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Is Bogle Right?

Is Bogle Right?

June 15, 2017

A recent Bloomberg interview with Vanguard Funds founder John Bogle discusses his views on foreign stock diversification.  Long a proponent of investing all of your assets in the United States, Bogle looks back on these views since the mid-1990s and has determined, because US stocks have outperformed foreign stocks, that "I was right, really right."  But was he?

First, whether you are "right" or not when it comes to investing shouldn't be determined by the outcome of your decision so much as the strategy behind it.  Sensible investing dictates that we spread our money out amongst different asset classes to ensure we aren't excessively concentrated in the worst performer (and we never know ahead of time which one that will be).  Said differently, investing isn't about picking the best performing asset class, but instead avoiding having all of your wealth tied up in the worst one.  None of us has crystal balls, so we diversify.  Diversification never loses, it just doesn't always produce the absolute best returns.

US stocks have indeed performed well over the last few decades, but what if our experience instead looked like Japan?  Since 1989, their stock market has failed to produce a positive return including dividends!  Over this same period, the S&P 500 and a globally diversified (Dimensional Equity Balanced Index) strategy both produced double-digit returns.

Bogle counters this glaring flaw in his philosophy by proclaiming "we're not Japan."  The strength, resilience and technological advancement of our economy, Bogle believe all but assures that we won't suffer a similar fate.  But we've seen a 10-year period where US stocks had negative returns while all other stock asset classes produced modest to significant gains, why isn't it possible that we could see an even longer stretch in the future?

It's not necessary to study every squiggly line on the chart above to recognize only one index sits below its starting point: the S&P 500 in light blue.  Diversifying globally across equity asset classes isn't a forecast that the future will mirror the 2000-2009 "Lost Decade." Instead, it's a recognition that if this period were to repeat in any meaningful way, it would be catastrophic to your long-term financial goals if you were invested in a single asset class.  Negative long-term portfolio returns from that asset all but assures you'll fail to achieve your wealth objectives. 

Finally, while I've spent the majority of this note explaining why smart investors focus on what could happen and protecting themselves against unnecessary risks (like having all of your eggs in one basket), it's probably worthwhile to point out that a global portfolio of indexes has in fact outperformed the US stock market since 1993, assuming it was spread across smaller and more value-oriented stocks (another element of diversification that Bogle feels is unnecessary).  The chart below looks at the Growth of $1 since 1993 in the S&P 500, the Russell 3000 "Total Market" US Index, and the Dimensional Equity Balanced Strategy Index that includes (30%) in non-US stocks.

In the chart above, it's impossible to differentiate between the large-cap S&P 500 and the "Total Market" Russell 3000 Index.  Bogle claims the latter is more diversified than the former, but clearly, they are virtually identical.  And both have trailed the returns of the globally diversified Dimensional Equity Balanced Strategy Index.

Ultimately, markets are cyclical, and every asset class performs (unpredictably) well at times and poorly at others.  But one thing is certain -- in the midst of a particular asset class run, there will be no shortage of "experts" who claim this streak will continue and concentrating your portfolio in it is entirely logical and even advisable.  As always, you're better off ignoring their advice, trusting your plan, and staying diversified and disciplined.  


Past performance is not a guarantee of future results. Index performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.