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John Bogle: Ignore The Noise; Buy Low-Cost ETFs
Aspire | 30 September 2015
By: Lim Si Jie
Articles (169) Profile

John Bogle: US Economy Still Not Strong Enough for Rate Hike

Legendary investor Jack Bogle believes that the Federal Reserve did the right thing by not raising interest rates at its most recent FOMC meeting. He feels that there are still plenty of challenges ahead for the US economy due to the messy state the whole world economy is currently in.

Bogle, the founder of the world’s largest mutual fund company The Vanguard Group, described the US economy as “adequately strong but not vibrant,” citing wage pressure and a small workforce as main reasons.

Problem: Falling Exports from Strengthening Dollar

The U.S. economy is primarily driven by domestic consumption where household spending makes up about 68 percent of GDP. However, exports are growing in importance to the US economy. In the past seven years, the US started breaking export records, aided by a weaker dollar. By the end of 2014, exports rose to almost 14 percent of GDP.

As shown in the chart, American exports stumbled at the start of 2015. Exports as a percentage of GDP dropped year on year from 13.6 percent to 12.8 percent in the first quarter. US exporters failed to get back up in the second quarter, as exports-to-GDP ratio slipped to 12.7 percent.

Deutsche Bank: Rate Hike Will Still Delay If Market Is Down

Here’s another thing to note: The Fed’s decisions are almost entirely dictated by the stock market.

According to an analysis from the global markets research group at Deutsche Bank, rate cuts have followed a 5 percent annualised average decline in the S&P 500 since 1994. In contrast, when the Fed held rates steady, stocks had rallied by 11 percent (annualised) since the previous meeting.

Since the beginning of 1994, there have been a total of 30 rate hikes. In 29 of those cases, the S&P 500 was up year-over-year at the time of the cut. The only other time was a 1.9 percent drop in the year prior to the February 1995 meeting.

Now, let’s forget the dot plots, with which individual Fed members pin their expectations for rates. In over 20 years, the Fed has never hiked once with the market down year-over-year. If we were to use that logic, should the S&P 500 be below 1989 points in December, Deutsche Bank would expect another delay of interest rate hikes at the next FOMC meeting.

Investors Takeaway: Ignore the Noise, Buy ETFs Using DCA

According to Goldman Sachs, the rest of the year remains pretty difficult for active investors seeking to beat the broader market thanks to a low return dispersion and a stock market selloff. However, low cost Exchange Traded Fund (ETFs) that track market index can allow investors to capture market gains.

Considering the amount of volatility and noise in the market, John Bogle’s advice to investors is to “just ignore all the noise”. A method that investors could adopt to help them ignore all the noise is the dollar-cost averaging—buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price.

John Bogle believes that investors should be happy when a market goes down because it highlights a time period of cheaper buying opportunities.

“When the markets go way down, it’s great for buyers and bad for sellers,” he said.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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