FIVE investing styles dominate today:
1. Value Investors
They rely on fundamental analysis of companies' financial performance to identify stocks priced below intrinsic value (the present value of a company's future cash flows.)
Benjamin Graham and David Dodd in the 1930s.
Warren Buffett in the 1970s and 1980s.
2. Growth Investors
They seek companies whose earnings gains promise to boost intrinsic value rapidly.
Philip Fisher late 1950s.
Peter Lynch in the 1980s.
3. Index Investors
They buy shares that replicate a large market segment such as the S&P 500.
Endorsed by Graham for defensive investors.
John Bogle in the 1980s.
4. Technical Investors
They use charts to glean market behaviour indiccating whether expectations are rising or falling, market trends, and other "momentum" indicators.
William O'Neill in the late 1990s.
5. Portfolio Investors
Tney ascertain their appetite for investment risk and assemble a diversified securities protfolio bearing the risk level.
Burton G. Malkiel in early 1970s.
Showing posts with label Jack Bogle. Show all posts
Showing posts with label Jack Bogle. Show all posts
Thursday, 13 June 2013
Friday, 10 August 2012
Avoiding Stocks Is a Big Mistake: Vanguard Founder
By Lee Brodie | CNBC – Mon, Aug 6, 2012
If you don't have money in the stock market (^GSPC) and you hope to retire someday, the founder of The Vanguard Group says you're making a big mistake.
John 'Jack' Bogle tells us if you're investing for the long-term don't get spooked by events of late. "Knight Capital is meaningless for anyone in the market for the long haul," he says. "In fact, you're probably in a mutual fund and you can pat yourself on the back for being smart."
In other words, for most individual investors the risk from Knight Capital is non-existent because most individuals hold a basket of stocks and the diversity of the basket hedges out the single stock risk.
And he takes issue with commentary from Bill Gross who believes "the cult of equity is dying."
"Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors' impressions of 'stocks for the long run' or any run have mellowed as well," Gross says.
The analogy of stock investing to autumn may be poetic, but it's not accurate and never will be, according to Bogle. "Equities offer higher risk and will therefore always generate higher reward," he argues. Therefore, "The cult of equity is never going to be over."
And he takes issue with commentary from Bill Gross who believes "the cult of equity is dying."
"Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors' impressions of 'stocks for the long run' or any run have mellowed as well," Gross says.
The analogy of stock investing to autumn may be poetic, but it's not accurate and never will be, according to Bogle. "Equities offer higher risk and will therefore always generate higher reward," he argues. Therefore, "The cult of equity is never going to be over."
Bogle goes on to remind us that in 1979 BusinessWeek made the same argument.
The article came out right before the beginning of one of the greatest bull markets of the 20thcentury, Bogle insists. "It's always a question of balance but anyone who is out of stocks right now is making a big mistake.
The article came out right before the beginning of one of the greatest bull markets of the 20thcentury, Bogle insists. "It's always a question of balance but anyone who is out of stocks right now is making a big mistake.
Saturday, 12 May 2012
Interesting interview by John Bogle.
Wednesday, 4 May 2011
13 Essential Rules for Investing
I just finished reading The Bogleheads’ Guide to Investing, and it is the best personal finance book I read this year. The book is very practical with tons of useful tips. It’s also witty which makes it fun to read. It’s philosophy of investing is long term with buy-and-hold strategy, and it proves the effectiveness of this strategy with numerous studies.
Here I’d like to share with you 13 investing rules I summarized from the book. I believe they are essential for successful investing. Here they are:
1. Choose a sound financial lifestyle
This is the first thing you should do before investing. There are three steps you need to take:
- Graduate from the paycheck mentality to the net worth mentality.People with paycheck mentality spend to the max based on their net incomes. Their financial lifestyle is all about earning to spend. On the other hand, people with net worth mentality focus on building net worth over the long term.
