Bogle on Buy and Hold and the "Long" of Long-Term Investing

John Bogle, founder of The Vanguard Group, was named one of Fortune magazine's four "investing giants" of the 20th century. Bogle launched the first low-cost index mutual fund in 1975 and has long advocated indexing for everyday investors. We recently had the pleasure of speaking with Bogle to get his thoughts on whether buy-and-hold investing is dead.

What follows is an edited transcript of our interview.

The Motley Fool: Over the past year, a lot of people have questioned the foundations of investing, so let's start with a very basic question in terms of investing in stocks. We all say stocks should be invested for the long term, but in your opinion, how long should the "long term" be? In other words, what time frame should people be thinking about when they are committing money to the market?

John Bogle: I would say forever -- or an investment lifetime. There is no point in doing anything shorter than that. You should be owning stocks -- or much more accurately, owning businesses -- and holding them forever, said to be Warren Buffett's favorite holding period. Trading stocks is obviously a loser's game. Just envision this with me for a second:

Let's assume that each of the stocks in the S&P 500 -- all 500 stocks -- let's assume that half of each stock is owned by traders and half of each stock is owned by holders (long-term investors). So the long-term investors will capture the market return. They own half of the market, they don't trade and they capture, therefore, the entire market return, assuming maybe nominal indexing kinds of costs.

The other half are trading, but they are, of course, trading with each other because the long-term investors aren't trading with them. It follows as the night to the day that the traders will lose by the amount of money paid to the intermediaries, the croupiers in the middle.

It therefore follows logically and mathematically that buying and holding is a winner's game and buying and trading is a loser's game. Simple as that. No way around it.

How long do investors need to be in the market to benefit?

TMF: In terms of an investor's time frame, let's say someone has some money and they plan to retire eventually, what would you say is the amount of time they should be in the market to get the benefits? So let's say they are 50 years old; they plan to retire at 65. Are you talking about money you don't need for five years, 10 years, 15 years?

Bogle: Well, that brings up the obvious question of asset allocation. For stocks, we have a rule that's becoming increasingly popular: that your bond position should equal your age. So your stock position at age 65, say, would be 65% bonds, 35% stocks -- gradually with the stock position going down as you age. That shouldn't change.

You should hold less in stocks as your time horizon shortens, in my conviction, for simple reasons. That is, what happens when you get older? You have got more money at stake, you have got less time for the market to bail you out of your mistakes and you are going to have to rely on investment income rather than human capital income to get by. All of those say "bonds over stocks" as a more important position in the portfolio.

If you said "What kind of a time horizon should I have to be in the stock market?" If you are not in the stock market, I would say 10 years. If you are going to be in the stock market for less than 10 years, I wouldn't do it; it is too unpredictable, too fraught with speculation.

But on the other hand, in my little way of looking at it, the stock market at 15% of your portfolio is a very different thing from the stock market at 100% of your portfolio. Again, when you talk about holding periods, I am talking not about holding stocks; I am talking about holding the entire market. All bets are off if you want to concentrate on a small handful of individual stocks. The risks have never been higher.

The risks have never been higher for some obvious reasons. One, this incredible collapse of our financial system. Two, the increasing power of globalization going back for around 20 years -- which means we have global competition, which will take U.S. companies out in favor of global companies. They will be creatively destroyed rather than being creative destroyers, in the Schumpeterian sense.

Finally, you have this technology revolution, which means that a company that is dumb and happy when the market opens today, may be out of business at the close of the day because someone has a better idea. So with the financial collapse, the global competition with technological innovation, the reasons for holding individual stocks are smaller than they have ever been -- and they have always been small.

And finally, don't forget this: As a group, we are all buy-and-hold investors. That is to say, all of us together own the stock market, so we are buy and holders, but we insist on swapping back and forth with one another. This is an investment system, a marketing system in which our croupiers basically pit one investor against another, knowing that there is only one winner -- and that is the croupier. One sure winner.

TMF: Right.

Bogle: Know that buy-and-hold investing is not dead, but you have to put the asset allocation factor in there.

Back-tested approaches that beat buy and hold

TMF: One of the challenges nowadays in defending buy and hold is that there are so many articles and even books now coming out showing that some other strategy would have beaten buy and hold, such as using a simple moving average or momentum strategies with ETFs. As an example, there is a new book out by Sam Stovall, chief investment strategist at S&P, which lays out seven different basic strategies based on momentum and ETFs. It has all these charts showing how these strategies would have beaten buy and hold over the last 10, 20, and 30 years, so if someone comes up to you and shows you these back-tested returns and then says, "See, this would have beaten buy and hold" -- what is your response to something like that?

