Buy And Hold the Bogle Way

Vanguard Group founder Jack Bogle has not changed his tune as a result of the economic downturn. At the ripe age of 80, he is still preaching buying-and-holding domestic stocks and bonds, cheaply, in an asset allocation that's appropriate for your age. Below are some key excerpts from a recent Market Watch article.

On including bonds in your asset allocation:

I have been saying for more years than I care to count not to forget bonds. And start to think about it as a rule of thumb, having your bond holdings equal your age.

Investors come to me and generally say one of two things, either 'Thank God I followed your advice,' or 'I really feel stupid for not having followed your advice.'

On the economy:

We can't fix our economy now, today. We can move in a direction of fixing it, but when you think about what is happening it's very obvious: We have to save more.

The old 3% real growth which is the rate the economy has grown at, well I think that is too aggressive. We're looking at much slower economic times.

On what a slower economy means for investors:

We have had a stock market crash of the largest proportions probably of the last century, with the possible exception of 1929 to 1933. We have had a big stock market crash. Do we have to have another one? I don't think so.

I would guess the market probably has it about right. I would guess that we have seen the low for the year and maybe the low for this cycle.

On having an international allocation:

Decide where you want to put your money. I would say U.S. stocks, because international will do well and then it will do badly, and the same thing for emerging markets, which will do well for a while and then do badly and then do well again. I just think you don't need to go beyond U.S. stocks.

On the reported death of asset allocation and buy-and-hold investing:

I am really concerned when I hear people say buy-and-hold is over. Investors, as a group, are buy-and-holders. We own the stock market, all of us together, we buy and hold it. As a group, we all have the same asset allocation. So when you hear someone say 'It's a stockpicker's market,' well if you picked well, then I picked ill, and as a group it's the same.'

You can read the entire article here. I don't agree with everything Mr. Bogle says, but I do think there is a lot we can learn from him. So what can we do to put some of the above in practice?

First, don't forget about bonds. As recently noted, treasuries and bonds tend to be less risky than equity investments, but have historically under-performed equities. When the market is climbing by double digits, it is easy to question why you are including bonds in your asset allocation. However, when the market turns down, the importance of bonds becomes very evident. I currently hold some old savings bonds (U.S.) and several funds/ETFs in my 401(k) and taxable accounts. My two favorite ETFs are Vanguard Long-Term Bond ETF (BLV) currently yielding 5.6% and iShares Barclays Aggregate Bond (AGG) currently yielding 4.7%.

Unlike Mr. Bogle, I think international investments play an important role in your asset allocation. Due to the complexities in this arena, I prefer to use indexed ETFs to meet my allocation here. In addition to a fund in my 401(k), I currently hold iShares MSCI EAFE Index (EFA) and Vanguard Emerging Markets Stock ETF (VWO). In addition, I am currently evaluating Vanguard FTSE All-World ex-US ETF (VEU).

As Mr. Bogle alluded to in the article, there are many excellent U.S. stocks to invest in. In this area I prefer to focus on great Dividend Stocks like Johnson & Johnson (JNJ) [analysis], Procter & Gamble Co. (PG) [analysis], The Coca-Cola Company (KO) [analysis] and 3M Co. (MMM) [analysis].

It seems that ever so many years the market turns down and someone declares the death of buy and hold. Even some go as far to say the Warren Buffett has lost his touch. The buy and hold investors and Mr. Buffett always seen to make a spectacular rebound, and they will once again. In the mean time, we need to focus on acquiring value and maintaining our asset allocation.

Full Disclosure: Long BLV, AGG, EFA, VWO, JNJ, PG, KO, MMM. See a list of all my income holdings here.


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