Bogle: Keep It Simple

In an interview with Texas’ The Statesman, Vanguard’s John Bogle says the key to successful investing is keeping things simple, and not allowing short-term performance to impact your decisions.

“[The biggest problem in investing] is that people are focused on short-term performance,” Bogle tells Scott Burns. He says that there will always be some funds that beat the market in the short term, but that “the willingness to project the immediate past into the future” is what hurts many investors.

Bogle says many investors fail to realize that investment returns are made up of two major parts: fundamental return, which includes a firm’s dividend yield and earnings growth, and speculative return, which involves how much investors are willing to pay for a dollar of a firm’s earnings. “Over time, it’s all about the fundamental return,” Bogle says. “The speculative returns tend to cancel out. Basically, the stock market is a giant distraction from the business of investing.”

One example of investors chasing performance, Bogle says, involves the recent spike in the popularity of international stocks. Bogle says to be cautious about jumping on the bandwagon: “I think you should limit international stocks to 20 percent of your equity exposure,” he says. “Put half in developed markets and half in emerging markets.”

Bogle remains a staunch advocate of low-cost index investing,  saying that over time the benefits are huge compared to mutual fund investing. In the 40-year period that ended in 2008, Burns writes, a $10,000 investment in a low-cost S&P 500 index fund would have grown to $346,117. Over the same period, the average managed domestic equity fund grew to $201,513.

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