Friday, January 09, 2009

Mind-Bogle-ling certainty from Vanguard pere

In the Jan. 8 WSJ Vanguard founder John Bogle, chief evangelist for low-cost index investment, implicitly poses as one who could have kept our portfolios on dry ground as the tidal waves rolled in. Among his time-honored - not to say time-worn -- prescriptions was this old guideline:
How much in bonds? A good place to start is a bond percentage that equals your age. Although I don't slavishly adhere to that rule, my bond position accounted for about 65% of my personal portfolio in early 2000. Because returns on my bond funds since then have totaled 50% and returns on my stock funds were negative 25%, bonds are now about 75% of my portfolio, still close to my advancing age.
It's pretty rich that Bogle here recommends (somewhat equivocally) a conservative bond allocation. In 2006, Vanguard rejiggered its TargetRetirement funds and cut the bond allocations to less than half that benchmark: TargetRetirement 2025 (presumably fit for 44 year-olds) went from approximately 40% bonds to less than 20%. Bogle also scolds performance-chasing over the past couple of years in emerging markets. In that same reallocation, Vanguard added an infusion of emerging market funds into the TargetRetirement family.

The TargetRetirement funds, which blend funds invested in broad stock and bond indexes, are supposed to offer one-stop asset allocation, and consequent peace of mind. Hence, when Vanguard airily informed investors by letter that it was increasing the funds' stock allocations , without even bothering to specify the new allocation, I was incensed. I called and learned that in the TargetRetirement 2025 fund, in which I had a bit less than half my retirement assets, the allocation was changing from approximately 60-40 to 82-18. I said, "I didn't pick my asset allocations out of a hat. Who's going to help me preserve them?" The short answer: no one. I ended up breaking up my Retirement 2025 holdings into their component parts (total stock market, total bond market, european and Pacific indexes). And a good thing too, or I would have lost even more in the recent crash than I did in fact.

To be fair, Bogle has been openly at variance with current Vanguard management for some time. He doesn't say so here, but current management fell prey to the very errors he's fingering here.

And even if they didn't... in this piece, Bogle repeats all his mantras: keep expenses low, don't feed the Wall Street advice racket, don't chase expense exotic assets, pick a rational asset allocation and stick to it. I'm a believer; I've done all that -- with a more conservative stock allocation than Vanguard recommends. And I still lost big -- and don't expect to recover any time soon.

Bogle could do with a bit of introspection and rethinking. To wit: while investors shouldn't chase performance and generally shouldn't try time the market, they should always be prepared to question established principles, to consider that unprecedented new conditions can arise at any time, and to adjust accordingly. It would have been prudent to pull most assets out of stocks at several stages of this 16-month collapse. Signs were ample that things were going to get worse for a long time, that losses would quickly mount that could take years to recoup. The Vanguard buy-and-hold approach failed, along with so many other investing principles.

A central Vanguard premise has always been, don't play a rigged game. The rigged game in Vanguardville is money management - the notion that one's own expertise -- or more commonly, hired expertise -- could beat the market. According to Vanguard, the management fees enrich the manager only, severely cutting the investor's profits. All true. But it turned out that the rigging was more pervasive than Vanguard perceived: it was not just the valuation of advice that was corrupted, but the valuation of all assets.

To be fair, again, there's ultimately never any place to hide. You could have all your money in 4% CDs now -- and get killed by runaway inflation in a year or two. But the index-and-asset-allocation strategy has to be questioned with everything else.

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