Sound Advice For Nervous Long Term Investors .... Do Nothing!

Jack Bogle, founder of the Vanguard Group of mutual funds, is the acknowledged guru of low cost index fund investing and a proponent of the positive impact of compounding over time. He also follows the advice of Ben Franklin, as we'll see,


Here's Bogle's latest missive about the turmoil in the market these days and what we should do about it. For what it's worth, he articulates my sentiments exactly.


Jack Bogle's advice for a rocky market: Follow Ben Franklin says this:


"The civic virtue that Benjamin Franklin brought to his entrepreneurship and invention has overshadowed the remarkable wisdom of this investment sage. Perhaps because it is so simple that it seems unremarkable, this wisdom goes virtually unheralded among his other grand accomplishments.


With his simple precepts, he would have realized that in this new age of investing, we have ignored the crucial lesson: Simplicity trumps complexity. . . .



Perhaps the best place to begin is with Franklin's acute understanding of the miracle of compound interest. . . . (aka) "the magic of compounding."

Similarly, for as long as I can remember, compound interest has been at the center of my own investment thinking. The opening words in the very first chapter of my very first book (Bogle on Mutual Funds, Irwin Professional Publishing, 1993.... the value of $1,000 invested in stocks in 1872 would have grown to $27,710,000 in 1992 [when the book was published and the historical rate of return on stocks was 8.8 percent.] ... the magic of compounding writ large."...


 Since a comfortable retirement is the principal objective of nearly all U.S. families, in my book, "The Battle for the Soul of Capitalism," I use a 65-year time horizon, one that assumes a 45-year working career (to age 65) and a further 20 years of life (to age 85) based on today's actuarial tables: "$1000 invested at the outset of the period, earning an assumed annual return of, say, 8 percent would have a final value of $148,780—the magic of compounding returns."

But I quickly warned that this total was unlikely to be achieved. Why? Because the obvious magic-of-compounding returns was all too likely to be overwhelmed by the subtle tyranny of compounding costs—a concept that, in a simpler age, even the great Franklin failed to contemplate. Here's what happens:

"Assuming an annual intermediation cost (by mutual fund managers) of only 2.5 percent, the 8 percent return would be reduced to 5.5 percent. At that rate, the same initial $1000 would have a final value of only $32,465—the tyranny of compounding costs. The triumph of tyranny over magic, then, is reflected in a stunning reduction of almost 80 percent in accumulated wealth for the investor ... consumed ... by our financial system."

When our financial system—essentially our money managers, marketers of investment products and stockbrokers—put up zero percent of the capital and assume zero percent of the risk yet receive fully 80 percent of the return, something has gone terribly wrong in our financial system. As I note in the book, "the shift in our system from owners' capitalism to managers' capitalism has been devastating to investors."


The principles of sensible savings and investing are time-tested, perhaps even eternal. The way to wealth, it turns out, is to avoid the high-cost, high-turnover, opportunistic marketing modalities that characterize today's financial service system and rely on the magic of compounding returns. While the interests of the business are served by the aphorism "Don't just stand there. Do something!" the interests of investors are served by an approach that is its diametrical opposite: "Don't do something. Just stand there!"


—By Jack Bogle, founder of The Vanguard Group"


Summing Up


Personally, I'm just standing there right now, doing nothing.


My next move, whenever it occurs, will be to buy and not to sell.


Thanks. Bob.