- Pay off credit card and high-interest debts
Paying your high-interest debts is the highest, risk-free, tax-free return on your money that you can possibly earn. - Establish an emergency fundFor most people, six months living expenses is adequate.
2. Start early and invest regularly
Saving is the key to wealth, so there is no substitute for frugality. And, due to the power of compounding, starting early makes a huge difference.
3. Know what you are buying
Know more about the various investment choices available to you, such as stocks, bonds, and mutual funds. Don’t invest in things you don’t understand.
4. Keep it simple
Simple investing strategy almost always beats the complicated ones. Index investing takes very little investment knowledge, practically no time or effort – and outperforms about 80 percent of all investors.
Instead of hiring an expert, or spending a lot of time trying to decide which stocks or actively managed funds are likely to be top performers, just invest in index funds and forget about it.
However, not all index funds are created equal. Many of them will also charge you high sales commission and high yearly management fee. Do not buy those. Only consider investing in no-load funds with annual expense ratios of 0.5 percent or less, the cheaper the better.
5. Diversify your portfolio
When it comes to investing, the old saying, “Don’t put all your eggs in one basket,” definitely applies. In order to diversify your portfolio, you should try to find investments that don’t always move in the same direction at the same time. A good mix for this is stocks and bonds.
6. Decide your asset allocation
You should decide what a suitable stock/bond/cash allocation for your personal long-term asset allocation plan is. This is the most important portfolio decision you will make.
Investments in stocks, bonds, and cash have proven to be a successful combination of securities for portfolio construction. At times, you will read about other more exotic securities (such as hedge funds, unit trusts, option, and commodity futures). It is advised to simply forget about them.
7. Minimize your investment costs
The shortest route to top quartile performance is to be in the bottom quartile of expenses.Jack Bogle
Costs matter, so it’s critical that you keep your investment costs as low as possible. It is recommended to avoid all load funds and favor low-cost index funds.
8. Invest in the most tax-efficient way possible
For all long-term investors, there is only one objective – maximum total return after taxes.John Templeton
Tax can be your biggest expense, so it’s important to be tax-efficient. One of the easiest and most effective ways to cut mutual fund taxes significantly is to hold mutual funds for more than 12 months.
9. Avoid performance chasing and market timing
I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.Warren Buffett
Using past performance to pick tomorrow’s winning mutual funds is such a bad idea that the government requires a statement similar to this: “Past performance is no guarantee of future performance.” And market timing (a strategy based on predicting short-term price changes in securities) is something which is virtually impossible to do.
The logical alternative to performance chasing and market timing is structuring a long-term asset allocation plan and then staying the course.
10. Track your progress and rebalance when necessary
Rebalancing is the simple act of bringing your portfolio back to your target asset allocation. Rebalancing controls risk and may reward you with higher returns.
Rebalancing forces us to sell high and buy low. We’re selling the outperforming asset class or segment and buying the underperforming asset class or segment. That’s exactly what smart investors want to do.
11. Tune out the “noise”
Most sales and advertising pitches from brokerage houses and money managers are variations of one single message: “Invest with us because we know how to beat the market.” Far more often than not, this promise is fictitious at best and financially disastrous at worst.
Here is a simple guideline: all forecasting is noise. Believing that “It’s different this time” can cause severe financial damage to your portfolio.
12. Master your emotions
When it’s time to make investing decisions, check your emotions at the door. Things such as blindly following the crowd, trying too hard, or acting on a hot tip will almost always leave you poorer.
Forget the popular but misguided notion that investing is supposed to be fun and exciting. If you seek excitement in investing, you’re going to lose money. Get excited about earning and saving money, but be very dispassionate when it comes to investing.
13. Protect your assets by being well-insured
To be a successful investor requires being a good risk manager. Managing risk means having a plan to cover the downside. That’s what insurance is all about – damage control to prevent the unforeseen from smashing your nest egg.
You need to consider the following type of insurance: life insurance, health care, disability, property, auto, liability, and long-term care.
Three key rules for being properly insured:
- Only insure against the big catastrophes and disasters that you can’t afford to pay for out of pocket.