Bogle: It is the easiest thing in the world to look backward on paper and pick out strategies that have won. If you can't do that you are, for the want of a better word, a moron. (Laughter.) Right? So these back-testing things look great in retrospect. I mean, if it doesn't look great, it isn't in the book, right?

TMF: Right.

Bogle: I would call books like that a cheap shot. I like Sam, but it is not right because the idea that the past is prologue has been disproved time and time and time again. If I can quote Samuel Taylor Coleridge for you, "History is but a lantern over the stern." Showing you where you have been, but not showing you where you were going. Did I make myself clear?

TMF: Very good point. Yes, I think you made yourself very clear. (Laughter.)

Is the index fund actually actively managed?

TMF: You have called index investing the ultimate buy-and-hold investing strategy, and when people think of index investing, they often think of basing an index fund based on the S&P 500, of which the Vanguard 500 (FUND: VFINX  ) is the oldest version of that. But some critics would say, well, that is actually an actively managed fund, managed by the S&P Index Committee, which does make changes every once in a while. What's your response to that? And a follow up, is there a better index to be basing an index fund on?

Bogle: Well No. 1, the idea that this prescient committee has anything to do with anything is simply balderdash. The S&P 500 has a correlation of 0.99, if they would simply use the 500 largest stocks in America, OK, no committee.

But when you fall out of the top 500, you are out and when you enter the 500, you are in. If you just did that continuously over the last 50 years, the correlation with the index would be 0.99. That committee isn't picking some funny little stock out of nowhere; they are picking the new big stocks. When old companies go out of business, they pick the newest big companies and if somebody gets very big, they will drop an existing old company. But the committee thing is just hokum, just designed to addle the minds of investors.

No. 2, the S&P is a very imperfect index. By operating the way it does, sometimes those new stocks go in and the stocks that are already in it can fall from the great heights to the great depths, and have. There were a lot of high-tech stocks that were put in that index because they got large. It is a very flawed index and I can see that and then I ask this question: If it is that terrible, how the hell is it beating all these money managers all the time? (Laughter.) Think of what a good index would do, right?

TMF: Right.

Bogle: Now we do have a good index and that is the index of the total stock market. That is also weighted by larger companies, but it isn't all-encompassing; now the Dow Jones and the Wilshire seem to be at some kind of odds, but it is the Dow Jones Wilshire 5000, or whatever it is called now and it goes back and correlates perfectly with the University of Chicago CRSP Index, going back to 1928. So we have the data on how the total stock market has done and guess what? The S&P has actually done a little bit better than the total stock market.

TMF: That is interesting.

Bogle: You can see the chart on that in my Little Book of Common Sense Investing. But the "betterness" is simply a matter of time-dependence. You knock out a couple of years at the beginning and the total market has done better than the S&P, or a couple of years at the end. You can play games with it, but the correlation I think comes out to be 0.94 between the two indexes because the S&P is pretty consistently around 80% of the market. Yes, it is a flawed index. Nonetheless, it tracks the market well and if someone can design a better index, the poor money managers will all go out of business.

Small caps and international investing

TMF: Building on that, do you see a benefit for adding other types of investments, whether it is an index fund or otherwise, such as tilting your portfolio to small caps or international investing?

Bogle: I do not. I believe that the markets are highly efficient.

Not perfectly efficient, I'd quickly add, but highly efficient and therefore if there is great value out there, it will ultimately be reflected in buying those securities for a higher price.

If you look at the record over a long period of time, you look at something like small caps, you can find 20-year periods when small cap … I freely concede that in the time-dependent period that French and Fama look at, probably going back to 1928, small cap has done better and what can I say? But there are periods that are as long as 20 years in there -- that is a long time to wait -- when large cap has done better.

Going forward, if the evidence is that persuasive, the small-cap bias or value bias is better, well those prices will reflect it. So if it is true that those things are better, then it won't be true, OK? Because the market will reflect that, so I look at the market as a good arbitrageur of the future against the past.

Now international is a little bit different. I have a home country bias because I earn my money in dollars, I spend my money in dollars, and the dollar is probably in for some trouble, but don't forget a weak dollar will create a lot of value for U.S. corporations. They will be doing more business abroad if the dollar is weak. So that should raise the value to at least some offsetting extent of the market cap of U.S. stocks in general because they do probably 40% of their business outside of the U.S., on average; the bigger companies certainly do.

