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Five Questions For: Jack Bogle, Vanguard Index Fund Pioneer

September 27 (Bloomberg) -- Jack Bogle, founder of the Vanguard Group, launched the first index fund 35 years ago on Aug. 31, 1976, with $11.4 million in assets. His fund took the then-radical step of holding all the equities that made up an index such as the Standard & Poor's 500, rather than paying a manager to pick stocks. Also radical: The fund charged a quarter of the fees of a typical actively managed mutual fund.

Index-based assets in U.S. mutual funds and exchange-traded funds now total $1.9 trillion, according to the Investment Company Institute. Some $900 billion of that is at Vanguard.

Bogle, 82, retired as Vanguard's chief executive officer in 1996. As head of Vanguard’s Bogle Financial Markets Research Center, he continues to speak and write in his usual no-holds-barred style on the benefits of indexing, the rate of return investors can expect from stocks and bonds, and the state of the mutual fund industry.

1. What investments are particularly overvalued?

Gold is probably particularly overvalued. Here's this totally speculative so-called investment, which has no internal rate of return. Stocks have earnings growth and dividend yields, and bonds have interest coupons. Gold has nothing except somebody's opinion. But in this kind of environment, it may take years, or maybe even decades, to get back to a reasonable level. When will speculators stop speculating? I don't think anyone knows the answer to that.

2. Do any investment categories look undervalued?

I don’t think anything is seriously undervalued. Stocks are fairly valued and should probably give a better return than bonds. Over the next decade, bonds, based on today's spectrum of yields, should give a return of about 3.5 percent per year. Stocks have a 2.25 percent dividend yield and their earnings should grow at least 5 percent. So that would be a 7 percent or 7.5 percent investment return, assuming no change in the price-earnings multiple. In a decade, at 3.5 percent per year, your bond assets will grow about 50 percent, and at 7.5 percent your stocks will grow 100 percent.

3. What trend in the fund industry troubles you?

It’s this growing speculative fever that affects even the mutual fund industry. Shareholders are holding their mutual funds for three years on average. That’s absurd. And the funds themselves are holding the average stock for about one year. That’s equally absurd. The fund industry has turned into a marketing business, and the important thing is getting a lot of assets under management. It’s run for the benefit of financial conglomerates that own most of the large mutual fund management companies.

4. Is this the worst investment environment you've seen in your lifetime?

Oh my goodness, no, not at all. I’ve been in this business for 60 years. So I’ve seen 50 percent declines in 1973-4, in 2000-3, and in 2007-9. This decline is not nearly that much. Could this get to be 50 percent? I doubt it, but I don’t know. The best investment advice I ever got came when I was a runner for a brokerage firm when I was in college. One of the other runners said: “Nobody knows nothing.” And of course that’s true. It’s not given to us to know. The future is not ours to see. You try to make intelligent decisions, have an intelligent plan that balances risk and reward, balances stocks and bonds, and ignore the noise in the market.

5. It seems there is a lot of hopelessness about peoples' investment options. How would you describe the current situation?

This is not a particularly cheap market to invest in. But, the problem is that we must invest. We can’t stand back. If you don’t save anything, I guarantee you will end up with absolutely nothing. There’s no such thing as a bad market. If the market goes way down, that’s good for buyers and bad for sellers. We’ve let the emotions—the excitement of the short term—take over our thinking about [our goals]—basically a long-term plan to fund retirement. Maybe not today, but over the long run stocks are going to be the best way to get there.

To contact the reporter on this story: Ben Steverman at

To contact the editor responsible for this story: Suzanne Woolley at

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