From the Wall Street Journal

GETTING GOING By JONATHAN CLEMENTS

 

 

Bogle Sees Tough Times Ahead For Stock-Market Investors
March 7, 2007; Page D1

Vanguard Group founder John Bogle doesn't believe you can forecast the stock market's short-term direction. But he's done a pretty good job of proving himself wrong.

He was bearish at the market peak in 2000 and bullish at the 2002 market low. Unnerved by the recent stock-market turmoil? Here comes Mr. Bogle, warning investors that modest returns may lie ahead.

• High dudgeon. Eleven years after his heart transplant, Mr. Bogle recently had shoulder-replacement surgery.
 

Yet, at age 77, he still gives 60 speeches a year, and he's about to come out with his sixth book, "The Little Book of Common Sense Investing." It's an easy read that will, I suspect, quickly join Burton Malkiel's "A Random Walk Down Wall Street" and Charles Ellis's "Winning the Loser's Game" as one of the indexing crowd's favorite books.

But what's most impressive is Mr. Bogle's unrelenting zeal. In fact, if anything, his fervor for index funds and for low-cost investing has grown over the years. "I really enjoy taking on the world," he allows.

Vanguard founder John Bogle, the icon of indexing.

"Saint Jack" may have made his name by building Vanguard into a major no-load mutual-fund company. But today, he is possibly best known as the fund industry's most famous critic, castigating fund executives for pushing mutual funds with high fees and hot performance.

To his detractors, he's a textbook example of a charismatic leader who is loath to give up the spotlight. And there may be some truth to that. Since he stepped down as Vanguard's chief executive in 1996, his relationship with his successor has been strained, and he has grumbled about changes at the Malvern, Pa., fund family.

Yet all this is remarkably easy to forgive, for one simple reason: When it comes to the big issues, Jack Bogle is almost always right.

• Low returns. For a column I wrote in early 2000, he told me "the odds are pretty good that we'll have a tough year in the stock market." When I interviewed him in October 2002, at the depth of the bear market, he argued that "this would be a very foolish time to be abandoning the stock market." Both calls proved prescient.
 
 

These days, Mr. Bogle isn't sounding particularly enthusiastic about the market's prospects. "Figure out what your stock allocation should be," he advises. "Now is a time to stay where you are or reduce. The odds are, we are in for a period of modest returns."

Mr. Bogle reckons stocks will average 7% a year in the decade ahead. He gets that estimate by dividing the market's performance into two parts, its investment return and its speculative return.

The investment return is easy to calculate. You simply add the market's 2% dividend yield to its long-term earnings growth, which might be 6% a year. The market's performance, however, will likely stray from the resulting 8% return, thanks to changes in price/earnings ratios.

This is the market's speculative return, and Mr. Bogle figures it will work against investors in the decade ahead. He thinks we might go from today's 17 times trailing 12-month reported earnings to a more-typical 16 times earnings. That would drag down the market's return over the next decade, leaving us with a 10-year average that's closer to 7%.

This might not sound too grim -- until you subtract the quadruple hit from investment costs, taxes, inflation and investor mistakes. This, of course, is why Mr. Bogle has been a longtime advocate of index funds, which offer a low-cost, tax-efficient way of capturing the market's return.

But there has been one change in Mr. Bogle's advice: He has become keener on international investing, in part because he foresees a weakening of both the dollar and America's position in the world.

He says investors might allocate up to 20% of their stock-market money to foreign shares, dividing this money equally between developed and emerging markets. But because foreign markets have lately done so well, he suggests moving slowly. "If somebody is at 0% and wants to go to 20%, take two years to do it," he says.

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