The answer is never "it depends" when you ask the man who invented the index fund about the right investing moves.
Do fees matter? Hugely, says John Bogle, founder of the Vanguard family of mutual funds in the United States and author of the influential book Common Sense on Mutual Funds . Is index investing right for everyone? Yes, he replies. How do investors hurt themselves? Let me count the ways, he responds.
On the occasion of a 10th anniversary edition of his book's release, I spoke to the 80-year-old Mr. Bogle from his office in Malvern, Pa.
Too many Canadian investors are oblivious to the costs they incur in investing. Can you say something to wake them up?
Costs are everything - that would be my definitive statement. Do your fishing in the low-cost pond. Why don't investors realize that? They think that performance is more important than cost. But performance comes and goes, and cost goes on forever.
Investor Education on mutual funds:
You've criticized exchange-traded funds for allowing the kind of frequent trading that hurts investors. But given that Canadian index funds are much more expensive than Vanguard funds, what about pursuing cheaper costs by investing in ETFs for the long term?
ETFs are an excellent way to go about it. But there are all kinds of caveats because you've got brokerage costs. For example, if you were dollar-cost averaging, it wouldn't work.
Is indexing right for all investors, all of the time?
Yes. Unequivocally, yes.
Is there ever a situation where active management makes sense?
The problem is, which active manager? When you get into the mutual fund business in the U.S., you have to ask how long a manager is going to be managing a fund. Investing is a lifetime affair, but the average manager tenure in the U.S. is five years.
Many active funds trail their benchmark index, but isn't the greater problem that many people don't make what their investments make because of ill-timed buying and selling and other errors?
I've been on that subject for about a decade and it's absolutely true.
So what are investors doing wrong?
They believe they can pick managers, they believe that looking at the past is prologue to the future when it's not, and they ignore costs generally. They're much more interested in moving money around than staying the course, and they don't think enough about asset allocation.
How important is asset allocation - the mix of stocks and bonds - as compared with choosing the right funds or stocks?
Asset allocation really comes first. For me, it's how much money do I want in bonds and how much do I want in stocks? I don't want to get into commodities and gold and narrow sectors of the market.
You talk a lot about the need for a long-term approach as an investor. What's the right holding period for an equity index fund?
One of my most important rules is: Don't peek. Don't look, just put your money away every month. When you retire at age 65, you will open your statement and be flabbergasted at how much money you have.
What do you say to someone who has some money to invest but is nervous of the stock markets and staying in cash?
Cash has no role in an investment program. Cash is essentially a market timing vehicle - "I'm getting out of the market and going to cash until the weather clears."
Well, when the weather clears, prices will be high. Get a good investment program and don't try market timing.
What's your best tip for young investors, say those in their 20s?
Start early. Start now. Start today.
Those early dollars can take advantage of the magic of compounding in a really profound way over a lifetime.
You recently updated your book to look back on the past decade. How did your advice hold up?
Just about everything in the book stands up well today. What was wrong was the failure of the book's objective to chart a course for change in the mutual fund industry.
I have a whole lot of gripes with the industry: Too much marketing, not enough management; too much salesmanship, not enough stewardship; too much cost, not enough value; too much speculation, not enough investment.
What's your sense of the Canadian fund market?
I'm a step removed from it. I'm struggling to understand the U.S. fund market.
One last question: Why don't you make Vanguard index funds for the Canadian market?
Canadians can buy our ETFs [listed on the New York Stock Exchange]
Personal: May 8, 1929, in Montclair, N.J. Graduated from Princeton University, where he studied economics. Best known for: Starting the Vanguard 500 Index Fund, the first index mutual fund, in 1975, and creating Vanguard Group, one of the world's largest mutual fund companies.
Books (a selection): Bogle on Mutual Funds; Common Sense on Mutual Funds; John Bogle on Investing; Character Counts; The Little Book of Common Sense Investing
Online: Bogle eBlog