- Carry the largest possible deductibles you can afford.
- Only buy coverage from the best-rated insurance companies.
Note:
I hope you find these rules useful. I completely agree with all of them, including the “controversial” rule of “tuning out the noise”. A few months ago I read the book Fooled by Randomness which takes different approach but arrives at the same conclusion.
I hope you find these rules useful. I completely agree with all of them, including the “controversial” rule of “tuning out the noise”. A few months ago I read the book Fooled by Randomness which takes different approach but arrives at the same conclusion.
Friday, 1 May 2009
Investment Advice from Jack Bogle
In Depth
April 9, 2009, 5:00PM EST
Investment Advice from Jack Bogle
The father of indexing cautions against trusting money management firms, market timing, or underestimating the potential for stock gains
By Roben Farzad
Jack Bogle turns 80 this May. Last summer his body started to reject his 13-year-old transplanted heart, a turn of events that landed him in the hospital four times as the financial world was melting down. Bogle should be in bed. He has every reason to just sit back and reflect on his career as the father of indexing and as the conscience of the individual investor.
But with the stock market not far from a 12-year low—and banks the world over taking ever-larger bailouts—he'd rather spend these delicate days raising hell (much to his wife's consternation). He thinks mutual funds totally blew it by spending untold sums on supposedly deep-digging in-house research only to totally miss the leverage time bomb. This might be a tad more tolerable, he says, if they didn't pass those costs on to customers, who ended up losing even more.
Bogle is pressing Washington for explicit regulation concerning fiduciary responsibilities. Here is some of Bogle's advice for investors in these turbulent times.
The Stock Market
"If you can't afford to lose one more penny," says Bogle, "get out. But, if you're in your 20s to 40s, keep going. These are good values. The stock market has taken an awful lot of this mess into account, and it's hard for me to believe that common equities won't do better than Treasuries from this point on." Bogle thinks that a 7% nominal return—more than twice Treasury bonds—is realizable over the next decade.
Simple Math
Bogle's "relentless rules of humble arithmatic" show the importance of being vigilant about costs. A dollar invested over 50 years at 8% a year compounds to just under $47. But dock just 2% for expense ratios and transaction costs and you're down to $18. Back out another three percentage points for inflation and you're at $4.38—less than a tenth of your potential catch.
On Timing and Chasing the Sector du Jour
"The stock market's day-to-day is actually a distraction to the business of investing," according to Bogle. His point: The past century of data show that American businesses have grown at an annual rate of about 9.5%, with 4.5% from dividend yields and the remaining 5% from earnings growth. The simultaneous aggregate return on bonds averaged 5%. These are the realistic benchmarks to focus on. "It's all simplicity, mathematics, and common sense," he says. In other words, calibrate your expectations to these long-term figures, a discipline that requires you to ignore the pull of solar, B2B, nanotech, or whatever last year's hot sector was.
Sales Ethics and Practice
Caveat emptor for investors: Don't assume your retirement provider or money management firm espouses a standard of honesty, full and fair disclosure, or putting its clients' interests first. The industry is quietly bifurcated into salesmen and professionals. That is why Bogle is urging Washington to enact a federal standard of fiduciary duty to mandate prioritizing clients, avoiding conflicts, and disclosing all fees.
Overextended Treasuries
"Bond prices are already high. Stocks should do 3 or 4 percentage points better than bonds."
Act Your Age
The percentage of your portfolio in bonds should roughly match your age. For example, a 30-year-old investor would be 30% in fixed income—a 75-year-old, 75%.
Where's the End?
This downturn could last 1½ years to 2 years. But the stock market will recover months before a turnaround comes. Don't try to time your entry.
