on a relative basis, you should take the long-term view and invest now.
- “Financial planners and advisers need to sell their value as keeping their clients from doing the wrong thing at the wrong time.” That is their value-add, and it can be significant.
Keep in mind these are Bogle’s opinions and not necessarily my own.
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A great man who has done great things for the average Joe investor. I’ll have to look at his reasoning behind international stocks matching US performance in the long run. I think there’s a lot more growth potential in emerging and developing markets than in a mature economy like the US.
So, a 60/40 for someone in their 20s?
There seems to be different schools of thought on this from the ‘pros.’ Warren Buffett suggests if you index just dump your money in an S&P 500 index fund.
I believe it was 90% in a very low-cost S&P index fund and 10% in short-term government bonds (2014 letter to shareholders).
Depends on your risk tolerance. Personally my tolerance is on the low side. I’m in my 30’s and I’m doing 50/50 US stock market index and Bond market index. There are now hard rules on the percentages. The main point is, don’t get suckered into fancy target retirement funds or high cost managed funds.
I think 60/40 is fine, depending on the person. I think 100% is also fine, depending on the person. The more important point is to stick with it through bull markets and market crashes.
The problem is many people don’t know what kind of “person” he/she is. They may think they are high risk tolerate type but when economic crisis hit, they panic, while the self-claimed “prudent” type may actually have much higher risk tolerance they thought they have.
That individual behavioral component is why investing is and will never be an exact science.
Re internal stock funds, doesn’t currency risk work both ways? Lately I’ve been putting my new money in internal ETFs, as the US market is getting pricey. I feel Intl may do a bit better in coming years.
My research over the past couple decades concurs with Mr. Bogle and I’ve therefore tended to invest most of my money in balanced funds, primarily the T Rowe Price Capital Appreciation Fund (PRWCX) and the Vanguard Wellington Fund (VWELX). Both are 5 star gold funds under the Morningstar rating system. PRWCX is now closed to new investors, but VWELX is still a great choice. According to Yahoo Finance, VWELX has an impressive track record. In its 66 years of existence, it has been down only 18 years. Of those, 14 were in the years 1930-1977. Its 10-year return was 8.29% and 5-year was 11.39%. Its expense ratio is only 0.26%. This is a great set-and-forget fund where the managers invest 60-70% in stocks and 30-40% in fixed income securities.
If one prefers to go entirely the index route via 100% stocks, the Vanguard Total Stock Market ETF (VTI)
with a low 0.05% expense ratio is a great choice. Morningstar states that it is their “favorite ETF for passive exposure to the U.S. stock market.”
Honestly if you invest in just a S&P500 index you’re still getting a good deal of international exposure. Most of the biggest companies have large foreign operations as well that are affecting their performance.
That may be true right now, but that could change over the next, say, 20 years. Personally, I don’t want to be in the business of trying to predict and time such a change.
Advocating 100% US stocks (for the stock portion of the total portfolio) sounds odd. Holding the world market provides, by definition, more diversification than holding only US stocks.
You are also diversifying your exposure to different currencies, which is where the increased risk comes in.