Bogle Warns Boomers on Coming Retirement Train Wreck

The near future “is not going to be a fun time for pensioners,” warned John Bogle, senior chairman and founder of the Vanguard Group of mutual funds, in the opening keynote on Thursday of the Fifth Annual Retirement Income Symposium.

Underfunded pensions, flawed “thrift plans” purporting to be retirement plans, and the difficulty of earning a decent amount of investment income will collide in a train wreck unless action is taken quickly, he predicted. Advisors with baby boomer clients in or those near retirement should focus on long-term, low-cost investments, not on trying to goose short-term yield by taking on more risk.

Prevented by health concerns from joining the symposium in Boston, Bogle, 83, spoke by Skype from a den lined with bookshelves and a model of the frigate U.S.S. Constitution.

For Low-Risk Yield: Dividends and Low Expense Ratios

Bogle said he believes most portfolio growth in total return over the next decade will be driven by dividends, which have provided half of stocks’ total investment return since 1900. Investors shouldn’t expect outperformance, though: Since 1960, the nominal dividend yield of 5.3% on the S&P 500 Index was only 1.2% after inflation.

Both stock and bond fund yields shrink even more once portfolio managers take their cut. For example, Bogle pointed out that after large-cap stock funds’ gross yield of 2.04% was reduced by an average expense ratio of 1.17%, the net yield to investors was only 0.87%.

To boost yield without increasing risk, Bogle advocates (no surprise here) cutting investment costs–a Vanguard hallmark. He cited a 0.05% expense ratio which barely dinged the 2.24% gross return of the Vanguard 500 Index Fund (Admiral Shares), yielding 2.19% to the investor.

‘A Little Wisdom’ on Chasing Trends

Bogle isn’t a fan of new funds that come along to capitalize on trends. Typically, he said, they have higher costs and arrive on the scene after gains have already occurred.

To a client or advisor tempted to diversify into a “hot” specialized fund, he would advise allocating only a small portion of assets. “My philosophy is ‘Don’t make big bets,’ ” he told the RIS group. “The hot ideas of the day peak and then fade; it’s written into their DNA. Following trends that have been popular only tells you what will not happen in the future.” 

Reversion to the mean, Bogle said dryly, is “one of my favorite subjects.” Noting that one-half to three-quarters of today’s funds and ETFs will probably be gone within 10 years, he added, “I can be wrong on these things, but in 61 years you get a little wisdom.”