Plan More Wisely: Your Savings Are Likely Inadequate
At the end of 2008, the median 401(k) balance is estimated at just $15,000 per participant. Even if you project this balance for a middle-aged employee with growth over time via presumed higher salaries and investment returns, that figure might rise to some $300,000 at retirement age (if the assumptions are correct). But while that hypothetical accumulation may look substantial, it would be adequate to replace less than 30% of preretirement income—a help, but hardly a panacea. (The target suggested by most analysts is around 70%, including Social Security.)
Contribute More
One reason for today's modest 401(k) accumulations is inadequate participant and corporate contributions made to the plans. Typically the combined contribution comes to less than 10% of compensation, while most experts consider 15% the appropriate target. Over a working lifetime of, say, 40 years, an average employee contributing 15% of salary, receiving periodic raises, and earning a real market return of 5% per year, would accumulate $630,000. An employee contributing 10% would accumulate just $420,000. If those assumptions are realized, this would represent a handsome accumulation, but substantial obstacles—especially the flexibility given to participants to withdraw capital—are likely to preclude their achievement.
Get Out of Your Own Way
There is excessive flexibility in 401(k) plans. Designed to fund retirement income, they are too often used for purposes that subtract directly from that goal. One such subtraction arises from the ability of employees to borrow from their plans, and nearly 20% of participants do exactly that. Even when and if these loans are repaid, investment returns (assuming they are positive over time) would be reduced during the time that the loans are outstanding, a dead-weight loss in the substantial savings that might otherwise have accumulated by retirement. Even worse is the dead-weight loss—in this case, largely permanent—engendered when participants "cash out" their 401(k) plans when they change jobs. The evidence suggests that 60% of all participants in defined-contribution plans—i.e., a 401(k)—who move from one job to another cash out at least a portion of their plan assets, using that money for purposes other than retirement savings. To understand the baleful effect of borrowings and cash-outs, just imagine in what shape our beleaguered Social Security system would find itself if the contributions of workers and their companies were reduced by borrowings and cash-outs flowing into current consumption rather than into future retirement pay. Bogle wants a new, streamlined, and unified retirement savings system to be stripped of so many confusing options. He says it should be replaced with a handful of conservatively calibrated choices that are clear in their risk profiles and the expectations they can satisfy.
Mandatory Allocation?
One reason that 401(k) investors have accumulated such disappointing balances stems from unfortunate decisions in the allocation of assets between stocks and bonds. While virtually all investment experts recommend a large allocation to stocks for young investors and an increasing bond allocation as participants draw closer to retirement, a large segment of 401(k) participants fails to heed that advice.
The Wrong Mix
Nearly 20% of 401(k) investors in their 20s own zero equities in their retirement plan, instead holding outsized allocations of money-market and stable-value funds—options that are unlikely to keep pace with inflation as the years go by. On the other end of the spectrum, more than 30% of 401(k) investors in their 60s have more than 80% of their assets in equity funds. Such an aggressive allocation likely resulted in a decline of 30% or more in their 401(k) balances during the present bear market, imperiling their retirement funds precisely when members of this age group are preparing to draw on them.
The Under-20% Rule
Company stock is another source of unwise asset allocation decisions, as many investors fail to observe the time-honored principle of diversification. In plans that offer company stock as an investment option, the average participant invests more than 20% of his or her account balance in company stock, an unacceptable concentration of risk. If you feel you must, dabble in company stock with not more than a sliver of fun money. You're already overweighted in your exposure to the company's fate by way of employment and income.
The Old College Try
"Mutual funds can make no claim to superiority over the market averages," argued Bogle in his 1951 Princeton senior thesis, The Economic Role of the Investment Company. In other words, good luck beating the indexes. If anything, his prophecy was understated. Of the 355 equity funds in business in 1970, 223 have since gone bust. Of the 132 that survived, only 24 beat the Standard & Poor's 500-stock index and only seven did so by more than (a statistically significant) 1% per year.
It Runs in the Family
"Gentlemen, lower your costs!" urged Philander Banister Armstrong, Bogle's great-grandfather, in an 1868 speech to fellow insurance executives. In 1917, Armstrong published the book A License to Steal: Life Insurance, the Swindle of Swindles: How Our Laws Rob Our Own People of Billions. "He's my spiritual progenitor," says Bogle.
