Mr. Bogle’s Relentless Rules

Those of you who are even sporadic readers of this blog probably know that I am an admirer of the late John C. “Jack” Bogle, the man who started The Vanguard Group investment firm and is considered to be the “father” of index investing. Here is right up there with Steve Jobs and Benjamin Franklin in my pantheon of genius. I recently saw an interview with Bogle where he summarized his entire investment philosophy in Ten Rules. After watching the whole thing, it seems to me that it could be further distilled into just seven, which also happen to encapsulate everything I have come to believe about investing. Here they are.

1. Time is your friend.

The most powerful tool in investing is the power of compounding. We all know that if you lend your money out to a company or an institution (as you do when you put your money in a savings account, or buy a CD or a bond) the institution will eventually return your money to you plus interest. Compounding happens when you reinvest the principle plus the interest that you earned. For example, let’s say you invest $1,000 for 30 years at 7% interest. Without compounding you’ll earn $2,100 ($70/year for 30 years). At the end of 30 years you will have $3,100.

Now consider the same investment but with the earnings reinvested (compounded). At the end of 30 years you will have $7,612.26! That’s around 2 and a half times more!

Modest amounts invested grow tremendously when the return is compounded.  But the key element is time. This is why is it is so vital to start saving early for retirement. It allows you to do a lot with a little. You don’t need to save huge amounts as long as you start early enough. In fact, how much you need to save each month, each year, becomes a simple math problem. I’ve talked about how to calculate this in the past, but if you need a refresher, feel free to contact me for how to run this simple calculation.

Over long periods (decades) the stock market has always outperformed the bond market. In fact, in recent years bonds have had negative real returns, so to achieve goals you’ll almost certainly need to favor stocks over bonds in your portfolio. How much? If you are young you may want to be as much as 80% stocks to 20% bonds and cash. When I started saving for retirement (around age 27) I was 100% stocks for those funds. I didn’t own any bonds of “fixed income” investments at all until I was in my 50s. Today I am 80% stocks and 20% bonds and cash. I am willing to give up some growth to reduce volatility. At least that is the theory.

But which stocks to buy, how do you pick the winners? You don’t.

2. Own the entire market.

Anyone who tells you that they know what to buy is lying. When I was young I thought I was smart enough to beat the market. Fortunately, I had the humility to only try with small amounts of “play money.” Guess what? I was wrong! Every individual stock I ever bought underperformed the market as a whole during the time that I owned it. Every stock except one, and that was just stupid, dumb luck. I bought the stock because I loved the company, not because I thought it would do well. In fact, I expected I’d lose most of my investment. The following year that company released a product that would go on to become one of the most successful in history. So as it happened, I did okay on that one. But only that one!

All investors taken together are going to be just average because for every buyer who is right, there is a seller who is wrong. You are not smarter than everyone. Neither is your money manager. So keep it simple, buy everything. Today this is easily done through a mutual fund that is indexed to the entire market. If the whole market is up 10% this year, your fund will be up 10%. If the market drops 20% (as it did last year) your fund will drop 20%. But over time the market trends upward. It seems contrary to the American ethos to accept average, but average is plenty good enough in the long term. You need own no more that 2-3 funds to capture the entire global stock and bond market. Easy to understand, easy to manage.

3. Impulse is your enemy.

It is natural to want to buy when the market is going up and to want to sell when the market is tanking. You must resist these impulses. If you are working, you must continually keep adding to your investments week in and week out regardless of what the market is doing. The day-to-day gyrations are a distraction. Ideally, don’t even peek at your investments. Bogle suggested shredding the statements without looking at them. Most of us can’t do that, but think in terms of decades. Don’t even think about selling until you are ready to retire.

4. Kill the costs.

The biggest drag on your return is costs, and often they are invisible. Here are the biggest costs you face.

Money manager fees. This is the cost an advisor is charging you to manage your money. Very often these fees are structured as a percent of your assets they are managing. Commonly these range from .75%-1.5%. These fees devastate your return. Because of compounding (see number 1) these fees can cost you hundreds of thousands over the course of your life.

Here is an example. Let’s say you are 30 years old and you begin to invest $10,000 per year until you are 67 (37 years) and your return without fees is 7%. When you turn 67, you’d have $1,603,374.

Now let’s say your advisor skims 1% off the top each year. At 67 you’d have just $1.27 million. And that is before trading costs or other fees they may be incurring. Imagine an accountant who wanted 1 percent of your net worth to do your taxes every year! Or a lawn care person who wanted 1 percent of the value of your house to mow your lawn! You’d think that was insane.

You can’t outsmart what Bogle calls the “relentless rules of humble arithmetic.” If you are paying an advisor 1% that turns into a colossal amount of cash.

Not to say an advisor can’t be helpful, but if you need one find one that charges a flat fee. $300-$500 per year doesn’t seem unreasonable to me (and there are plenty of flat fee advisors out there) but you may find that you only need to meet with them once or twice and then every decade or so. If you are a client of an investment firm like Fidelity or Schwab, they will provide you with an advisor for free but I have found that what they know varies widely and they may suggest products that generate fees for their firms or themselves. Be sure to ask questions and be clear about what you want. If you can, try to get one that is a certified financial planner but that too is no guarantee of competence.

