Asked to explain his retirement investing philosophy to young people, Vanguard Group founder John Bogle summed it up very simply: Expect a 7% return from the growth of American business and nothing more, and never, ever speculate.
The U.S. stock market rides on the productivity of American business, Bogle said in an interview. Corporations pay a dividend yield of about 2%, and long-term earnings growth is about 5%.
Add those two numbers together and you get a solid, repeatable 7% return, so long as you don’t blow it by trying to reach for more, Bogle warned.
You can avoid the Wall Street casino simply by not attempting to beat the market by speculating in the short term. Just get in and stay in, Bogle told young investors, and it’s very hard to get it wrong.
“I would say, go into the casino, which is what Wall Street is today. Bet on the entire stock market and then get out of the casino and never show yourself there again,” Bogle said.
He then uses a metaphor that’s very near and dear to us in the portfolio indexing world, calling short-term, active trading strategies a “loser’s game.”
The term was coined decades ago by Charley Ellis, a former member of the Vanguard board and today a member of the Investment Committee of my firm, Rebalance.
“Just don’t play the game, because the game is not worth playing. It’s a loser’s game,” Bogle said. “It’s a buy-and-hold game, not a short-term speculation game.”
The metaphor used by Ellis resonates still, a generation after it was first published in the Financial Analysts Journal and later became the classic investment book, Winning the Loser’s Game.
Ellis was talking about tennis. His fundamental insight was that the skills gap between amateur and pro tennis players is absolutely enormous.
Yes, a small number of professional tennis players should be trying to win. They should be making the effort to push an opponent to the limits of his or her abilities, to force them into making errors.
Retiring with more
Amateur players, however, benefit consistently from holding back and playing to their physical abilities. Just keep the ball going back over the net and, in time, your opponent will make mistakes that give you the points and the game.
Get in, stay in, avoid big mistakes. It’s not exciting tennis and I can guarantee you it’s not exciting investing. But that’s really the key to retiring with more — go focus on your career, your life, your family, all the things that will benefit from your active involvement.
Just don’t pour yourself into trading stocks, because the mostly likely outcome will be a significant mistake that costs you big. In contrast, owning the market and keeping fees low is plenty enough to compound your savings into a solid retirement.