John Bogle’s investing advice is timeless

NEW YORK (MarketWatch) � With relics of American investing history framing them, some respected icons of the nation�s financial system told investors that a secure future comes from following what has worked in the past.

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Their message: Straightforward, long-term investments will turn out far better than the flavor-of-the-day/week/month.

The John C. Bogle Legacy Forum this week at the Museum of American Finance in New York brought together three former heads of the Securities & Exchange Commission, a former Fed chairman (Paul Volcker), some ultra-smart money managers, and Jack Bogle, the legendary founder of the Vanguard Group and the patron saint of index investing and long-term asset-allocation strategies.

Costly wagers

While much of the event was spent talking about the need for the financial-services business to act in the best interests of customers � something it all too frequently fails to do � an underlying theme was that investing should be easier than most people make it.

Caught up in the 24-hour news cycle, with talking heads tweeting stock tips and blurting out their feelings about what is happening �now� � as if they have special insight about the current moment � consumers are too involved in the day-to-day and not nearly focused enough on the right thing.

�Too many people spend their time trying to figure out the hot stock to buy rather than spending their time trying to get their asset allocation right,� said Gus Sauter, Vanguard�s chief investment officer. �Stocks, bonds and cash � take care of that decision and the rest should go right.�

Reuters John Bogle.

Not surprisingly, Sauter�s sentiments fall closely on the lines that Bogle has always expressed, noting that the key is not in picking a fund manager or managers who can actively beat the stock market for a year, but rather who will beat the index over two decades.

�If you have no skill in picking managers, you should be 100% indexed,� Sauter said, noting that even if you have tremendous skill in selecting active managers, research shows that you will still want a significant portion of your money tied into index funds.

Interestingly, one of the people sharing the dais with Sauter in a session about the importance of product simplicity and low costs was David Swensen, chief investment officer for the Yale University Investments Office, and a manager with a nearly unparalleled record for successful active management.

Said Swensen: �You either have the passive strategy that wins the majority of the time, or you have this very active strategy that beats the market � but the people who are in the middle are the ones who will be the losers.�

The losers, according to Swensen, represent the bulk of investors, considering that roughly one-quarter of all assets in mutual funds are run by passive strategies. Even some of that is misleading, as there are investors using active strategies to buy passive exchange-traded funds, which Bogle has always suggested as nonsensical because he can�t fathom why someone would �want to buy the index at 10:30 and sell it at 2:15.�

Allocate, rebalance and repeat

The problem is that consumers always want what�s new and hot and what promises the best results, and in the financial-services world, that typically means something that manages � for awhile, at least � to buck the odds and look great, justifying the higher costs.

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One of Bogle�s favorite sayings is that �The investor gets what he doesn�t pay for,� meaning that every dollar that doesn�t go to pay for expenses winds up with the shareholder.

A panel discussion on whether indexing will be �the way of the future� got the answer to that question wrong, however. While they advocated that average investors keep it simple, low-cost and long-term, they failed to acknowledge that the industry is heading in the opposite direction � and most consumers are going with it.

It�s not so much that asset allocation and buy-and-hold strategies are dead � as their critics proclaim. It�s that people are making moves warranted by their thinking, justified by a system that is increasingly complex.

It�s why money gushes out of funds where a downturn in performance leads to a lower star rating from industry research firm Morningstar Inc., but floods into funds that have gained an extra star to get an above-average rating.

The move is based on past performance � there�s no denying which fund you would want to own if you could go back in time to build portfolio � and supported by numbers, even if there is plenty of evidence to show that investors typically move into hot issues just before they cool and bail out of beaten-down securities just before they rebound.

�For almost all institutions and individuals, the simple approach is best,� said Swenson, who noted repeatedly that his own approach is anything but simple. �The simple thing is to set up an asset allocation, rebalance regularly, revisit your allocation decision occasionally and stick with it.�

Chances are that approach will work in any long-term scenario the market dishes out, but it doesn�t mean that average investors or the financial-services companies they rely on won�t try to come up with something better that is mostly more complicated, more costly and less likely to work over a lifetime.