So what worries me is the time we talk about adding to the diversification mix is usually when these kinds of investments have done very well. When did people start to talk about gold? Back when it hit a high. When did people start to talk about commodities? A year-and-a-half ago, when they were on an all-time high. Emerging markets were at an all-time high.

Then they all, of course, collapsed last year and while international isn't doing very much this year, and significantly better than the U.S., the emerging markets really leaped this year, as you know, and I don't know what to do about that. If you have a permanent holding in emerging markets, which is where I would prefer if I were investing, the developed markets don't do too much for me. They are run just like the United States; Europe is kind of sick. Japan is kind of sick. But if you want an international component, I would lean toward emerging, but I would get into it very slowly and the time to get in was when we were all scared to death last October and November. Just average in very slowly, maybe to the point of 10%-15% -- no more than that if you are equities. ...

We have this performance-chasing bias in this business, which just kills us. And we see and we can measure this; I can't give you the exact number, but you can get it out on Morningstar (Nasdaq: MORN  ) . Let's take a look at our emerging markets ETF and our emerging markets fund. They both lag the emerging markets over the last five years. Both lagged significantly the return of the emerging markets themselves. The ETFs by a colossal amount. I think the difference are our own emerging markets fund and the Barclay's emerging markets fund lag by the fund's reported performance over the last five years ran 2 or 3% a year and the ETFs lag, our ETFs lag by about 7or 8% a year.

It is astonishing. Investors are their own worst enemies.

For more on the buy-and-hold debate:

The Motley Fool owns shares of Morningstar, which is a Motley Fool Stock Advisor recommendation. The Fool has a disclosure policy.


Read/Post Comments (20) | Recommend This Article (105)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 16, 2009, at 5:21 PM, stan8331 wrote:

    If individual investors are simply incapable of beating the market, then we're all morons and the inescapable conclusion is TMF ought to close up shop and stop selling us all snake oil.

    Of course I don't believe that's the case, or I wouldn't be here. The notion that all individual investors are constantly trading companies of random qualities between and amongst each other is a straw man. I think the collective wisdom of tens of thousands of investors, refracted through the admittedly imperfect but nevertheless very useful lens of the CAPS game, combined with independent professional advice from the TMF team, gives individual investors a major advantage over not only the index funds, but also the actively managed funds and various institutional investors.

    I must respectfully disagree with Mr. Bogle - all companies are not of equivalent quality, and the characteristics of strong companies are not so mysterious as to be unfathomable to ordinary mortal investors.

  • Report this Comment On June 16, 2009, at 5:53 PM, RiverRover wrote:

    Hear, hear!! I agree with stan8331.

  • Report this Comment On June 16, 2009, at 5:53 PM, 102971 wrote:

    I also disagree with Mr. Bogle, otherwise I wouldn't subscribe to TMF. That's not to say that TMF is infallible - its isn't. It has recommended some really sick dogs over the years but if you use it as a guide and then do your own investigating you'll do okay.

  • Report this Comment On June 16, 2009, at 6:33 PM, texastar1 wrote:

    I completely disagree with Mr. Bogle. Everything and anything MUST have an exit. I have been in business for 30 years and still am...never heard that you buy and hold EVERYTHING FOREVER.

  • Report this Comment On June 16, 2009, at 9:28 PM, avacava wrote:

    "It therefore follows logically and mathematically that buying and holding is a winner's game and buying and trading is a loser's game. Simple as that. No way around it." - ???

    Sorry, mathematically it's correct only if market, or, rather, values of individual market components are frozen. Without buying and trading market is dead. What if 100% are holding? It's not that simple.

  • Report this Comment On June 16, 2009, at 10:30 PM, memoandstitch wrote:

    "So the long-term investors will capture the market return."

    What if the market return is negative? The long-term investors don't win. Only traders have a chance to turn positive. Buy and Fold worked spectacularly in 2008.

  • Report this Comment On June 16, 2009, at 10:49 PM, kamuirei wrote:

    Bogle is making the case for the average investor... who works and has a family and doesn't put the time in to follow macro trends, let alone individual stocks.Who panics when the market plummets. Who is enthusiastic when the market is at it's peak. For these people, it makes perfect sense to continually invest and remain so with as little in the way of fees as possible.

