Jack Bogle founded Vanguard and was considered the “father of index investing,” but he did have a few takes on things that weren't quite right.
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Contents
Video
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Introduction – Jack Bogle
Humans have a tendency to latch onto specific people and believe everything they say is true without assessing the content of each piece of information or advice on its own merits. I explained in another post that this is known as authority bias. Investors tend to do this with figures like Warren Buffett and Ray Dalio, and Bogleheads specifically do this with the late Jack Bogle. Not everything one person says should be taken as gospel, including things that I say.
One could make the argument that Jack Bogle did more for retail investors than anyone else in history. He is one of the most well-known figures in the investing world. He founded the shareholder-owned brokerage firm Vanguard and constantly fought for lower fees and the power of things like passive index investing and diversification.
Bogle definitely espoused some fantastic ideas and very quotable pieces of sage advice over the years, and many of his followers, called Bogleheads, adhere to those ideas with an almost cult-like idealogical rigidity. But there are several areas where it may be wise to deviate from Bogle's advice.
ETFs
Bogle advocated for index investing by buying and holding a mutual fund. Sounds innocent enough. But when the first ETF (Exchange Traded Fund) launched in 1993, he felt the vehicle inherently promoted more trading, and trading is staunchly anti-Boglehead due to higher fees and the folly of market timing.
He was also concerned that intraday pricing of ETFs – as opposed to the guaranteed NAV for mutual funds at the close of trading – would always lead to them being sold at a premium to retail investors, and suggested that investors didn't need that intraday liquidity anyway.
In short, Bogle felt that ETFs were a poor product and were just a way for exchanges to extract fees from investors. In fairness, Bogle's concerns are valid for investor behavior; they just weren't inherent properties of the ETF as a product as he proposed. In any case, even though his theoretical fears never really became a reality, Bogle never changed his anti-ETF stance, and even felt that Vanguard should have never offered them.
Corporate Bonds
Bogle famously commented many times that the Barclays Aggregate Bond Index – which most total bond market funds track – “overemphasizes” treasury bonds. He seemed to prefer corporate bonds and suggested that a fund like Vanguard's BND – which only has about 25% corporate bonds – should contain more of them.
Bogle liked corporates for their higher yields compared to treasuries. And that's true. But the reason it's true is also the reason I don't own or suggest owning corporate bonds – they're riskier.
I explained in a separate post that corporate bonds are inherently much more correlated with stocks, have greater tax consequences, and tend to fall at the precise times when we need them most. For these reasons, historically, an equities portfolio with treasury bonds generated higher general and risk-adjusted returns than one using corporate bonds. This is also why I don't use total bond market funds and prefer to use treasury bond funds.
For the investor who owns any allocation to stocks, I see no reason to own corporate bonds. Yield and a greater risk/reward profile within fixed income assets should only be concerns if the portfolio for some reason is 100% bonds.
International Stocks
Something I've mentioned many times around here is the idea of global diversification. Unfortunately Bogle's championing of passive index investing stopped at U.S. borders. Bogle famously only invested in the U.S. stock market and didn't feel the need or see the reason to own international stocks.
Make no mistake that this is very much an active choice, which is ironic for someone who proposed buying “everything.” Bogle had a few explicit reasons for avoiding international stocks.
Bogle's first reason for solely sticking with the U.S. is that “international investing involves extra risk, ranging from currency risk and economic risk to societal instability risk.” This isn't necessarily a bad thing. These are the unique risks that we're expecting to be compensated for and that are responsible for lower correlations to U.S. stocks. These are precisely that risks that have caused Emerging Markets to be the highest performing corner of the global market historically.
Secondly, Bogle commented that international stocks move close enough with U.S. stocks that they don't offer much diversification. This is arguably true of Developed Markets, but is demonstrably false for Emerging Markets. I've explained elsewhere that Emerging Markets offer unique risks and a reliably lower correlation to the U.S. market. Any purveyor of market history will know Emerging Markets have proved a useful component in portfolios over most time periods.
