How Many Index Funds Should You Own?

Vanguard founder, Jack Bogle, provides some guidelines for age-based investment decisions with index funds.

Mar 16, 2014 at 8:45AM

John C. Bogle is the founder and retired CEO of The Vanguard Group, the largest mutual fund organization in the world, comprising more than 160 mutual funds with current assets totaling more than $1.4 trillion. Since his retirement from Vanguard in 1996, Bogle has spent his time studying, writing, and speaking on the financial markets and mutual funds. He is president of the Bogle Financial Markets Research Center, created in 2000 to support his ongoing work on behalf of investors.

Getting the right investment mix depends partly on how old you are. Many investors have heard the advice that your bond position should equal your age; in this video segment Bogle offers some insight into additional factors that play into that decision, that are sometimes overlooked.

We hope you enjoy this exclusive interview with Jack Bogle, the father of index funds himself.

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Tom Gardner: Let's say somebody is indexing entirely. How many funds should they own, as an individual? What's too many and what's too few?

Jack Bogle: You can certainly do it with one, and that would be something like the Vanguard Balanced Index Fund. It's 60% total stock market, 40% total bond market, both U.S. That's fine.

Gardner: A person out there could simplify their lives; make sure they're paying off all their high-interest debt -- it's gone -- they're saving a portion of their salary each year, and they're putting it all in the Vanguard Balanced Index Fund. That three-step approach is going to improve the outcomes for the majority of investors out there, number one, and you think it's completely reasonable to put it all in a single fund.

Bogle: There are obviously a lot of nuances here, and one of them is if you're younger I would think you would want to be 80-85% equities, and if you're older I would think -- although interest rates are so terrible today you have to rethink all these things as the markets change -- but older maybe 25% equities and 75% bonds, something like that.

This is kind of age-based -- your bond position should equal your age -- but that's a rule of thumb and, interestingly enough, it shows a gap in the way these target-date funds, that are very popular today, are structured, because they ignore the fact that 85% of their shareholders have Social Security.

And Social Security, when you begin it, has capitalized value -- the stream of future payments you will get that is capitalized at around, say, $350,000 -- if you have $350,000 totally invested in an equity index fund, you're 50/50. You don't look at it that way, and your behavior may get you in trouble that way, because you've got too much in stocks.

What people should be doing, honestly Tom, is stop looking at the silly stock market every day and look at the cash flow they get.

Social Security, those payments are going to continue. They're going to grow with the cost of living. I'm certain -- as certain as I can be -- that Social Security will be repaired, simply because it has to be. I don't think its future is in doubt, if we can just wake up a few of those people down in the nation's capital.

For stocks, you probably want to look at more of a dividend bias. You could buy a high-yield dividend index instead of the total stock market index if capital flows. That dividend -- if you look at the stream of dividends -- it makes the stock market look violently volatile. The dividend stream goes up, up, up.

The fact of the matter is, there have only been two significant dividend cuts since 1925. One was in '29-'32 and the other was a few years ago, 2007-'09, when all the financial companies pretty much eliminated their dividends. We've already recovered from that' that's over. The Standard & Poor's index is paying more dividend now than it was before the drop.

All of these things are clear in the past and, in a lot of ways, that doesn't matter. But if you assume that American business grows and America grows, that dividend stream will keep going up -- and as people ask all the time -- corporations have got huge amounts of cash so dividends should not be jeopardized, absent some real problem in the world and in the economy. People should be aware of that.

Nothing is a lead-pipe cinch in this world. Actually, it's sort of amusing! You have a couple of big risks out there. You know about the economy. You know about the international, kind of hanging on by its own. You know about the dollar. You know about the Federal Reserve buying all those securities and trying to bid the prices up of assets; not a particularly wise move.

You have to assess those risks and try to make some kind of a judgment, however difficult, about how they come out. But you also have to realize a couple of things. The second set of risks is really the incomprehensible risks, like nuclear warfare or a meteorite hits the U.S.

Gardner: Or robots begin to control our society.

Bogle: It won't matter whether you have stocks or bonds or anything else.

Gardner: A club. You'll need a club.

Bogle: Yes, just a club.

There are all kinds of big and small risks. But, as I've often said, we're sitting here knowing the world is going to hell in a hand basket, but people have been worried about that since the beginning.

Gardner: The known fears are not the ones to really fear.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors. The Motley Fool recommends and owns shares of Chipotle Mexican Grill, Costco Wholesale, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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