Where Do We Go From Here? Investing Smarter In the Recovery

John Bogle, founder of the widely successful Vanguard mutual-fund company has released a new book advocating prudence in investing. Enough: True Measures of Money, Business, and Life, is Bogle’s seventh book, and is getting stellar reviews. William Bernstein writes:

“If you are wondering about the cause of the current market crisis, then you haven’t been reading enough of Jack Bogle. Because he certainly knows not only where, but why and how. For decades Jack has been communicating his disquiet in previous books, speeches, and public testimony. Years from now, when historians and investors dissect the economic and market meltdowns of 2008, they’ll consult this slim, well-written volume.”

Bogle believes in prudence, in personal responsibility for one’s actions. He believes firms should have limited their own risk during the bubble period, but instead they took big risks knowing they had the too big to fail support.

In an interview with US News & World Report’s Rick Newman, Bogle answers many questions about how to invest smarter after the recession. Here are some excerpts:

Newman: What lessons do you feel people should be learning from the recession and the way we’re reorganizing our lives?

Bogle: For the last two decades, we have ourselves to blame, our advisers to blame, our brokers to blame, our fund managers to blame. There’s one obvious lesson that people will never learn because it seems so trivial: How much you pay for investing services is critical. If an investor’s annual expenses average 2.5 percent over an investment lifetime of 60 years, the investor gets 25 percent of the market’s return, and Wall Street gets 75 percent. Mutual funds are also incredibly tax inefficient, which might reduce the real return, after inflation, down to 0. People should be thinking about just the ABCs of investing. Like the three R’s of primary school.

Investing is a long-term game. Don’t trust the history of the stock market returns to tell you anything. Don’t pay attention to all this baloney fed by brokers and mutual fund managers and all these other intermediaries. Cost is important. Don’t speculate. Don’t chase performance. And don’t think you can pick tomorrow’s winners. Investment returns are only what the stock markets are generous enough to give us or mean enough to take away. As an investor, you’re bound by the returns on stocks and bonds. Don’t gamble, because you don’t know what’s coming next. Be careful, because nobody knows what’s ahead.

Newman: People made a lot of money in those years. Weren’t those formative years that helped define expectations for people on the verge of retirement today?

Bogle: That was phantom wealth based on the idea that prices would keep going up, sold to you by the people on Wall Street who excel at destroying wealth. That phantom wealth we mistook for real wealth. We forgot what investing is all about, which is dividend yield and earnings growth. Dividend yields were at 1 percent in March 2000. They’re up to about 2.5 percent now. The dividend yield is the product of two numbers: dividends and price. Dividends tend to go up over time.

Newman: Do you think this is a historic moment in American society?

Bogle: I think we’re at an inflection point in American history. The economy, the stock market, the housing market, community values, the works. In The Battle for the Soul of Capitalism [2005], I rewrote the first two paragraphs from Gibbon’s history of the Roman empire, except I wrote them about America, not Rome. It’s amazing how little rewriting I had to do. We still have a chance to fix things, politics and investing and values, and get our national priorities in order. But it’s not going to be easy. Some people say the problem with Rome was self-love. You could say the same thing about America.

Read the whole interview here.

Get the book here.

See my interview with FEE Chairman Wayne Olson on the financial crisis here.