The last main component of Bogle's US-centric argument is the assumption that the United States leads the globe in productivity and economic output, ergo its stock market will outperform. There are a couple problems with this assumption.
First, GDP and stock market returns have been negatively correlated historically, so the idea is based on a logical fallacy. Emerging Markets stocks have beaten U.S. stocks historically, for example. Similarly, Bogle always noted, as many do, that large U.S. companies get revenue from abroad, but this doesn't really hold any weight. A stock's market risk component will move with its country's stock market.
Secondly, many subscribe to this US-only idea due to recency bias. Zooming out, there are plenty of extended periods historically where international stocks outperformed U.S. stocks, and where a global portfolio had higher general and risk-adjusted returns than a U.S. portfolio. In fact, recent U.S. outperformance means lower future expected returns – not higher – compared to international markets.
The point is that sensible investors must acknowledge that the future is unknowable and invest accordingly, which in my opinion means truly owning everything. This is where the famous “VT and chill” mantra comes from.
I went into the merits of international diversification in even more detail in a separate post here if you're interested.
Conclusion
So to recap, Jack Bogle was one of the greatest minds in investing, but ETFs are fine, treasury bonds should probably be preferable alongside stocks to corporate bonds, and it's likely wise to invest globally in stocks.
What do you think of these ideas? Let me know in the comments.
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While no one’s perfect, it’s arguable that Bogle was right on all three aspects but especially so on international investing.
First, the fees on international funds or commissions on such individual securities are significantly higher than their U.S.-only counterparts.
Second, as many have noted, international diversification works until the moment an investor “needs” it; e.g. Financial Panic of 2008-9, COVID pandemic, etc.
Third, many non-U.S. markets, especially those in developing countries, have economic sectors that are over-represented. Many of these markets are commodities-related. One can counter that energy prices affect U.S. equity markets though the counter to that is their effect is short-term and the dynamism of the U.S. economy allows for adjustments and substitutes, e.g. fracking, shale oil. sustainable energy tech, amongst other solutions.
Fourth, the historical data on international and specifically emerging markets outperforming U.S. markets is often an apples to oranges comparison. Most of these studies use the S&P500 as the comparative U.S. benchmark, which has a large cap bias. Most of the non-U.S. benchmarks’ components are relatively small-cap and even micro-cap stocks. When compared to, say, the Russell 2000 index, even the MSCI Emerging Markets index falls short–far short–even before fund fees, which are much lower for the former.
Fifth, though it may be controversial, it’s a reality that investors should be aware that the 20th century demonstrated that financial markets and capitalism aren’t embraced everywhere in the world. Czarist Russia and pre-revolution China and Cuba, amongst many others, once had active stock and bond trading markets. What happened to their investors leads to a cautionary dictum: caveat emptor.
Finally, even Benjamin Graham, long preceding J. Bogle and the revolutions noted above, counseled investors against investing in even most foreign sovereign credits, let alone their stock issues.
J. Bogle sounded as contrarian taking a stand against Americans investing in international markets as when he was evangelizing index funds. He wasn’t the first professional however to hold that view. So why do so many others advocate “international diversification”? Academia and commissioned sales with fatter margins. Caveat emptor.
Thanks for the long, thoughtful comment, but I’d disagree. Your arguments seem to largely be a product of recency bias, as is usually the case with the pro-US position. I don’t have time to go through it all but I’ll address a couple.
Fee delta is a few bps at most, small enough to not even be worth mentioning.
You mention int’l not working in major sudden crashes. No one worth their salt would expect it to, as we’re still talking about all stocks, for which US and ex-US have a strong positive correlation, albeit imperfect. That’s what bonds are for, specifically treasuries.
From your “fifth” point – it’s funny because I’d draw the opposite conclusion: don’t concentrate wealth in one single country’s stock market, even the U.S.
I’d encourage you to check out my more thorough post on international stocks here.