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John Bogle: 4 Keys to Investing Safely & Successfully
Aspire, Thought Leaders | 02 December 2015
By: Lim Si Jie
Articles (169) Profile

John Bogle, founder of Vanguard Group, the world’s largest mutual fund company, has revealed his investing strategy that made him such a successful passive investor.

In essence, Bogle maintains a basic portfolio that follows an asset allocation known as the 60-40 rule — 60 percent in a market index fund and 40 percent in a bond index fund. This allocation has been his style of investment for many years.

He believes that such an allocation is able to provide noteworthy investment returns during bull markets, while providing downside protection during bear markets.

Investors Takeaway: Creating an Investment Portfolio like John Bogle

There are four particular steps that you can take to mirror Bogle’s worry-free investment portfolio.

1. There is no need for rebalancing – once a year is more than enough.

We often hear investment advisors quoting the elusive word “rebalancing”. To Bogle, rebalancing is just to sell your winners so as to return your portfolio to its asset allocation. This is because research has shown that you will reduce your risk of a big loss in the short term in your portfolio with regular rebalancing.

However, according to Bogle, if you’re really in your investments for the long term, such tinkering may be more trouble than its worth. You may end up with taxable gains, and you will certainly end up incurring additional redundant trading costs that could have been prevented.

From Bogle’s point of view, he doesn’t rebalance his own portfolio, and he believes that “if you want to do it, once a year is probably enough”.

2. Invest in markets that you understand

Bogle famously keeps his portfolio entirely in U.S. markets. He believes that the U.S. market has the best investor protections and legal institutions. Most importantly, it is a market that he has strong knowledge on.

But Bogle’s advice goes against conventional wisdom and even some Vanguard Group research. In 2014, Vanguard research suggested that investors allocate at least 20 percent of an equity allocation to non-U.S. stocks.

However, Bogle pointed out the inconsistency of even calling the rest of the world “international”. Many large U.S. companies derive 50 percent or more of their revenue from outside the United States, so buying a fund comprising the U.S. market de facto gives you exposure to international markets.

3. Diversification means bonds, nothing more than that.

Historically, stocks have produced the best returns over the longest period of time. A risk-taking investor will allocate 100 percent to stocks in their portfolio and keep it there for years.

But John Bogle pointed out a systematic risk in an all-equity portfolio: In 2007–09, such a portfolio would have been a disaster. Your portfolio would have eventually recovered, but what if you needed the money during that time span?

Bogle uses bonds to reduce equity risk in his portfolio as he is comfortable with a simple portfolio. He increases the bond allocation as he ages to reduce the risk of a sudden and massive drop in value.

4. If you make the ‘simple’ portfolio choices, you’ll spend a lot less time worrying.

The genius and beauty of Bogle’s portfolio is its simplicity. Bogle believes in creating a portfolio that is easy for him to track and understand, and therefore stick to.

While you might like the challenge of trying to maximize your returns by adding diversification or rebalancing, it is important to be sure that you can stick to what you decided and won’t sell in a panic or buy in greed. The fundamental thing you want from your portfolio is a sense that it’s the right choice for you over the long term.

A plan that uses low-cost, diversified investments should take care of the other big risk in investing — emotions-based decision-making. For Bogle, being an investing master isn’t about the exact makeup of his portfolio; it’s about tailoring it to what feels right for him, believing in it and sticking to it.

 

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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