Age is just a rule of thumb: Bogle
In the long run, corporate earnings and dividends drive stock prices, says John Bogle, founder of Vanguard Group — an investment manager that manages over $5 trillion in assets worldwide. Sharing his investment philosophy at the Morningstar investment conference in Mumbai through a recorded video, Bogle said age is just a rule of thumb and one should consider it only as a starting point in deciding asset allocation.
“I don’t do a simple age-based formula. If I did, I’d be 90 per cent in bonds, and 10 per cent in stocks. And that would be ridiculous,” says the 89year-old investor.
Bogle has about 50 per cent of his corpus invested in stocks at present, and the remaining 50 per cent in bonds. “I spend half my time thinking why I have so much in stocks and half my time wondering why I have so little in stocks. So, this is equal opportunity and regret,” he says. His advice to ordinary investors: work out your asset allocation based on your own individual circumstances.
“Your financial ability to withstand risk and emotional ability to withstand risk are important. These are two very different things. You want to be emotionally in tune with your financial ability when setting your asset allocation,” says Bogle.
Bogle cautions that past performance may not guarantee future returns. “To the extent that your psyche can take it, ignore past performance. Or make that the last thing you look at and not the first,” he says.
Bogle feels that dividends are investors’ best friends and could really be the difference between investment success and failure. Investors are often their own enemies given their tendency to trade, he says.
As the industry matures, says Bogle, you’ve got investors that are better informed, more knowledgeable, and more concerned about the future. He also calls into question the ability of active fund managers to consistently outperform the market.
“When people say the market is much more efficient, I don't believe it. It has always been fairly efficient and has always had times of great inefficiency. And there is nothing in the data that would indicate that MF managers used to win by a lot but don't do it anymore because of efficiency in the market," says Bogle, pointing out that unbundled advisory is the best model to follow.
Bogle added that there is no such thing as a stock picker's market. “That’s because if someone is a good stock picker, there has to be someone out there who’s average or bad. If a good manager can outperform the S&P500 by 3 per cent a year, there’s another who’s going to underperform by 3 per cent.
Bogle also believes the uptrend in US markets could reverse if the earnings growth of US firms starts to fade.