Outside the Box: Who’s afraid of the Bogleheads?

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“Why does anyone listen to Paul Merriman?”

That is the provocative title of an online discussion I recently saw on a chat site maintained by followers of the late Vanguard founder John Bogle.

Perhaps this was meant to set up a rivalry of sorts between Bogle and me, but I don’t really buy into that idea.

I interviewed Bogle many times over the years. And actually, he and I were in lockstep regarding the most important things investors should do: keep things manageable, keep costs low, avoid picking individual stocks, and avoid market timing.

Read: The legacy and luck of Vanguard’s Jack Bogle

With that said, I teach diversification more robustly than he did, and that seems to get me in trouble with some of his followers.

A group of Bogle’s followers, who call themselves Bogleheads, believe strongly — sometimes passionately — in Bogle’s teachings. And when my recommendations differ from his, some of them apparently conclude that one of us has got to be right and the other wrong.

We’re both right

In fact, his views and mine are both “right.” Any investor who faithfully follows either what Bogle taught or what I teach is likely to be very successful.

If you want to read what the Bogleheads had to say in this online forum discussion, you can find it here.

John Bogle himself is not immune to being pilloried by some members of this group. To wit: “Why do people listen to Bogle when Bitcoin
BTCUSD,
-1.86%
,
Tesla
TSLA,
-0.77%
,
Gamestop
GME,
-3.20%

and ARKK
ARKK,
-2.98%

have blown the doors off of index funds recently?”

Later in the thread, the author of that post claimed it was meant as sarcasm. But actually the comment reflects a very common view among young investors who haven’t yet learned a few hard lessons.

One of them: There’s no risk in the past.

A second: You always know today what you should have done sometime in the past.

A third: You can’t go back and invest retroactively.

I could discuss that tension between the “I can pick the best stocks” approach (for which there is no convincing evidence) and “those boring old index funds” (for which there is ample evidence).

But I’d rather use this opportunity to look at a few no-nonsense equity portfolios made up of low-cost index funds.

The first is a two-part combination advocated by Bogle (and many of the Bogleheads as well). It’s allocated 70% in the total U.S. market index and 30% in the total international market index.

The second is an alternative that I advocate — combining four U.S. index funds that follow large-cap blend stocks (very similar to the S&P 500
SPX,
-0.30%

), large-cap value stocks, small-cap blend stocks and small-cap value stocks.

Read: The reason Jack Bogle doesn’t fly first class says everything about his legacy

The messenger, not the author

And by the way, I did not invent this combination.

Many years ago, two University of Chicago business school professors, Eugene Fama and Kenneth French, discovered that large-cap stocks and small-cap stocks often go up and down at different times and rates. The same is true for growth stocks and value stocks.

These facts, together with superior long-term performance by small-cap stocks and value stocks, provide investors with good diversification and (usually) higher performance.

The historical evidence

Over the past 51 calendar years, from 1970 through 2020, John Bogle’s two-part equity portfolio compounded at 10.9%, slightly above that of the S&P 500 (10.7%).

The four-fund portfolio that I recommend achieved a compound return of 12.2% over that period.

For long-term investors willing to manage and rebalance four equity funds, that’s a very significant difference. Over a lifetime of investing, every extra 0.5% in return can be worth $1 million.

In addition, as we shall see, the diversification of this four-asset-class combination proved to be a godsend during some very rough times in the market.

At its core, the choice between these two portfolios is between more diversification (Paul Merriman) and less diversification (John Bogle).

I’ve given you 51-year track records, but many investors are most interested in what’s happened recently.

So let’s look, decade by recent decade, at how these two combinations did.  

Many investors regard recent performance as the most significant, so here’s a look at compound rates of return from 2010 through 2019.

  • Bogle’s portfolio: 11.4%

  • Four-fund portfolio: 12.3%

That decade was relatively favorable for equity investors. But the previous one, the first of this century, provided a rough roller-coaster ride, including two major bear markets between 2000 and 2009.

  • Bogle’s portfolio: 0.9%

  • Four-fund portfolio: 4.7%

By the way, during that decade the S&P 500 had a negative compound return of 1%; the total market index broke even.

Looking just at that 10-year period, which of these portfolios would have given you confidence to continue investing money?

The decade of 1990 through 1999 included a huge bull market for U.S. stocks. The two portfolios performed similarly.

  • Bogle’s portfolio: 14.7%

  • Four-fund portfolio: 15.4%

Likewise in the 1980s, both portfolios performed very well, with nearly identical results.

  • Bogle’s portfolio: 19.0%

  • Four-fund portfolio: 18.8%

Back in the 1970s, the diversified portfolio showed its stuff as U.S. stocks suffered a bad bear market.

  • Bogle’s portfolio: 8.4%

  • Four-fund world portfolio: 10.5%

This comparison is between only two combinations, and of course endless variations are possible.

If you’d like to see year-by-year and decade-by-decade results for 10 no-nonsense portfolios, you’ll find them in this table.

Choose what gives you confidence

You now have access to a lot of data, but knowledge alone won’t produce good investment results.

That knowledge is useful only to the extent that it gives you the confidence to make good decisions about choosing and managing your investments.

And ideally, that confidence will give you the strength and discipline to stick to your plan, whatever it takes, so your investments can do their thing through the good times and the not-so-good times.

Investors who adopt and stick to any of these no-nonsense portfolios over the long term should do well. And once they have sufficient confidence in whatever approach they prefer, they should not have to worry about whose beliefs are better.

If I had to choose between the theoretically “perfect” strategy without the confidence to carry it out or a “good enough” strategy with the confidence to maintain it, the latter would certainly be my preference.

For a discussion of a dozen reliable no-nonsense portfolios, check out my latest podcast: “Why does anyone listen to Paul Merriman?”

Richard Buck contributed to this article.

Paul Merriman and Richard Buck are the authors of We’re Talking Millions! 12 Simple Ways To Supercharge Your Retirement.

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