John Bogle: The Stock Market Seems To Be Ignoring The Big Risks by Christoph Gisiger, Finanz und Wirtschaft
John Bogle, founder of the Vanguard group, spots risks of a severe setback in the stock market but encourages investors to stay the course even if the ride gets bumpy.
John Bogle, we’ve seen some wild swings in asset prices over the last few weeks. What are your thoughts when you look at today’s financial markets?
I look at them a little nervously. We live in a very uncertain and fragile world with big risks. Now, we have a little bump going on here and if it gets more serious who knows really what’s going to happen. Sentiment in the stock market has been quite bullish and sometimes that bullish thinking changes for no apparent reason. Fundamentally, today things are not very different than they were at the end of December when the S&P 500 climbed to a new record high. But now, the market seems to have taken on a nervous cast and there is very little anybody can do about that.
What’s the biggest risk for stocks right now?
There are financial risks, economic risks and the risk of war rising all over the world, particularly in the middle east. And those are big risks, not little ones like corporate earnings which are easy to measure. But the markets looks at them and says: «We don’t have to worry». Is the market right? Well, only time will tell. I’ve been saying for several years that we have a stock market that seems to be ignoring those kind of risks. I think we’re seeing a turn in lower global economic growth and a turn in lower corporate earnings and I’ve been telling people for years: When you can’t afford a 25 or 30% drop in the stock market you should not be in the stock market. I have no reason to think this will be a correction that strong but it easily could be.
So what would be your advice for investors?
ell, what I’m trying to do and what I’ve been trying to do all my career is to persuade individual investors that they should ignore the fluctuations in the marketplace and continue to invest. When you get market declines – even for a protracted time – keep investing because when you use the same amount of Dollars you are getting more and more shares. So if you continue to invest you’re taking advantage of the ever descending prices a bear market brings. And don’t stop because things are getting cheaper. That’s what’s so funny: In your everyday life you don’t like it when prices go up. But in the stock market you do. When the price goes down for steak you love that. But in the stock market you hate it. So try to take the emotions out of investing.
A reason for concern is the ample volatility in the currency markets and an almost unprecedented uptick in central bank interventions. What is your take on the new bond buying program of the ECB?
They waited a long time to do it and they probably should have done it at the beginning of the European debt crisis. The European community was too heavy on austerity and too light on making money easier.
So what kind of return can investors expect from US stocks?
To get what I call the investment return, I add together the current dividend yield and the assumed earnings rate for the next decade. That’s the equipment we have to do this analysis. Today, the dividend yield is 2%, and I think we probably will be able to get 5 or 6% in earnings growth annually over the next ten years. So in total that’s a 7% investment return, even if we use the lower number. Then there’s the question about a special return. That’s the change in the P/E multiple. Normally, if the P/E ratio is above 20 it’s likely to go down during the decade. So you can offset a point. In total that would be a 6% return on stocks over the next decade. That’s below the long term norm of 9%. But what are you supposed to do? That’s my question really.
What do you mean by that?
For instance, you could choose to not invest at all. But that’s one way to make sure you will have nothing when you retire. Inflation will eat away your cash. So it’s really about stocks and bonds: Hope for the best over the long term, hope for the productivity, hope for the imagination and hope for the competitiveness of modern capitalism to produce better and better goods and services for lower and lower prices. This is not a risk free choice. But I acknowledge that a portfolio with stocks and bonds is the lowest risk way of proceeding that I know of. So just make sure that your asset allocation suits your needs. And if it suited your needs in December it is almost certainly going to suit your needs today. So I think what’s best for almost all investors is to stay the course.
See full interview with John Bogle here.