BusinessWeek Senior Writer Farzad covers Wall Street and international finance.
--------------------------------------------------------------------------------
http://www.businessweek.com/print/magazine/content/09_16/b4127040249262.htm
April 9, 2009, 5:00PM EST
Investment Advice from Jack Bogle
The father of indexing cautions against trusting money management firms, market timing, or underestimating the potential for stock gains
By Roben Farzad
Jack Bogle turns 80 this May. Last summer his body started to reject his 13-year-old transplanted heart, a turn of events that landed him in the hospital four times as the financial world was melting down. Bogle should be in bed. He has every reason to just sit back and reflect on his career as the father of indexing and as the conscience of the individual investor.
But with the stock market not far from a 12-year low—and banks the world over taking ever-larger bailouts—he'd rather spend these delicate days raising hell (much to his wife's consternation). He thinks mutual funds totally blew it by spending untold sums on supposedly deep-digging in-house research only to totally miss the leverage time bomb. This might be a tad more tolerable, he says, if they didn't pass those costs on to customers, who ended up losing even more.
Bogle is pressing Washington for explicit regulation concerning fiduciary responsibilities. Here is some of Bogle's advice for investors in these turbulent times.
The Stock Market
"If you can't afford to lose one more penny," says Bogle, "get out. But, if you're in your 20s to 40s, keep going. These are good values. The stock market has taken an awful lot of this mess into account, and it's hard for me to believe that common equities won't do better than Treasuries from this point on." Bogle thinks that a 7% nominal return—more than twice Treasury bonds—is realizable over the next decade.
Simple Math
Bogle's "relentless rules of humble arithmatic" show the importance of being vigilant about costs. A dollar invested over 50 years at 8% a year compounds to just under $47. But dock just 2% for expense ratios and transaction costs and you're down to $18. Back out another three percentage points for inflation and you're at $4.38—less than a tenth of your potential catch.
On Timing and Chasing the Sector du Jour
"The stock market's day-to-day is actually a distraction to the business of investing," according to Bogle. His point: The past century of data show that American businesses have grown at an annual rate of about 9.5%, with 4.5% from dividend yields and the remaining 5% from earnings growth. The simultaneous aggregate return on bonds averaged 5%. These are the realistic benchmarks to focus on. "It's all simplicity, mathematics, and common sense," he says. In other words, calibrate your expectations to these long-term figures, a discipline that requires you to ignore the pull of solar, B2B, nanotech, or whatever last year's hot sector was.
Sales Ethics and Practice
Caveat emptor for investors: Don't assume your retirement provider or money management firm espouses a standard of honesty, full and fair disclosure, or putting its clients' interests first. The industry is quietly bifurcated into salesmen and professionals. That is why Bogle is urging Washington to enact a federal standard of fiduciary duty to mandate prioritizing clients, avoiding conflicts, and disclosing all fees.
Overextended Treasuries
"Bond prices are already high. Stocks should do 3 or 4 percentage points better than bonds."
Act Your Age
The percentage of your portfolio in bonds should roughly match your age. For example, a 30-year-old investor would be 30% in fixed income—a 75-year-old, 75%.
Where's the End?
This downturn could last 1½ years to 2 years. But the stock market will recover months before a turnaround comes. Don't try to time your entry.
Plan More Wisely: Your Savings Are Likely Inadequate
At the end of 2008, the median 401(k) balance is estimated at just $15,000 per participant. Even if you project this balance for a middle-aged employee with growth over time via presumed higher salaries and investment returns, that figure might rise to some $300,000 at retirement age (if the assumptions are correct). But while that hypothetical accumulation may look substantial, it would be adequate to replace less than 30% of preretirement income—a help, but hardly a panacea. (The target suggested by most analysts is around 70%, including Social Security.)
