Morningstar is the single greatest website on the planet for mutual fund research. But they do more than tell you if your 401(k)’s offerings are crap or golden; they do quite a bit of publishing of articles on the subjects of investing, like the one below.
But first some introductions. Index funds are a type of mutual fund that seeks to mimic the returns of a particular index. The most referred to is the S&P 500 Index Fund. I endorse index funds as the perfect way to invest for someone who doesn’t care about investing, which is most of the world. One of the biggest names in index funds is Jack Bogle, the figure-head and brand of Vanguard (with whom I am an investor). Look at Bogle for index funds the way you look at Steve Jobs for iPods, or Simon Cowell for talent shows. Devout followers of Jack Bogle are often referred to as “Bogleheads.”
Morningstar is pretty tight with Jack, Sue Stevens especially so. I don’t doubt Sue’s strengths in the world of finance, she holds the three most prestigious certifications one can obtain in the industry (CFP, CFA, CPA). Sue has buddied up with Jack over the years and every once in a while checks in with him to see what his investment portfolio looks like.
Jack is old in my world, he turns 80 this year. On top of being old, he’s also quite wealthy. Wealthy old guys aren’t really big into stock investing. This is because they already have their wealth, and they want to keep it that way (the rest of us have nothing to lose). As expected then Bogle is a conservative investor. As of the article’s writing (2006), he was looking at a 60/40 split of bonds to stocks. That is 60% of his money is in bonds, and 40% in stocks. What was fascinating to learn is though is the funds he actually is invested in. No he doesn’t hold Fidelity mutual funds or something like that, but he is holding about 24% of his stocks in funds that are not traditional indexes.
Being that Mr. Bogle is the index fund’s primary brand, finding out he isn’t completely invested in them might be like finding Steve Jobs rocking a Blackberry instead of an iPhone.
These other funds are known as “actively managed” which is a fancy way of saying the fund manager follows an investment philosophy other than simply copying an index. Many of them are “value funds,” which is a term I haven’t really discussed in detail in the past. Value funds are mutual funds that invest in more established companies that perhaps pay dividends. Google is not a value stock, GE is.
So why then does the messiah of indexed mutual funds use funds that aren’t indexes when the subject of his books and interviews preach their virtues so much? The three value funds he’s invested in are old ones that he can’t seem to let go of. In other words, he is emotionally attached to his investments. We all know you shouldn’t treat your investments like old buddies, so why is Bogle making such a beginner boo-boo?
Now we can see two mutual fund faux pas in Bogle’s portfolio. First is he doesn’t use index funds for his entire portfolio. Being his status as the index king, this can be a surprise, and make him somewhat hypocritical. Second, his non-indexed holdings are based on emotion. You start losing when you mix emotion into your investments. Why then, should we take investing advice from a hypocrite?
Because he’s human. In fact, we should cherish his advice more now than we might have in the past. This is because we know that he is just like us. Jack Bogle knows exactly what he should be doing, but that doesn’t stop him from doing the opposite. I want to see Jack Bogle put some emotion in his investing, he’s still conservatively invested. I want to see Dave Ramsey use a HELOC to buy a boat, he can pay it off at any time. I want to buy Bob Harper a plate of ribs with fries, he’ll burn off the calories tomorrow. And I want YOU to make sure you break the rules once in a while. If you try some strict guideline from an advice book, you’re going to drive yourself crazy trying stick to it.
Take me for example. I’ve dipped into my emergency fund for non-emergencies. I bought the stock of my own employer (remember it’s a BANK). I had a ton of chocolate today. But I re-filled my emergency fund, I sold the stock after it lost 10%, and I’m going running this afternoon. I’m happy.
And I’m proud that Jack Bogle has no problem spilling the beans on his portfolio.
Thanks to JD over at Get Rich Slowly for sharing the link to the Morningstar article.
Morningstar interview with Jack Bogle.
 By The Weakonomist |
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I’ll start off by saying I’m not an expert and my losses over the last year would tell you so. In that light, I think Bogle is being rational. In index fund investing all stocks are treated equally, held in some ratio that represents the index you are tracking. If you know Company A is making some bad decisions and is in a poor position for the current market, why would you hold its stock? In index investing you would hold Company A regardless of whether it’s a good bet or a bad bet. In a rising market it doesn’t matter that much, everyone is making money. A rising tide lifts all ships…In a falling market it pays to be more strategic. Dump the losers, there are definitely some companies that were a bad idea to stick with. A decent actively managed fund better be able to out-maneuver an index fund in a falling market.