I’ve always admired Vanguard founder Jack Bogle, so it was amusing to see him on CNBC earlier this week reiterating his conviction that buy-and-hold will work even though it is entirely possible that the market could experience another 50 percent decline in the next decade. He threw the CNBC gang into a new tizzy, but he is right.
Bogle actually remarked that a couple of declines of 25 percent or 30 percent were more likely in the next decade, but he expected equities to double in price over that period, taking the S&P 500 to 3,000. The fact is equities have experienced four 50 percent declines in the last century, and two have occurred in the last 13 years. However improbable it may be, who is to say it couldn't happen again.
We all know one big crack-up is coming in the next decade. That will occur when the Federal Reserve ends QE and begins raising rates. But that accident will affect the bond market first and it has been so well-telegraphed that it should come as no surprise.
Nevertheless, one should expect some major discombobulations. If the interest rate on a 10-year bond rises to 5 percent, investors could lose about 30 percent of their principal, so they are even less likely to offer a safe haven.
In all likelihood, Fed officials already are burning the midnight oil figuring how to provide as soft a landing as possible. Moreover, the next disaster is likely to come from an event no one expects than one everyone expects.
What always amuses me is that everyone talks endlessly about volatility when stocks are going down, but no one bothers to mention it when they are in elevation mode. Given that equities have climbed 130 percent in the last four years and show no signs of slowing down, a major correction at some point is inevitable. Still, I think Bogle is spot and they will be a whole lot higher in 2023. Of course, neither he nor I have to deal directly with retired individuals.
Bogle: Buy And Hold Works Despite Prospect Of 50% Decline
April 3, 2013
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Comments
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Most people over 60 can’t stand the volatility of being down 50%. In 1973-74, the unweighted index of the market went down 66% in two years. Most people over 60 don’t have time to get their money back because they are living off of the principal. In the academic world, 20 year periods in the market are not significant, but in a person’s life, that’s too long of a time to be able to live with the volatility and recoup the losses. Our clients can’t stand being down 37% in a year or 66% like in 1973-74 because then you need to be up 60% and up 200% to get back to even. Bill Gross commented lately that buy & hold is dead and he doesn’t like bonds either. We agree with Bill. Mike Kress Crosspoing Capital Management [email protected]
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Gary, I hope you don't think all of your clients turn stupid when they age. Especially those brilliant in their field.
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Mr. Bogle will turn 84 in May. I've read he has had 5 heart attacks and a heart transplant. That he has nothing to do but talk about "long term investing" is sad if not disturbing. As Keynes famously remarked, "In the long run we're all dead". If I were his advisor, I would tell him to take his kids (grandkids) to Europe. He is becoming Norma Desmond of Sunset Boulevard. That the article discusses whether he will be right or wrong by 2023 is pathetic, he'll be dead (I might be as well but I'm going to have some fun).!