    I disagree with him on a few things... but that doesn't detract from his point.

  • Report this Comment On June 17, 2009, at 1:55 AM, joandrose wrote:

    The one thing I agree with Mr Bogle about , is that as you age - so your exposure to equities as a % of your portfolio must decrease . The age related % is probably about right . However I also believe that by using my own special and unique advantage - my brain - I can do better by constructing a portfolio of specially chosen and researched quality companies. Clearly, not all companies are the same .

  • Report this Comment On June 17, 2009, at 9:48 AM, wpr101 wrote:

    "Going forward, if the evidence is that persuasive, the small-cap bias or value bias is better, well those prices will reflect it. So if it is true that those things are better, then it won't be true, OK? Because the market will reflect that, so I look at the market as a good arbitrageur of the future against the past."

    This is a magnificent way to put it.

  • Report this Comment On June 17, 2009, at 10:14 AM, Melaschasm wrote:

    If you take all the day traders and average their returns, they will underperform the market as a whole. However, within day traders, a small number of exceptional individuals will outperform the market.

    Think of it like playing poker. If I sit down at home with 10 friends and we play poker, it is reasonable that 5 would be profitable and 5 will lose money over the long run. Furthermore, it is likely that 2 will make most of the profits, and 2 will be the biggest losers.

    If these same ten people sit down at a casino where they are paying a rake (transaction costs), then it becomes much more likely that only 2 people will turn a long term profit, while most people will lose money. If you consider the cost in time it takes to play the game (the time to research stocks), then profitability becomes even less likely. For the vast majority of people, it is better to slowly and steadily buy index funds until retirement approaches, then slowly sell off those index funds so that the cash is available.

    If you consider the tax advantages of 401k and IRA plans, then you should see people significantly beating the after tax average return by consistantly purchasing index funds during most of their life.

    I am a Motley Fool member right now, because I am trying to figure out if I am part of the 5-20% of individual investors who can consistantly beat the market.

  • Report this Comment On June 17, 2009, at 10:19 AM, Oldfool666 wrote:

    "I would say forever -- or an investment lifetime. "

    What sort of damfoolery is that? What's the point of investing if you're never going to HARVEST your investments?

    Unless of course the REAL point is to keep pouring money into a broken system that benefits only the professionals like Mr. Bogle.

  • Report this Comment On June 17, 2009, at 11:19 AM, jkipling wrote:

    Yes, it's not as simple as Bogle makes it. Buying low, selling high is mathematically a winners game thereby debunking that argument that trading is by definition a losers game.

    Sure it's hard to time the market, but it's not as hard to identify seasonal or cyclical lows in large cap stocks, buy around 10% of its low, and sell when its around 10% of its high. Buy again when its back to a low trend. This amplifies return that isn't realized in the hold forever strategy.

  • Report this Comment On June 17, 2009, at 11:36 AM, rrosenkoetter wrote:

    TMF is a funny place for a Bogle interview, because the subscribers here think they can beat the averages over the long-term.

    Everything he said was right... Trading (in aggregate) is a losing game... For every winner, there is a loser, and the costs of trading apply to all...

    Now, can you beat an index average? Sure! Some of those traders are winners... TMF exists because people think they can be the winners...

    For many people though, taking the average is the better solution...

    Here are your choices...

    Take the market average over the next 30 years... (who knows what this will be? It could be 7% a year or 10% or -5% - it's quite likely to be somewhere between 5%-10% though)

    or play the trading game for the next 30 years... You may beat the average or do worse... You'll have to be pretty good every year to beat the trading costs and your occasional losing trades... There are very few professional managers who beat the market year after year after year. Maybe you'll be one of them! (Being small helps us individual investors)

    Me, I'll take the low-cost index fund and plan my savings around a conservative 6% average gain for the next 30 years...

    I also have 10% of money set aside as "play" money, so I come here to see if I can beat the market as well...

    I sleep a lot better a night with my conservative investments though...

  • Report this Comment On June 17, 2009, at 3:42 PM, BigOlDave wrote:

    Q: Is "Buy-and-Hold" dead?

    A: Yes!

  • Report this Comment On June 17, 2009, at 4:23 PM, pantograph wrote:

    Buy and hold is alive and well. Vanguard had some stats on their web site recently that indicated that a significant percentage of their investors didn't panic and buy high and sell low, which is the normal alternative investment approach.

