John Bogle, Index Icon, Accused of Timing Market

“Think you need highly engineered institutional class mutual funds inspired by Fama to achieve those results?” the DFA advisor asks. “$1 invested in Vanguard’s own Small Cap Value Index Fund (VISVX) since its inception in 1998 has grown to almost $4 vs. barely $2 for the Vanguard Total Stock Index fund (VTSMX).”

But while tilting a portfolio for corporate bond crumbs at higher risk yet refusing to reach for more substantial equity returns seems unwise to Nelson, it’s the apparent abandonment of stay-the-course investing that constitutes his third criticism of Bogle’s April 1 interview.

Asked whether investors should protect their gains after a five-year bull market (presumably by exiting the market), Bogle offers a nuanced, or perhaps contradictory, response:

“People aren’t going to know how to do that — it’s market timing,” Bogle is quoted as saying. “I’d say, never be out of the stock market. It just makes no sense to me whatsoever. But maybe you can trim taking 15 percentage points off the table or something like that.”

To which Nelson responds:

“A dramatic 15% shift goes well beyond rebalancing into the realm of tactical allocation — making sizable portfolio bets in reaction to past events or based on forecasts about the future,” he writes.

The lesson Nelson learns from the interview with Bogle, whose “cult-like following” has “hundreds of thousands of individual investors hanging on his every word,” is to “trust a philosophy, not a person” who “can easily be swayed by prevailing market sentiments.”

That is why fiduciary advisors typically require their clients to establish investment policy statements (IPS).

“When urges to make changes or follow the crowd present themselves, revisit your IPS and remember that your portfolio is based on your unique goals, objectives and risk tolerance, not off-the-cuff comments or market-timing calls from prominent industry professionals,”  he writes.

Ignore the temptation to “just do something,” his blog concludes.

Reached by ThinkAdvisor, Nelson acknowledged some reluctance to taking on Bogle but for the overriding investment principles at stake:

“I really don’t mean to be nit-picky with this stuff, but sticking with a long-term investment plan ain’t easy,” he said. “And when those we perceive to be pillars of discipline are wavering, suggesting tactical moves and wholesale asset class changes without a full description of the risks involved, I think we need to call them out.  Even if this causes a few of his devout followers to think twice about his advice and think a bit more critically about their own situation, I think it’s worthwhile.”