John Bogle on How to Build Wealth in the Stock Market

But I think the idea of buying and holding forever and not trying to make adjustments requires that you've gotten it right in the first place. That you can only hold tight if you've bought right, if you will. And that is to say, have an asset allocation that has something to do with how many years you have to accumulate money, how much resources you have at stake, how much income you need, and how much courage you have to ride out the peregrinations of the market.

You summed up your investment philosophy as "buy everything and hold it forever." Do you still subscribe to that in light of what the market has been doing, or would you unload some things now?

No, I—my theory is not subject to the ups and downs, the peregrinations of the stock—the unpredictable pargradations of the stock market. It's painful to do, but I think the idea of owning the stock market is the best approach to equity investing. And perhaps I didn't make that thoroughly clear there. I have never felt that equities should be the only portion of an investor's long-term program. I myself am about fifty percent stocks, fifty percent bonds, for example.

I was brought up, when I came into this business in 1951, with the Wellington Fund, which was and is, and I hope always will be, a conservative balanced fund. But I think the idea of buying and holding forever and not trying to make adjustments requires that you've gotten it right in the first place. That you can only hold tight if you've bought right, if you will. And that is to say, have an asset allocation that has something to do with how many years you have to accumulate money, how much resources you have at stake, how much income you need, and how much courage you have to ride out the peregrinations of the market. So you've got to take all that into account.

From that simple statement, you are the godfather of index funds aimed at the average investor. This questioner points out that actively managed funds have outperformed an index over the last two years. Is there a case then for market timing? What should you do when the index funds are losing money?

Well, I—I my friend Jim Glassman quoted me in his op-ed piece in the Wall Street Journal yesterday. I quote: "I don't even remember where I made, but it said, I don't know anybody who has ever been successful in timing the market. I don't even know anybody who knows anybody who has ever been successful in timing the market." Last year, these last two years, the index S&P index has outperformed roughly half of the funds, a little bit less last year, just about half this year.

I don't regard that as a significant long-term sign at all. First of all, the number of funds is not a relevant statistic. We use it because it's convenient. But if you've got a few little funds in there that do well, they count just as much as a few big funds. The reality is, no matter what the statistics tell you, indexing always wins. I say that because index is delivering the market return, and all those investors out there are by definition getting the market return themselves, less cost.

So statistics don't capture that index advantage. It will be corrected in the next year or the next year. And by the way, if you look at the—even the last 15 years, counting those last two years, the indexes outperformed about 75% of all active managers.

Someone out there will want to take careful notes here because we're going to go from the general to the very specific. For the past 15 months, I've been investing $1,200 per month in Schwab mutual funds. He or she doesn't say which Schwab funds. Should I continue, or is there a better place for that money these days?

Far be it from me to get even more trouble with Mr. Schwab than I'm in already. But leaving aside that, you know, the infinite variety of a stock of mutual funds they could be buying through any kind of a mutual fund marketplace like Charles Schwab's, the answer is yes: continue to invest.

I've told you, particularly young people in the office who are really petrified by this market decline that it's the best thing that ever happens to them. If you think about it logically, of course, it's wonderful. I mean, think of, say, the young man I was talking to yesterday, who's probably 25 or 26 years old, and he's got the rest of his life in investing.

I said, well, let's suppose that Chris—Chris Scott, his name is. I said, let's suppose, Chris, that the market's going to end up, but Jim Glassman's 36,000 by the time you retire. Do you want to be investing all your money with the debt, with the Dow at 35,000, or invest it all when it's 9,000? Just think about that for a minute because you want a long time to invest at low prices.

And it's certainly a frightening advantage for those of us who have some money at work in the market today to think that this is a blessing. But it is a blessing because in the long run, investing depends on accumulating money at sound prices and not inflated prices like we have.

I also think the general economy and the financial markets are well served by a return to reality. When you leave reality and depart from the laws of gravity, there's nothing but bad things that can happen. And the higher you fly, the more you fall. We flew quite high enough, and I think it's a blessing—maybe a blessing in heavy disguise—a blessing that we've come back a little bit toward the ground.

Speaking of coming back toward the ground, this investor's stocks are really down: Dr. Coop, just for feet—is that quickly pharmaceuticals, Cisco, Lucent Technologies—should I sell? I haven't heard a list like that.

He even makes those tech funds I told you about seem like heroes. I don't have any comment on those individual stocks. I mean, they are hugely depressed. I think Dr. Coop, I read the other day, is in danger because the stock is in danger of becoming delisted. I think it's sold up in the mid-thirties—thirty dollars—and now is something like 19 cents.

Yeah, it wasn't a good turn, and it's very painful for people—for speculators, where people agreed, overwhelm their good judgment to get hurt. But will they bounce back? I mean, I guess the answer to that group of stocks, without knowing much about Quigley’s pharmaceutical and being very nervous about Dr. Coop, is, you know, companies like Lucent will come back in time. I don't think there's much question about that.

But the only handful of individual stocks—I don't think is sound investing. And to obviously jump on the bandwagon at a silly time is, you know, I feel very, very sorry for the investor, but I don't know how to help him now—him or her.