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The Long View

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John Bogle was long a prophet without honor in the financial services industry. Calling on investors to hold down costs through low-cost, broad-based indexes was once seen as an act of war by those who made their living off commissions.

Today, no less than the big wirehouse firms are singing from the same hymnal as the now sainted Vanguard Group founder, arguing­—in their efforts to corral both advisors and clients into fee-based accounts—for the crucial importance of avoiding the appearance of conflicts of interest.

Well, that’s progress of a sort: Keep the portfolio appropriate and on track and let the advice flow onwards. Bogle’s index funds and Mother Merrill’s advisors could create quite a team. But then along came ETFs, which brought even lower fees on diversified index-based portfolios, but whose easy tradability opened the door wide to speculation. 

In an important interview for this month’s cover story (“How John Bogle Really Sees ETFs”), Bogle addresses exchange-traded products with both finely sliced nuance and clear principle. Asked if he’d have launched ETFs had he still been CEO when Vanguard rolled them out, he says “maybe yes, maybe no,” but his answer seems to reside more in the “no” camp.

”I’ve been profoundly skeptical about ETFs,” Bogle told Research’s Jane Wollman Rusoff. “And I’ve also found in my long, long, long career that when I did something for marketing reasons, it usually turned out to be a mistake.”

This month we would all do well to think long, hard and long-term about another kind of investing and marketing with great salience for our country: The marketing is being carried out by the Obama and Romney presidential campaigns and the investment at stake is how America’s economic resources are to be marshaled in years to come.

It is a time-honored tradition in American politics for each side to portray its opponent as radical. Whether the John Adams campaign branding Thomas Jefferson an atheist and Francophile or Lyndon Johnson skewering Barry Goldwater as itching to start a nuclear war, our challenge is to see beyond the marketing image and look clearly at what the investment entails.

As October’s four debates get going, the key issue will be how the candidates plan to maintain America’s social safety net while restoring the nation’s fiscal strength. Restructuring entitlement programs can easily be portrayed as a radical breach in the social contract. But the real choice is whether we will keep to a postwar spending-to-GDP ratio of under 20% or maintain programs for older Americans that will necessitate permanently higher government funding levels.

Also, pay attention to news this month from Greece. Its troika of international creditors is due to release a report on conditions for extending loans to the financially strapped nation. Leaked reports indicate one of the conditions is the introduction of a six-day work week.

The news is important because it reaffirms the economic principle that there is no free lunch—that sooner or later we pay for our mistakes and the later we pay the pricier the payment.

Investors following Bogle’s advice have done well. We must similarly look past campaign marketing and soberly decide a pivotal election that will shape our country for a “long, long, long” time to come.


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