Let cooler heads prevail

John C. Bogle, founder of The Vanguard Group

TEXT OF INTERVIEW

Tess Vigeland: Of course, we don't have a paper bag big enough for the economy's head and the stock markets at least have had a fairly good couple of weeks in a row now, but there are plenty of folks who say it's not going to get better anytime soon and, in fact, could get worse -- possibly much worse -- and many of you tell us you believe them.

So for those who are ready to put their money under the mattress, we've asked no less an authority than Jack Bogle to join us for some perspective. He is the legendary founder and retired CEO of The Vanguard Group.

Mr. Bogle, it's a pleasure to welcome you back to the program.

Jack Bogle: It's good to be with you.

Vigeland: So, I don't know about you, but I'm increasingly hearing people express grave concerns about the economy, that something is coming that is going to send this economy over the cliff. People don't know exactly what it is, but they feel very uneasy. In fact, we got a listener letter just this week from someone who asked "What should I do with my investments if I'm convinced, crazy or not, that the whole system is going in the tank?" Are you hearing these kinds of sentiments?

Bogle: I've been hearing a lot of negative sentiments and a lot of concerns, but nothing remotely approaching that the economy is going over some sort of a cliff. That would be pretty low down in my order of probabilities.

Vigeland: People will often tick off kind of a litany of problems. You have peak oil, the question of whether we're going to run out, oil prices approaching now $120 a barrel, the current food crisis and perhaps most of all, major concerns about the banking and credit systems. Is there a critical mass here? Do we have any sort of perfect storm brewing?

Bogle: Well, there are certainly plenty of elements of a storm here and in the financial markets themselves, I want to make this important distinction: the biggest problem is certainly the credit side, the ridiculous risk-taking by our banks and investment banks, seemingly unknowing that they were taking the risks they were taking. I find that shocking and that's going to be something that's going to take a long time to recover from. That has led over to problems on the consumer or business side of the economy and there's a lot of pressure on the housing side through overextension on mortgages. So it's a real problem, but I still don't see an off the cliff kind of a thing.

Vigeland: So what is the advice for people who are worried about having their money in the stock market or even in a bank at this point? What's your advice to people? Is it just simply to stay steady and this thing will correct itself?

Bogle: Let me divide my advice into two sections. This is what I just have to do in these kind of markets particularly. You have to ask yourself whether you are an investor or a speculator and most people in the stock market and most institutions in the stock market, sad to say, are speculators and speculators are people betting on prices going up and down and to be honest with you, I don't know what advice to give a speculator. I guess if I were advising a speculator, I'd say "You better get out and stay out until things calm down." So if the investor is in there for the long-term, which is the only intelligent way to invest, is very diversified in the U.S. corporations and global corporations, owning maybe 80 percent in the U.S. stocks, 20 percent in international stocks, foreign stocks in the stock position and then depending on age, has significant bond positions. If you're way up in years, past retirement, you probably want to have 40 or 50 or 60 percent in bonds, because bonds will produce income for you and of course, stocks produce very little income. If you're worried about what's going to happen next month or next year, I don't think you should be in the stock market; that's speculation.

Vigeland: And for those who are dollar cost averaging... I mean, if you're in a 401(k) and you just keep kind of putting the same amount in all the time, aren't you essentially getting a whole lot of bargains right now?

Bogle: You're getting a great bargain! Why people don't understand that for buyers, the lower the stock market goes the better. It's only the sellers for whom the higher the stock market goes, the better.

Vigeland: So the advice is really the same as it would be in any other downturn, any other stock market decline, any other economic recession, assuming that we're in one: that you go with the age-old advice that it's all really based on your age?

Bogle: There's an ancient saying of a monarch who wanted his wise men to give him the best advice no matter how good the world was or how bad the world was and the wise men came back and said "Here's the advice: this too shall pass away," and this too shall pass away and American will come back here, but I think we could be in for more troubling times than I've known in my long career in this business.

Vigeland: Really? So does this feel different to you? Have we been here before, maybe with different specifics but a similar feeling of dread or is that... I mean, you've kind of indicated that that's a bit overblown.

Bogle: Yeah, dread is not a word that appears in the Bogle lexicon very often, to be honest with you, but concern and more serious concern than I've had in the past.

Vigeland: And why is that?

Bogle: Well, I've been through nine bear markets in my long career now, bear market being defined as a market that drops more than 20 percent, but what I see is this tremendous overextension of credit in the economy, this astonishing decline in credit standards and then the way we're managing our nation I find deeply troubling, the staggering amounts of debt we've incurred. So yes, I am concerned and those reasons that I've just annunciated really are the subtle reasons that go way beyond what the stock market going to do today or tomorrow.

Vigeland: And how do you translate those much larger concerns to people who are watching their 401(k)s take a nosedive?

Bogle: I have to tell you that for myself, going back to early 2000 when the market was at a high and was about to go down, I decided then to substantially... I haven't done market timing all my career, but I was getting older and the market was ridiculously high, so I cut back by equities, probably about 75 or 80 percent of assets, to about 35 percent of my assets so the bond position went from say 25 percent of assets up to 65 percent of assets and I haven't done a single thing with my account since then. So other investors ought to look at things that way. How much of a decline can you afford? Be a little bit conservative if you haven't got an air. Do it gradually is always good advice, I think, because these things may take long to unwind. There's an old saying "Don't consider just the probabilities that lie ahead" -- and this is, I think, pretty good wisdom -- "...consider the consequences as well" and if the consequences of a very tough period here for three or four years would be devastating to your financial wealth, you simply have to be more conservative, not so much because of the uncertainly, but because of the consequences if those thing were to happen.

Vigeland: John Bogle is the founder of Vanguard and author most recently of "The Little Book of Common Sense Investing," which I recommend you all go out and read immediately. Thank you so much for sharing your time with us today.

Bogle: It's wonderful to be with you.

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