If you are paying someone a percent of assets under management, you are being hoodwinked. There is no nice way to say it.

Other sources of costs are trading fees, mutual fund expense charges, or front end load fees. But if you are purchasing a straightforward index fund from Fidelity, Schwab, or Vanguard, you are probably going to pay an expense charge of .05% or less. That is very small. Index funds have low costs because they are just following the market. They don’t need to pay someone to make decisions about what to buy and sell. A computer algorithm can match the index for a very low cost and that is all you need.

So kill the costs. Keep the savings for yourself.

5. There is no escaping risk.

If 2021 taught us anything it is that owning cash is not risk free. With inflation running at 8-9 percent, cash is losing value every day. With bonds returning 4-5%, their real return (after inflation) is negative too. Stocks at least have a chance of keeping pace with inflation because corporate earnings increase along with inflation (generally speaking). Yes, in the short term stocks are more volatile than cash, but we don’t care about the short term do we? (See number 1.)

Obviously, I am referring to long-term investments here, like retirement funds. If you are saving to buy a house in the next few years or the education of a child just a few years from college, volatility is to be avoided. Holding cash, bonds, or CDs makes perfect sense to provide for these near expenses.

6. Don’t fight the last war.

It probably goes without saying at this point but you shouldn’t be adjusting your investments based on what happened this year or last or what you think might happen next. Making changes because inflation was low or high last year won’t work. This year will be different. Last year’s best mutual fund probably won’t be this year’s winner. What goes up, must come down and vice versa. Stick with your plan and stay the course.

7. Stay humble and remember reversion to the mean.

The market goes up and the market goes down but by definition it must always return to the mean. Once you accept that you are guaranteed to be average (as long as you buy the whole market and hold if forever), you will sleep better. But do remember although the American stock market has returned roughly 12% from 1957-2021 there is certainly no guarantee that it will do so in the years to come. Growth of GDP has slowed recently and with it the growth of American stocks. Although you can be assured of being average, you don’t know what average will be. If you plan on a return over 30 years of an average of 6-7 percent on a portfolio of 80-90 percent stocks, you will likely do ok.

Bogle suggests that a reasonable guide to what stocks will do over the next decade is to take the current average dividend yield and add earnings growth which roughly tracks growth in GDP. By this measure he thought in 2019 that the market in next decade might yield 7%. He ignores speculative growth because that cancels itself out over time.

When in doubt (which is always), lower expectations will force you to save more and be more frugal, thus increasing the likelihood that surprises will be good ones. Above all, live beneath your means. Finding yourself able to retire before you planned and having to decide if you want to keep working is a better problem to have then being unable to work as long as you’d planned and not having enough to make ends meet or living a smaller retirement than you’d hoped.

Of course there could be a personal situation (health, divorce), or national, or global events that could drive your return much lower: an economic depression, war, or the collapse of the American Empire. All of these things have precedence in history. Ultimately there is no safe store of value because there is no permanence. But if any of these things happen, there will be many, many people who will be in a similar situation and we will do what humans have always done. We will try to figure it out together. Until then, for my money, the father of index investing knows best.

What the Market Doesn’t Know

In June of 2020 I reconnected with a childhood friend. Chris and I met when I was just four. Our dad’s worked together at the Social Security Administration in Baltimore. When I was around 14 he moved to Colorado Springs but we continued to see each other when I spent several weeks with his family each summer. In our late teens we fell out of touch but reconnected once in 1994 when the association I worked for had its annual meeting in Denver. Then ensued several decades of silence.

In Fall of 2020 Barbara and I spent most of September and October subletting my daughter and son-in-law’s apartment in Lakewood, Colo. during the last few months of their lease, they having bought a townhouse. It was a super fun place to hang out during the pandemic. Barbara was still working at the time, but I had been unemployed since June 2020 when I had left my job as the Hillel director at the University of Rochester.

I found Chris though social media (before I left social media) and he picked me up early one morning in Lakewood and we went fishing. Well, he went fishing. I watched and jabbered on as he spent several hours failing to catch anything. It was a wide-ranging conversation.

He had also recently left his job as a teacher of history and economics, and we caught up on some 20 years of family and life history. It is a cliché to say that we connected as if no time had passed, but it was kind of like that, at least for me. Eventually we came around to talking about what it was like not to be working.

At that point, I wasn’t sure if I was retired or just unemployed. At a relatively young 59 years old, I said that I still had energy and still wanted or was perhaps even obligated to continue to contribute to society. When I left Hillel, I had thought I might look at another interim director job. But the pandemic made finding such work, highly unlikely. I actively not looking for work.

It was not that I wanted for something to do, but I did feel like I had more capacity than was being fully used. At one point Chris said (like an economist), “If you are able to afford to quit working the market has determined that your contribution has been sufficient.”

