Jack bogle simplifies investing in the stock market

WHAT ABOUT BONDS? THEY’RE CONSIDERED SAFER BECAUSE EVEN IF THE COMPANY GOES BANKRUPT, YOU HAVE THAT CLAIM ON THE COMPANY’S ASSETS. STOCKHOLDERS, ON THE OTHER HAND, USUALLY GET WIPED OUT IN A

BANKRUPTCY.  That’s why you want some bonds in your portfolio, for safety. But you need stocks for growth and to really get the benefits of compounding, earning not only a return on the

money you invest but also a return on that return. With compounding, if you have a 7 percent return, your dollar will double in 10 years.  MANY PEOPLE DON’T UNDERSTAND WHY IT IS THAT STOCKS

GO UP OVER TIME. LONGTERM RETURNS ARE THE PRODUCT OF THREE THINGS, CORRECT? Yes. The investment return has two components—the dividend and the rate of earnings growth. Over the long term,

stock prices tend to rise with earnings. SO IF EARNINGS CAN GROW AT, SAY, 5 PERCENT A YEAR, AND DIVIDENDS ARE 2 PERCENT, YOU COULD GET A 7 PERCENT ANNUAL RETURN. THE THIRD ELEMENT IS HOW

HIGH A PRICE INVESTORS PUT ON EARNINGS, WHICH DEPENDS ON MANY VARIABLES, INCLUDING HOW QUICKLY THEY BELIEVE THE COMPANY WILL GROW. That third element is what we call speculative return —h ow

much are investors willing to pay to buy a dollar of earnings? At the beginning of the great bull market in 1982, it cost about $8 to buy a dollar of earnings. Today it costs $26 to buy a

dollar of earnings. Stock valuations have gone up. It has been good for the holders of stocks, but it makes it problematical for investors today. SHOULD EVERYDAY AMERICANS WORRY ABOUT THIS

KIND OF SITUATION ON WALL STREET?  In the short run, people get excited and stocks get way overpriced. Then a sell-off happens, the stock price goes down, and that sends [price-earnings

ratios] lower. The long-term investor should pay no attention to that. The stock market is a distraction to the business of investing. SO DON’T PAY TOO MUCH HEED TO THE DAILY EBB AND FLOW OF

THE MARKETS? IT’S TRUE THAT THE ABILITY TO TRADE ALL DAY CAN LEAD PEOPLE TO BUY AND SELL ON IMPULSE, WHICH USUALLY LEADS TO LOWER RETURNS. You’ve heard the phrase “Don’t just stand there,

do something”? For investors, by far the better advice is “Don’t do something, just stand there.”  LET’S TALK ABOUT MUTUAL FUNDS AND ETFS. WHY SHOULD AN INVESTOR CONSIDER THEM OVER TRYING TO

PICK INDIVIDUAL COMPANIES TO INVEST IN? The big advantage to investors is the instant diversification that comes with funds, as opposed to buying individual stocks or bonds. By spreading

your bets across many different companies, you are less vulnerable to the collapse of an individual firm or the misfortune of industry.  FOR MANY DECADES, MUTUAL FUNDS WERE RUN BY MANAGERS

WHO PICKED STOCKS BY TRYING TO PREDICT WHICH ONES WOULD OUTPERFORM. IN 1976 YOU AND YOUR NEW COMPANY, VANGUARD, LAUNCHED THE FIRST INDEX FUND, WHICH INSTEAD HELD ALL THE STOCKS IN THE

S&P 500. INDEX FUNDS, OR AT LEAST THE GOOD ONES, CHARGE MUCH LESS THAN ACTIVELY MANAGED FUNDS, AND YOU HAVE SAID THAT SIMPLE MATH PROVED INDEXING SUPERIOR. The cost of money management

detracts, dollar for dollar, from your investment returns. Before expenses, all investors as a group will earn a return precisely equal to the return of the total stock market. As a group,

we’re all average. But after the costs of investing — mutual fund fees, trading commissions, sales loads, taxes and so on — are deducted, all investors as a group will lag the market’s

return by the amount of the expenses they’ve incurred.  BUT THE STOCK PICKERS SAY THEY ARE BETTER THAN AVERAGE. THEY CAN EARN THEIR FEES AND MORE. Absolutely no one knows what the stock

market is going to do tomorrow, let alone next year. Nor which sector, style or region will lead and which will lag. Given this absolute uncertainty, the most logical strategy is to invest

as broadly as possible and benefit from the compounding dividend yields and longterm earnings growth of American — and global  — corporations. YOUR BIGGEST INFLUENCE ON INVESTING MAY BE THAT

YOU HELPED BRING DOWN COSTS. IN THE CASE OF THE INDEX FUND, THERE ARE VIRTUALLY NO TRADING COSTS — AND THE FEES, IN SOME CASES, ARE AS LOW AS 40 CENTS A YEAR ON A $1,000 INVESTMENT. I call

the long-term cost of fees the tyranny of compounding. Think about it this way: If you have a return of 7 percent but paid the managers and Wall Street 2 percent, you’ll make 5 percent. You

don’t just lose that 2 percent; over the years, you lose the earnings you would have made if that 2 percent had been reinvested. Or think about it like this: You put up 100 percent of the

cash, took 100 percent of the risk and got 33 percent of the return. You want to figure out a way to get 99 percent of the return. Low-cost index funds can do that.  LET’S TALK ABOUT

DIVERSIFICATION. A VERY GENERAL RULE OF THUMB IS THAT YOUR PERCENTAGE OF INVESTMENTS IN BONDS SHOULD BE YOUR AGE MINUS 10. SO A 50-YEAR-OLD WOULD HAVE THE CLASSIC PORTFOLIO OF 60 PERCENT

STOCKS, 40 PERCENT BONDS. And when you allocate your assets, you also have to think about how much you get from Social Security. We have to fix the system, which I think can be done fairly

easily. All it would take is some combination of a gradual increase in the maximum income level for wage earners paying into the plan; a change in how we calculate the annual increase in

benefits to align with inflation; a gradual increase in the retirement age to, say, 69; and a modest means test, limiting payouts to those with considerable worth.