Contribute More
One reason for today's modest 401(k) accumulations is inadequate participant and corporate contributions made to the plans. Typically the combined contribution comes to less than 10% of compensation, while most experts consider 15% the appropriate target. Over a working lifetime of, say, 40 years, an average employee contributing 15% of salary, receiving periodic raises, and earning a real market return of 5% per year, would accumulate $630,000. An employee contributing 10% would accumulate just $420,000. If those assumptions are realized, this would represent a handsome accumulation, but substantial obstacles—especially the flexibility given to participants to withdraw capital—are likely to preclude their achievement.
Get Out of Your Own Way
There is excessive flexibility in 401(k) plans. Designed to fund retirement income, they are too often used for purposes that subtract directly from that goal. One such subtraction arises from the ability of employees to borrow from their plans, and nearly 20% of participants do exactly that. Even when and if these loans are repaid, investment returns (assuming they are positive over time) would be reduced during the time that the loans are outstanding, a dead-weight loss in the substantial savings that might otherwise have accumulated by retirement. Even worse is the dead-weight loss—in this case, largely permanent—engendered when participants "cash out" their 401(k) plans when they change jobs. The evidence suggests that 60% of all participants in defined-contribution plans—i.e., a 401(k)—who move from one job to another cash out at least a portion of their plan assets, using that money for purposes other than retirement savings. To understand the baleful effect of borrowings and cash-outs, just imagine in what shape our beleaguered Social Security system would find itself if the contributions of workers and their companies were reduced by borrowings and cash-outs flowing into current consumption rather than into future retirement pay. Bogle wants a new, streamlined, and unified retirement savings system to be stripped of so many confusing options. He says it should be replaced with a handful of conservatively calibrated choices that are clear in their risk profiles and the expectations they can satisfy.
Mandatory Allocation?
One reason that 401(k) investors have accumulated such disappointing balances stems from unfortunate decisions in the allocation of assets between stocks and bonds. While virtually all investment experts recommend a large allocation to stocks for young investors and an increasing bond allocation as participants draw closer to retirement, a large segment of 401(k) participants fails to heed that advice.
The Wrong Mix
Nearly 20% of 401(k) investors in their 20s own zero equities in their retirement plan, instead holding outsized allocations of money-market and stable-value funds—options that are unlikely to keep pace with inflation as the years go by. On the other end of the spectrum, more than 30% of 401(k) investors in their 60s have more than 80% of their assets in equity funds. Such an aggressive allocation likely resulted in a decline of 30% or more in their 401(k) balances during the present bear market, imperiling their retirement funds precisely when members of this age group are preparing to draw on them.
The Under-20% Rule
Company stock is another source of unwise asset allocation decisions, as many investors fail to observe the time-honored principle of diversification. In plans that offer company stock as an investment option, the average participant invests more than 20% of his or her account balance in company stock, an unacceptable concentration of risk. If you feel you must, dabble in company stock with not more than a sliver of fun money. You're already overweighted in your exposure to the company's fate by way of employment and income.
The Old College Try
"Mutual funds can make no claim to superiority over the market averages," argued Bogle in his 1951 Princeton senior thesis, The Economic Role of the Investment Company. In other words, good luck beating the indexes. If anything, his prophecy was understated. Of the 355 equity funds in business in 1970, 223 have since gone bust. Of the 132 that survived, only 24 beat the Standard & Poor's 500-stock index and only seven did so by more than (a statistically significant) 1% per year.
It Runs in the Family
"Gentlemen, lower your costs!" urged Philander Banister Armstrong, Bogle's great-grandfather, in an 1868 speech to fellow insurance executives. In 1917, Armstrong published the book A License to Steal: Life Insurance, the Swindle of Swindles: How Our Laws Rob Our Own People of Billions. "He's my spiritual progenitor," says Bogle.
BusinessWeek Senior Writer Farzad covers Wall Street and international finance.
--------------------------------------------------------------------------------
http://www.businessweek.com/print/magazine/content/09_16/b4127040249262.htm
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