You won’t find two people with more different approaches to long-term investing than Warren Buffett and John Bogle. Buffett has made billions selecting stocks (even while strongly endorsing index funds for retirement).
John Bogle, the founder of Vanguard Group, built his name on not selecting stocks. He didn’t invent passive index funds, but he sure has turned them into the preferred investment of millions of Americans.
So where do these two agree, and how can you take advantage of their most profound shared insight?
It’s simple enough: Turn off your TV. Don’t read the financial section of the paper. Shun market information entirely. Just don’t look, and you’ll be fine.
“Don’t watch the market closely,” Buffett told CNBC in an interview. “The money is made in investments by investing and by owning good companies for long periods of time. If they buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now.”
Which mirrors what John Bogle says about what to do when markets decline. Don’t open statements, don’t obsess, don’t even look.
“One of my favorite rules is ‘Don’t peek.’ Don’t let all the noise drown out your common sense and your wisdom. Just try not to pay that much attention, because it will have no effect whatsoever, categorically, on your lifetime investment returns,” Bogle said.
Not all investments do well over time. But the investments that do well typically do very, very well. So much better than the losing investments that it doesn’t matter at all — if you manage to not mess things up.
J.P. Morgan Asset Management has this boiled down to a single chart. The chart shows returns for a variety of investment types over the past two decades — REITs, stocks, stock-and-bond portfolios, bonds alone, gold, foreign stocks and so on.
Leaving aside volatility for a moment, REITs did great, returning 11.5%. The stock market did 9.9%, while a diversified portfolio returned 8.7%.
Way, way down on the far right of the chart you’ll find the “average investor.” The return experienced by that person was 2.5%, just a hair above inflation.
Crazy, right? Certainly that’s not the typical experience, you might say. But it is, based on a detailed analysis of mutual fund investors by Dalbar Inc.
The reasons why vary. Some of it is excessive fees charged by actively managed mutual funds and by financial advisors. But a big part of it is the investor “guessing wrong” on the near-term direction of stocks.
It’s buying high and selling low, the opposite of what you are supposed to do. It’s panicking in and out of stocks rather than buying them and just holding on, dollar-cost-averaging during declines and periodically rebalancing.
It’s the watching, and then reacting, that is the problem, the sin against your portfolio that Bogle and Buffett warn us against.
The problem is not the investments but the investor. The problem is our behavior, poor decisions made under pressure based on limited information and, often, exactly backwards in effect.
The answer, and I know it’s counterintuitive, is to do less. Don’t look, and you’ll retire with more.