Why John Bogle Does Not Have a Clue about Global Investing

John Bogle, the founder of the Vanguard funds and the father of index investing, is one of the best-known names in the U.S. investment world. In a recent interview, Bogle argues that foreign markets will perform about the same as the U.S. market over the next 10 years. He points out that foreign markets suffer from “unforeseen risks, currency risks, sovereign risks and more that could equalize the markets.” And while he concedes there’s a “lotta logic why global markets will grow over the next 10 years,” he does not recommend that you allocate more than 10% of your assets to developed markets and 10% to emerging markets. Overall, Bogle believes that investing your money outside the United States won’t make much of a difference to your investment returns. He contends that you might as well just play it safe and stay close to home…

I must say, this assessment left me scratching my head…

But understanding why John Bogle couldn’t be more wrong literally could add hundreds of thousands of dollars to your investment and retirement accounts over the coming decades.

John Bogle: A Pioneer on Costs and Indexing…

Bogle launched the industry’s first index fund 30 years ago and endured a lot of criticism from skeptics for doing so. But since then, dozens of academic papers have proven that Bogle was right. The only way the average investor can match the returns of the market consistently is to invest in the low-cost, no-frills offerings that he championed.

As the founder of Vanguard, Bogle’s “hammer” is a focus on index investing and minimizing costs. That’s all fine and good. In fact, one of the core investment programs that I offer to my own money management clients uses only low-cost, index exchange-traded funds (ETFs).

The beef I have is with Bogle’s asset allocation strategy. It’s here that I think he gets it completely wrong. Had you invested $100,000 in the U.S. S&P 500 on January 1, 2000, you’d be down well over 20% — even before accounting for inflation. The same $100,000 invested in fast-growing global markets – say, something similar to Vanguard’s own Emerging Markets Stock ETF (VWO) — would be worth around $290,000.

So think of $80,000 in your account versus $290,000…

That’s too big of a difference to ignore.

What John Bogle Doesn’t Get…

Bogle advises you to keep the bulk of your assets in the United States, where it’s safe from the “unforeseen risks, currency risks, sovereign risks” that characterize foreign markets. Bogle notes that even developed markets like the United Kingdom are in “poorer shape than the U.S.” In doing so, Bogle suffers from an extreme case of “home-country” bias.

Ironically, I heard the same “home-country” bias on a MoneyShow panel in London that I sat on this past Saturday. One of my British co-panelists — one of the most widely read financial columnists in the United Kingdom — advised the audience: “Don’t take the risk of investing outside the U.K. After all, 80% of the revenues of the top 100 U.K. companies come from abroad.” Meanwhile, as I sit here in Budapest, Hungary, a country famous for its financial profligacy — the local “John Bogle” is advising me to keep my money in “safe bets” like the local Hungarian national savings bank and the local national oil company. It seems that no matter where they are, investors want to put their money in companies whose names they recognize.


The Main Event: “Bogle v. Templeton”

The recently deceased John Templeton was a rare exception. By focusing on large, sweeping global investment trends — the rise of Europe after World War II and the emergence of Japan — Templeton boasted one of the longest and most successful track records on Wall Street. From its foundation in 1954, his Templeton Growth Fund grew at an astonishing rate of nearly 16% a year until Templeton’s retirement in 1992, making it the top-performing growth fund in the second half of the 20th century. A $100,000 stake invested in 1954, with distributions reinvested, would have grown to $55 million in 1999. In contrast, had you followed Bogle’s advice and invested the same $100,000 in a (then non-existent) S&P 500 Index fund in 1954, it would have grown to “only” $31.4 million.

That’s an astonishing 75% difference…

Global Markets: “You ain’t seen nothing yet!”

Global markets comfortably outperformed the S&P 500 back when the United States was by far the top dog on the global economic playground. But over the past decade alone, global markets have outperformed the U.S. market by more than 3 to 1.

This is no accident. I realized this while reading Ray Kurzweil’s remarkable book “The Singularity Is Near.” Applying Kurzweil’s insights on the pace of technological change to global investing, I suddenly realized that over the last decade, global financial markets have been expanding exponentially — the pace of change is accelerating with each passing year. But as Kurzweil points out, we humans have a really hard time getting our heads around the implications of exponential change. A picture like the one below is the best we can do.


Consider the example of China. A 10% growth rate in China 10 years ago did not have the same impact as a 10% expansion today. But thanks to compounded, exponential growth, China today plays a much bigger role in the world’s economy. In 2000, Wall Street could care less where Shanghai — the stock market of an economy barely half the size of California — closed. But last week, a sharp sell-off in Shanghai set the tone for the day’s trading on Wall Street.

Financial markets have globalized more in the past 10 years than they did over the course of John Templeton’s entire 50 year-plus investment career. It’s one thing for Bogle to warn you about the high costs of mutual funds and active investing. But to recommend investing the bulk of your assets in the S&P 500 is just plain wrong. And following that advice will cost you much more than what you’ll save by investing in any domestic Vanguard index fund.

The good news is that unlike in the days of pioneer John Templeton, there are a wide range of stocks and ETFs available to you at a click of a mouse that put this entire global investment world at your fingertips.

So whether you’re making big profits investing in the latest red-hot Chinese small cap or in a company that is making a mint betting on Asia’s Las Vegas, understand that global investing isn’t a fad…

It isn’t even the future…

It is today’s ever quickening reality.


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