John Bogle, founder of the Vanguard group, spots risks of a severe setback in the stock market but encourages investors to stay the course even if the ride gets bumpy.
John Bogle has single-handedly revolutionized the asset management industry. The founder of the Vanguard group launched 1975 the first index mutual fund which marked the start of a mass movement among investors all over the world. Today, Vanguard surpasses $3 trillion in assets under management and is the largest mutual fund company. Even Warren Buffett (Trades, Portfolio) recommends to invest in the Vanguard 500 Index Fund which tracks the S&P 500 (S&P 500 2047.41 -0.13%) Index and is the largest fund of the group. "Index investing is the biggest change in investing in history, and it’s changing the shape of the world", says Mr. Bogle. He advises investors to keep cool despite of rising tensions in the financial markets. He cautions that the mood of the stock market could switch suddenly and that a severe setback could easily happen. Nevertheless, in the long term he thinks there’s no alternative to equities and he encourages investors to stay the course.
Mr. Bogle, we’ve seen some wild swings in asset prices over the last few weeks. What are your thoughts when you look at today’s financial markets?
I look at them a little nervously. We live in a very uncertain and fragile world with big risks. Now, we have a little bump going on here and if it gets more serious who knows really what’s going to happen. Sentiment in the stock market has been quite bullish and sometimes that bullish thinking changes for no apparent reason. Fundamentally, today things are not very different than they were at the end of December when the S&P 500 climbed to a new record high. But now, the market seems to have taken on a nervous cast and there is very little anybody can do about that.
What’s the biggest risk for stocks right now?
There are financial risks, economic risks and the risk of war rising all over the world, particularly in the middle east. And those are big risks, not little ones like corporate earnings which are easy to measure. But the markets looks at them and says: "We don’t have to worry". Is the market right? Well, only time will tell. I’ve been saying for several years that we have a stock market that seems to be ignoring those kind of risks. I think we’re seeing a turn in lower global economic growth and a turn in lower corporate earnings and I’ve been telling people for years: When you can’t afford a 25 or 30% drop in the stock market you should not be in the stock market. I have no reason to think this will be a correction that strong but it easily could be.
So what would be your advice for investors?
Well, what I’m trying to do and what I’ve been trying to do all my career is to persuade individual investors that they should ignore the fluctuations in the marketplace and continue to invest. When you get market declines – even for a protracted time - keep investing because when you use the same amount of dollars you are getting more and more shares. So if you continue to invest you’re taking advantage of the ever descending prices a bear market brings. And don’t stop because things are getting cheaper. That’s what’s so funny: In your everyday life you don’t like it when prices go up. But in the stock market you do. When the price goes down for steak you love that. But in the stock market you hate it. So try to take the emotions out of investing.
A reason for concern is the ample volatility in the currency markets and an almost unprecedented uptick in central bank interventions. What is your take on the new bond buying program of the ECB?
They waited a long time to do it and they probably should have done it at the beginning of the European debt crisis. The European community was too heavy on austerity and too light on making money easier.
In the US, the Federal Reserve is moving in the opposite direction and plans to raise interest rates which is probably one of the main reasons behind the strong rally of the dollar.
The strong dollar means two things: It’s tougher for US companies that are exporting products and services. But it’s also tougher for international markets to do well because the rising dollar means that they have to rise even more to be equal to US stocks. But that’s not going to go on forever and the dollar will eventually stabilize. I’m struck by the level of the Dollar right now compared to the Euro. It’s almost exactly the same exchange rate at which the Euro was introduced in 1999. So all these fluctuations came back to kind of a norm and that’s what we should expect with anything that has to do with the markets – some kind of a reversion to the mean.
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