Thursday, January 17, 2008

Fortune Magazine Q&A with John Bogle

Fortune Magazine did a great Q&A with the founder of Vanguard and the creator of the first index fund—John Bogle. The article, dated December 24th, has a few bold predictions—such as the DOW going over 20,000 ten years from now. It seems like a stretch with the way things are going now; however, ten years is a long time, and things will stabilize in the long-run.

John Bogle answering reader’s questions:

Q: What are the odds of a recession right now?
A: I would put the odds of a recession at 75%. This economy is very much consumer-based, and I believe that 70% of the GDP is consumer spending. That’s a very high number. Two things are happening there: Consumers have fewer resources because from 2001 to 2005 they took $5 trillion out of real estate. That will not recur. This is a big drop. We also see weakness in auto sales and retail spending—we even see it at companies like Starbucks. There is another, equally important factor in consumer spending, and that is confidence. Consumers are not going to spend if they are worried about the future.

Q: Where do you see the DOW ten years from now and why?
A: Well, the DOW is a peculiar piece of work. The DOW yield is 2.2% now, vs. the S&P’s 2%. Since I’m expecting a 6% to 7% return on stocks, the DOW ought to grow at 4% to 5% a year. So over ten years, growing 4-5% a year, it would grow by 55% and so it would be slightly over 20,000, give or take. But anybody who is expecting that ought to be prepared for a lot of bumps along the way.

Now for the Brian Reese investment advice: Continue dollar-cost averaging in a passively managed total market index fund or S&P 500 index fund in a Roth IRA. Don’t worry about all the talk from the Fed or the three piece suit wearers on Wall Street. If you can’t handle the bad news, than don’t read about it. Don’t watch it on T.V. Will there be a recession? Maybe. But it doesn’t matter when you have 20+ years until retirement.

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