60 Years and Counting

We were encouraged to see recently that John Bogle, the founder of Vanguard Funds, has come out with a new book entitled “The Clash of the Cultures”. Bogle has been in the investment industry for 60 years. He has seen it all, the good and the bad. He was an early advocate of low-cost index fund investing, which was the premise on which he founded Vanguard Funds. It is a good thing for our industry that people like John Bogle and Warren Buffett have lived so long and experienced so much and are willing to share their experience and insights with us.

Bogle’s book is highly critical of the financial services industry, primarily because of what he believes has been a) too great an emphasis on short-term thinking (meaning “trading” or speculating over sound fundamentally-based investing), and b) the industry placing too great an emphasis on its own profit at the expense of the investor. This has come into particularly stark focus in the wake of the events of the past 5-10 years. Some of the investment insights he points out in his book are important:

               

·         Despite the problems our economy is now experiencing, Bogle believes long term investors need to hold stocks to capture growth.

·         The outlook for bonds is abysmal, but alternatives are hard to find.

·         Investors need to have a long-term view and stay the course. Trying to time or second-guess the markets is a losing proposition.

·         Everyone in the industry needs to adopt a fiduciary standard that puts the interests of the client first.

From a financial planning perspective, we could not agree more with Bogle. The abuses of our industry over the past ten years have hurt not only individual investors but the economy as a whole, and while as a nation, we have started to make some progress on addressing these issues, the healing process will take many more years. With respect to investing, we agree with Bogle that diversification and a long-term view are critical elements of successful investing. As financial planners, we believe adequate diversification of client portfolios is a cornerstone of good investing to not only reduce volatility but also capture returns of multiple market sectors. Fundamental research is important not only in identifying attractive investments, but also in maintaining and supporting the fiduciary standard which Bogle advocates: basing decisions on reasoned logic and avoiding speculation. We also believe that time mitigates risk, which supports the importance of long-term investing. Why? Because data on long-term economic trends allows us to place greater confidence in developing a financial plan and investment roadmap and incorporating that confidence into the discipline that a sound financial plan provides.