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Friday, October 26, 2007

John Bogle on Managed and Index Funds

Runner Twentysix posted this in our "Asset Allocation" forum in the facebook group "Investing for the Long Term."

Index funds or managed funds when allocating your asset classes?

Here is some eye opening info from Jack Bogle from his “The Little Book of Common Sense Investing”, Chapter 8.

Jack took a look at the 355 equity funds in existence in 1970 to examine their 36 year track record.

He says the first surprise is that 223 of the funds,

  • 2/3 of the total no longer exist, have gone out of business, mostly from poor performance.

  • Another 60 underperformed the S&P 500 significantly by more than 1% per year.

  • 48 were within 1%, above or below.

  • 15 funds outpaced the market by > 1%

  • 9 funds outpaced the market > 2%

  • “…a superiority that may be due as much to luck as to skill.”

    “When the accomplishments of these nine successful mutual funds were noticed by investors, cash poured in, and they got large….As they grew, the records of six of them turned lackluster. One fund reached its performance peak way back in 1982, 24 long year ago. On balance, it has lagged ever since. Two other peaked in 1983. The remaining three peaked no more recently than 1993.” (one was Lynch’s Magellan Fund).

  • That leaves only three superior funds.
“The core of you program should consist of at least 50 percent index funds, up to 100 percent”…. “Actively managed mutual funds? Yes. But only if they are run by managers who own their own firms, who follow distinctive philosophies, and who invest for the long term, without benchmark hugging. (Don’t be disappointed if the managed fund loses to the index fund in at least one year of every three!)"

This is great advice from John (Jack) Bogle. I recommend investors place 80 to 95% of their investment assets into "core" portfolios that use very low index funds from Vanguard or Fidelity (or anywhere else you can get the index funds I recommend in my newsletter that you can find with lower annual expense charges.)

With the remaining 5 to 20% I "explore" with individual stocks where I try to beat the averages over the long term (my results) while avoiding "benchmark hugging." This means I don't expect my good and bad years to always match that of the major indexes. Higher return comes at a price of higher volatility but you can use the time of lower returns to take profits in what is up to add to what is down.
I heard John Bogle on a TV interview say he uses managed funds the same way I use and recommend my "explore portfolio."

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