Was an ETF.com interview on Tuesday with John Bogle some sort of April Fool’s joke?
With all apparent seriousness, the 84-year-old investor famed for the simplicity and parsimony of his stay-the-course indexing approach encourages investors to tactically allocate 15% of their portfolios from stocks to corporate bonds.
And that was enough to provoke a withering critique from market blogger Eric Nelson, an Oklahoma City-based registered investment advisor and principal of Servo Wealth Management.
The first of three main criticisms in the new blog post, “Befuddled by John Bogle’s Advice,” is Bogle’s recommendation that investors increase their risk exposure for what amounts to a mere sliver of higher expected returns.
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Nelson faults Bogle for emphasizing the return advantage of corporate bonds relative to low-yield government bonds without mentioning the higher risk.
“A discussion of possible write downs or defaults in corporate bonds… is noticeably absent,” he writes, adding:
“Mentioning the fact that for over 80 years (since 1927), the realized return difference between higher-risk corporate bonds compared to lower-risk government bonds … hasn’t even been 0.5% per year? No mention of that either.”
Nelson also points out that corporate bonds tend to significantly underperform when the stock market declines (so in 2008, for example, corporates lost 3.1% when government bonds were up 12.4%), adding this coup de grace:
“I imagine that is something the market-timing bond investor may want to be reminded of before they decide to reach for that extra 0.5% of potential return.”
Bogle’s reach for yield in fixed income is bitter irony for Nelson, a value-oriented Dimensional Fund Advisors proponent, since Bogle is adamant in his rejection of Nobel Prize winner Eugene Fama’s view that small-cap and value stocks deliver higher expected returns than the plain-vanilla total stock indexes Bogle favors.
But Nelson points out that in that same time period since 1927, value stocks beat a total stock index by more than 2% annually, small-cap stocks did the same, and a combined small-value portfolio outperformed a total stock index by more than 5% per year.
What’s more, Nelson says the same pattern is observed in both developed and emerging markets in recent decades.