    The winning traders are just those "skilled" at flipping coins. There will be a few who score big and chalk it up to being smart at predicting the direction of the market when they are just temporarily at the lucky end of the statistical distribution curve. And luck has an ugly habit of changing in a flash.

  • Report this Comment On June 17, 2009, at 11:12 PM, vmh104 wrote:

    What Bogle is proposing; buying and holding an index fund; is just another form of gambling. It's no different than using TA to day trade. He claims it's more profitable to hold the index fund. He may be right... but I say it is worse than speculating. Here is why;

    There is nothing wrong with accumulating (or trying to accumulate) wealth. However the market has a very clear purpose to fulfill. Namely to facilitate the natural selection process of businesses. To prop up successful and promising businesses and to weed out bad ones. If we all just bought and held index funds this process ceases. It's the equivalent of investing without any regard for the underlying business. The free market would collapse. It's an absolute disaster.

    If you want to accumulate wealth the best way to do it is to invest in good companies ...and short bad ones... if you know what good and bad companies are this will make you rich... and in an honorable way. Bogle is just presenting another way -supposedly safer way- to game the system.

    V

  • Report this Comment On June 18, 2009, at 8:44 AM, RaulChapin wrote:

    Mr. Bogle is right, most investors are better off with average returns. Some will benefit from applying their individual skills, knowledge and enterpreneurial spirit to try and get an edge.

    Just like in other aspects of life, those who are willing to risk making less than average but who also know they can be rewarded more than average are the ones that either make it or break it.... on average they match the market, but capitalism is not centered on averages, it is centered on individuals... and as an individual, the market is not a zero sum game.

    Now given the above, teh average joe is better off being average, most people here are not the average joe. just the fact that you enjoy reading these articles puts you in a whole separate class of people. If on top of that you invest in something you understand and maybe even enjoy, that puts you further ahead.

    Investing in individual stocks because there can be a higher return is like studying to be an accountant because you might make CFO... if you hate accounting you are not likely to be good nevermind reaching CFO... similarly if you do not like to read about thrends, industry reports, individual company business plans and news etc etc... you are just going to misserably fail...

    Also, if you lose a little money but enjoy what you are doing, then there is a "profit" hiden to the matematicians.... the profit of having fun.

    IF on the other hand, you risk your whole future every day (day trading with all you got) you are playing russian roulette... the odds fo not getting the bullet are pretty good (5 out of 6 on a clasic revolver) but when you do get the bullet... bye bye mr. day trader...

  • Report this Comment On June 18, 2009, at 3:34 PM, motleymarty wrote:

    After the carnage of 2008, I no longer believe in "buy and hold". Really, John Bogle. Invested in mutual funds faithfully for 15 years. Saw half my investment evaporate over several years. If only I'd been paying attention! I thought.

    But no, I made the mistake of trusting in actively-managed funds. Only problem was . . . they weren't actively managed by me.

    Now, with the help of Motley Fool Income Investor, I can write that I had three double-baggers in about a month, have erased initial losses from my own investing, put together my own "fund" and as John Lennon sang, "I'm just sitting here watching the wheels go 'round and 'round". Really love to watch 'em roll!

  • Report this Comment On June 19, 2009, at 12:18 AM, goalie37 wrote:

    Indexing - the belief that rather than thouroughly researching a small number of great companies, it is better to blindly buy 500 companies, many of whom I have never heard of, picked by someone else.

    Efficient Market Theory - the belief that the underlying business value of the 500 companies has increased 40% since March of this year.

    Brilliant. I'll put my retirement money into that kind of thinking.

  • Report this Comment On June 19, 2009, at 11:39 PM, lawtony wrote:

    Graham Benjamin's investing principle didn't rule out short-time buy and sell, margin trading, bonds, stocks.

    He said anything that is with careful analysis is investing, others are speculating.

    He said an intelligent investor will buy an intrinsic undervalued stock and wait. If the market act normal again, he will hold the stock since the stock return is satisfactory even though there is capital gain. However, if the market is over-optimistic, running from one edge to another edge, he will sell the issue since the stock he is holding is too high and not attractive comparatively .

    Therefore, how long will an investor to hold an issue is depend on the market, not by a fixed time.

    Benjamin do emphasis that an enterpriser will hold his stock for a long time.

    But, if we consider those enterpriser shareholders will selling heir shares only during high time and re-purchasing the stock during low time all because they know their issue's real value. Therefore, we could conclude that without a careful analysing of intrinsic value, even "to buy and hold" is a speculation.

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