Friday, April 1, 2011

Bogle on the Markets


I might not always agree with John Bogle but I always find his comments thought-provoking.

John is best known as the founder of mutual fund giant Vanguard. He was also an early advocate of index funds, and has remained passionate about the benefits of indexing for individual investors.

(John also worked for a time at my old firm: Scudder, Stevens and Clark. However, due to his iconoclastic beliefs, and the fact that he did not believe in the value of active management, he was shown the door. He then went on to start Vanguard, and the rest, as they say, is history).

John wrote a column in Wednesday's Financial Times that made a number of good points about investor expectations. I don't know if I totally agree, but here's what he wrote:

Over the past century, for instance, the US stock market has provided an average annual return of about 9 per cent - 4.5 per cent from dividend yields and 4.5 per cent from earnings growth. But today's dividend yield is only about 2 per cent, meaning that a critical component of the stock market's return has been slashed by more than one half.... ...combining the two tells us that reasonable expectations for nominal returns on stocks over the coming decade are likely to centre around 7 per cent, several percentage points below the long-term norm.

FT.com / Markets / Insight - Wall St’s illusion on historical performance

Bogle goes on to note that investors should not only focus on gross returns from their investments but expenses associated with their investment activities.

John estimates that the typical mutual fund charges fully 2% annually (including expense ratios, estimated portfolio turnover costs, and sales loads) which would obviously have a significant impact on net returns.

Finally, Bogle notes that investors should also focus on inflation in calculating their investment results. Even if inflation rates remain low (which Random Glenings believes), even a 1.5% inflation rate for the next ten years means that the real purchasing power of today's dollars will be 14% less by 2021.

Worth a read.