Now before I commit blasphemy, a few words: I am as close to being a Boglehead as you will find, without actually being one. The bulk of my portfolio is in passive indexes. Most of the assets I manage are in a broad allocation model.
This is a tribute to the wisdom and teachings of investing legend John Bogle, who founded Vanguard Group 40 years ago on the premise that matching market-based returns yielded better results for most investors than picking individual stocks, market-timing or any other investment strategy. During the past four decades, the sleepy firm Bogle started has turned into an investment giant, now managing about $3 trillion.
But we have learned many things during the intervening years. I don’t want to commit the sin of ignoring the accumulated quantitative evidence. There are certain mathematical truths in investing, and to pretend they don’t exist would harm my portfolio (and my clients).
Please understand that my deviation from Bogle’s philosophy isn’t due to hubris, but rather, mathematics. Certain facts of long-term investing have such strong evidence behind them that they are almost incontrovertible. It would be irresponsible for any investor, or their fiduciary, to ignore this evidence. Hence, I find myself at odds with someone I respect in four areas of portfolio management:
1) Overseas Investing: Last year, Bogle restated his bias against emerging markets and non-U.S. assets, saying, “I wouldn’t invest outside the U.S.,” primarily because of currency costs.
This approach has numerous problems. It ignores diversification of assets. It ignores equities in other parts of the world that are both cheaper and faster-growing. It ignores that over time, currency issues are a wash. It reflects a home- country bias. As Cullen Roche pointed out, excluding a vast class of assets turns Bogle into “an active investor in passive clothing.”
2) Smart Beta: Bogle recently said this to Institutional Investor: “Smart beta is stupid; there’s no such thing. It’s an idiotic phrase. Quoting Shakespeare, I guess: It’s a tale told by an idiot, full of sound and fury, signifying nothing.”