3 Lessons for Investors from Vanguard Founder John Bogle

When Vanguard Group founder John Bogle created index investing, it helped provide investors with a streamlined and low-cost way to buy broad market-tracking mutual funds. His writings have had such a lasting impact that there is an official Boglehead® community that holds meetings, writes books, and maintains an informational forum. . . More than 120,000 registered members with more than six million posts.

Warren Buffett once said, “If ever a statue was erected to honor the man who did the most for American investors, Jack Bogle should be the choice.” Although he passed away in 2019, his lessons continue to light the way towards a financially secure and happy retirement. Reviewing hard-earned savings is a healthy exercise for all those trying to beat inflation over time.

Bogle quote #1

“Ask yourself: Am I an investor, or a speculator? An investor is someone who owns a business and owns it forever, enjoying the returns that US businesses and, to a lesser extent, global businesses have earned since the dawn of time. Speculation is betting on price. Speculation has no place in a portfolio or the kit of a typical investor.

This sentiment aligns with the idea that timing the market generally leads to market timing. It is not good to see the market fall and it is a natural human desire to withdraw funds until the coast is clear. But, in this case, leaning on the perspective of history is usually more valuable than survival instincts. Timing the market requires a crystal ball and they don’t exist. Market recoveries averaged a 30% increase in the first 30 days of that movement. Sure, the whole process is more gradual, but the first part of that recovery time, on average, makes the difference. Losing those gains can seriously hurt your entire portfolio.

Reviewing S&P 500 data from 1995 to 2023 provides 29 years of evidence. People who are fully invested have seen an annual growth rate of 8.4%, meaning money typically doubles every nine years. Missing the best five days of those 29 years had a devastating effect: returns fell to 6.6 percent, a 21% lower annualized return. It gets worse from there—missing the best 30 market days drops the return to 2.0%.

Take John Bogle’s warning to heart. The risk of missing the market’s best days is too great to attempt an almost impossible tightening action.

Bogle quote #2

“The greatest enemies of equity investors are costs and emotions.”

Good habits are one of the most effective ways to overcome challenging moments in life. As they plan for retirement, investors are beset by a long list of concerns, not the least of which is the unpredictable equity market. And no matter how poorly the portfolio performs, life costs will rise. Investing requires courage and a helpful technique to limit equity exposure to a more tolerable level is diversifying with a certain percentage of safety-type assets such as fixed income and cash. Specifically, racking up three years worth of dry powder is highly constructive.

In finance, dry powder refers to cash reserves maintained by a company or individual to meet obligations during times of financial stress. This equates to different ways to fill your cash (Savings, Money Market, Certificates of Deposit) and income (Treasuries, municipal and investment-grade bonds) buckets.

Follow these two steps to figure out how much you need.

  • Calculate your annual income difference.

Take your annual expenses (food, housing, auto, medical, volunteering, travel, major activities, taxes) and subtract your guaranteed or recurring income (Social Security, pensions, annuities, rental properties, deferred compensation, etc.). If you need $100,000 a year and your guaranteed income from Social Security and pensions is $50,000, your portfolio will need to cover $50,000 a year. That’s your income gap

  • Multiply your income gap by three.

Multiplying the $50,000 income gap by three years shows a dry powder requirement of $150,000 in your portfolio.

Running the scenario in reverse helps explain. Say you have $1 million in your portfolio, with $400,000 allocated to the dry powder category. Your income difference is $40,000. Dividing $400,000 by $40,000 shows that you have 10 years of dry powder to cover yourself in times of high stress.

For many people, dry powder is an important psychological tool for a good night’s sleep. Or, as Bogle says, it can protect against costs and emotions. Preparing for volatile times by reinforcing a reliable structure will prevent your nest egg from cracking when the world shakes.

Bogle quote #3

“Dream is the main enemy of a good plan A perfect plan. Stick to a good plan. “

Some future retirees worry so much about choosing the wrong plan that they don’t choose one. Listen to John Bogle and accept that no plan is perfect. Adjustments can always be made later, so get started.

There is a saying that it is better to be lucky than good. Unfortunately, luck doesn’t last as long as you need your retirement savings. So, stop searching for ancient alchemy or secret potions. There are many ways to accumulate wealth, but none are shortcuts. Time, patience, and planning may not sound sexy, but they can certainly create a financially secure, happy retirement.

You may prefer to draw your own blueprint. Here’s a link to an interactive financial planner that pairs the lifestyle habits of happy retirees with financial benchmarks. A financial advisor can help you create your portfolio allocation and budgeting strategy based on future spending goals, inflation protection, risk tolerance and potential for financial success. Finding the right fit just requires some personal reflection and a little research.

Bottom line

John Bogle’s idea was to limit Wall Street’s control over American workers making money off of their hard-earned productivity. Future retirees who are willing to practice disciplined patience to allow their money to outpace inflation over time increase the likelihood that they will accumulate enough wealth to fund their needs, wants and desires in their golden years.

John Bogle reinvented the wheel, but his teachings are valuable reminders that you don’t have to. Create a slow and steady retirement plan and let those wheels move and carry you to a happy retirement.

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