It was useful argument and one that I used with myself over the next few years when I was tempted to explore a job opportunity.

But last week after two and a half years of ‘retirement,’ I accepted a part-time position as the Finance Manager for the Jewish Grandparents Network, a nonprofit that was founded and is run by my good friend and Hillel colleague, David Raphael.

Here’s why:

• I continued to feel that I had something to contribute and wanted to use some of the skills that I had acquired over 35 years in the nonprofit work force.

• I missed the comradery and feeling of being part of a team that working can bring.

• I love accounting. It’ s the one aspect of the human world that is mostly black and white. Debits always equal credits. When an account balances to the penny, it is satisfying in a way few other things in life are.

• The opportunity seemed ideal. Working on a team where everyone was working remotely, setting my own hours, and working from wherever I happened to be. I would be going in knowing that I liked and respected the leader of the organization and enjoyed working with him and trusting that I would feel the same about whomever he hired.

• The validation and affirmation that comes with someone being willing to pay you for your work. The feeling that your knowledge and labor has value to others.

• Working even a few hours a day, gives your week a structure, an anchor, and forces you to be a bit more disciplined if you are going to get in your exercise and other errands along with your work. Tempted to stay up until 1 am watching The Bourne Ultimatum? Sorry, it’s a work night.

• I didn’t have to apply. He asked me to do it. It is nice to be wanted.

Finally, if I am honest, there is the paycheck itself. Because no matter how many times I tell myself that the retirement math is solid, there is a psychological benefit that comes along with earned income even if it is only a supplement to IRA draws.

If I want to buy some lox to enjoy with breakfast, what the heck, I’m working!

If I need a new iPhone this year (who doesn’t?), why not, I’m working!

If I want to fly first class to Europe? Okay, get a grip!

At the very least paying a bit more into Social Security will help support the system in the short run and may increase my benefit a little when it is time for me (or my wife) to collect it. (I should live so long!)

So, this week, I returned to work, and I guess I am a tiny fraction of those fabulous jobs numbers that the president was boasting about. So far, I am enjoying the work and the folks I am working with. And, yeah, I feel that I am making a contribution, even if the market says, ‘enough already!’

There are things that even the market doesn’t understand about sufficiency.

Delicious Denver

After a few hours wandering aimlessly in the Denver Art Museum on the MLK holiday, our daughter took us to a nearby bakery, Leven, where I had one of the best sandwiches of my life. Fresh mozzarella, roasted tomato pesto, arugula, on sea salt and rosemary focaccia. The mozzarella was melt-in-your-mouth soft and tasted simply of fresh milk with a light tang. The tomato pesto was bright and acidic with a touch of heat and the bread was voluminous, yeasty with a bit of crunchy salt on top.

My choice of side was spicy, marinated green olives that were picante and delicious, while my daughter had the bread and butter cauliflower pickles and Barbara chose the marinated artichokes. The sandwiches were huge and we all took half home for another meal. My son-in-law purchased a huge loaf of sourdough (1 kg?) to bring home.

I was motivated to try to make my own mozzarella when I get home. There are lots of videos on YouTube on how to do it. Alex is my go to.  I’ll report on the results.

Denver is a culinary powerhouse and especially welcome after you have spent three days driving through southern Indiana, Missouri, and Kansas. In spite of booking a hotel with a kitchenette, we have succumbed to the temptation to dine out multiple times. We had an incredible vegetarian Nepalese meal at Sherpa House in Golden, Colo. and a decent wood-fired pizza in the Belmar town center in Lakewood though not worth the $62 price tag for lunch for four.

Tuesday morning was spent transferring ownership my mom’s low-mileage Honda Civic to my son (Thanks, Mom!). This required an emissions inspection (recent Maryland inspection not accepted) and a VIN verification (30 min./$50), then a trip to the County Courthouse (known locally, I learned, as the Taj Mahal thanks to its central dome) for a Colorado title and plates (30 min/$68). As we were leaving the courthouse, plates in hand, my son wryly noted that if our goal that morning had been to purchase a hand gun, we would have completed our task much quicker, probably cheaper as well.

With little time left before my son needed to be at his graduate school class, we sped off to Carmax to unload his old Mazda 3. Just 20 min later, we walked out with cash.

After our deep engagement with American bureau-crazy, we stopped for a well-deserved classic burrito from Bonfire Burritos. It was chilly sitting at the tables in the plastic wrapped deck area but the cheesy beans, roasted peppers and hot sauce warmed things up nicely.

Is there anyone on this planet who doesn’t love a burrito?

A lighter dinner was appropriate so Barbara and I prepared a meal of salad, roasted brussels sprouts, and potato latkes for the family at my daughter’s pad. Yes, latkes in Tevet! We had no applesauce or sour cream but there was plenty of ketchup so….

We were going to begin the journey home today but with up to a foot of snow expected, we decided to delay our departure for a day or two. Damn!

Oh well, where are we going for lunch?