John C. Bogle — known to all as ‘Jack’ — has been advocating the simplest portfolio strategies for decades. Surprise! They’ve outperformed the S&P 500. • In the last book he says he’ll ever write in his lifetime, the legendary index-fund pioneer lets fly with some scathing but profitable revelations about mutual funds, ETFs, and the colorful cast of characters who made them all come to life.
Figure 1. Bogle in 2016. Photo by Daniel Burke/Institute for the Fiduciary Standard/CC-BY 4.0.
As founder in 1974 of the Vanguard Group and father in 1976 of the first index mutual fund, Jack Bogle has often been called “Saint Jack” by his many admirers. Others don’t regard him as all that saintly.
In his new book, Stay the Course, Bogle shreds some of his many enemies and — best of all — reveals some juicy tricks about how you can gain the best returns from both mutual funds and the newer exchange-traded funds (ETFs).
Bogle’s disdain for actively managed funds is legendary. He has a lot of evidence behind him. The mid-2018 15-year study of active funds by Standard & Poor’s shows that 92% of large-cap managers, 95% of mid-cap managers, and 98% of small-cap managers failed to outperform their benchmarks. The managed funds were judged against the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively.
To be sure, S&P is in the business of licensing its various indexes to passive managers, such as Vanguard, BlackRock, and State Street Global Advisers. But despite its bias toward indexing rather than active investing, S&P’s numbers have been consistently confirmed by numerous researchers. For example, Eugene Fama and Kenneth French state in the conclusion of their 2010 study of 3,156 funds, “The tests on net returns say that few funds have enough skill to cover costs.”
Although Bogle is best known as the inventor of index funds — which have been shown to capture 99% of any given benchmark’s performance — he’s also been a long-time advocate of very simple investing strategies. In particular, he’s written and spoken for two decades about the merits of American investors holding only two classes of assets: US stocks and US bonds. A 50/50 balance of the two, with no trades other than rebalances to equal weight near each year-end, actually outperforms the S&P 500 over time.
A simple 50/50 portfolio does what most hedge funds cannot
In a 1996 presentation, with a victory lap 15 years later in a 2011 whitepaper, Bogle recommended that investors hold two Vanguard index mutual funds: the Total Stock Market Index (VTSMX) and the Total Bond Market Index (VBMFX). My book Muscular Portfolios shows that individuals who prefer the trading ease of ETFs can instead use Vanguard’s VTI and BND, which have the same performances and fees as the mutual funds.
In my Jan. 8, 2019, StockCharts column, I graphed the simulated performance of Bogle’s two-asset portfolio over a long period: 46 years from 1973 through 2018. The 50/50 portfolio returned a healthy 9.5% annualized, right on the tail of the S&P 500’s 9.9%, including dividends. An investor with separate tracking accounts would have found that the 50/50 account had a higher balance than the S&P 500 account in 61% of the months. And the 50/50 portfolio lost a maximum of only 29%, much more tolerable than the index’s heart-stopping 51% crash in 2007–2009.
In that same column, I showed the results of real-money accounts for the past three years and confirmed this basic relationship. In the bear-bull market cycle from Oct. 31, 2007, through Dec. 31, 2018, the 50/50 portfolio returned 6.16% annualized. That’s a rounding error away from the S&P 500’s return of 6.58%. And the 50/50 portfolio once again subjected its investors to smaller losses. (All drawdowns measured between month-ends.)
Figure 2. Actual mutual funds representing a 60/40 portfolio and the S&P 500 — including all contemporaneous mutual fund fees — show that the simple portfolio outperformed the index in the last two bear-bull market cycles. Source: Muscular Portfolios.
Figure 2 shows a very similar strategy to Bogle’s: the 60/40 allocation of Vanguard’s VBINX balanced mutual fund. It handily beat VFINX, which tracks the S&P 500, from 2000 through 2017 — two bear-bull market cycles. The balanced fund subjected investors to a worse drawdown (33%) than the 50/50 portfolio. But VBINX still outperformed the index, 5.6% annualized to 5.2%. It achieved this enviable track record, as I’ve written elsewhere, while seriously underperforming the S&P 500 during bull markets — a quality shared by virtually all market-beating strategies. (See my summary.)
Oddly, Vanguard offers neither a mutual fund nor an ETF with the exact 50/50 split of stocks and bonds that Bogle’s been recommending for years. But Bogle says a 60/40 proportion has “similar returns” to a 50/50 equal-weight portfolio.
Anyone who thinks it’s hard to beat the S&P 500 should seriously consider how easily a simple strategy does it. By contrast, fancy high-fee hedge funds with their complex strategies are abject failures. The average equity hedge fund actually lost 6%, while the S&P 500 gained 97% in the 10 years ending February 2016, according to a study by Pension Partners.
The ecstasies and agonies of indexing
In Stay the Course, Bogle provides valuable insight into how investors can profit by holding down their costs. Importantly, he shows that these costs go beyond a mutual fund or ETF’s annual fees (expense ratios). He also quantifies the hit you take when trading funds and fees, as we’ll read in Part 2 of this four-part column.
We’ll also see the highly personal aspect of investing, as Bogle experienced it within the walls of Vanguard. Although many people assume that Bogle is still the CEO and chairman of the company, he handed over the CEO reins to his chosen successor, John Brennan, on Jan. 31, 1996. After Bogle had a much-needed heart transplant just 21 days later, he soon returned to Vanguard but found that his strict ideas about the firm’s direction set him at odds with its other top executives. Brennan became chairman in 1998 and asked Bogle to leave the board in 1999 when the founder turned 70, as described in corporate policy papers.
Since then, Bogle has remained in the Vanguard offices — but far removed from the CEO’s suite. He’s the director of his own Bogle Financial Markets Research Center, which the company funds. In his small office carve-out within the corporate campus, he’s written many articles and books, including Stay the Course — which he describes in a footnote as his “12th and last (yes!) book.”
Bogle comes out swinging — right off the bat — in his book’s three-page introduction. He explains that executives refused to let him review the corporate minutes of the Vanguard mutual funds from the time when he’d been chairman of the board. This refusal, Bogle says, was ultimately ratified by the full board of directors (which, of course, he hasn’t sat on for almost 20 years).
There’s much, much more, as we’ll see in the upcoming parts of this column.
With great knowledge comes great responsibility.
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