Jack Bogle: Should you buy Index Funds at All-Time Highs?

So it's no secret that the stock market right now is currently smashing through all-time highs, and boy, is the market expensive. We're currently looking at a Schiller PE of around 35. What that means is essentially investors are willing to pay realistically double for the S&P 500 as to what they would normally pay for it historically. We're also seeing a Wilshire GDP, a Buffett indicator, of now 200, which is just insane considering like a fully priced stock market is at about 100, and a cheap stock market is like 50 or 60.

But here's the tricky thing: most of us investors out there are passive investors. Passive investing is now by far the most common investing strategy in the whole world. It is the strategy of simply buying the whole market and just throughout your life, showing up periodically and just continuing to contribute to that broadly diversified portfolio. The idea here is that we consistently invest throughout our whole life and we simply get the average market return by doing that.

There's no brain power involved. We're not trying to pick individual stocks; we're not staying up all night doing research on individual businesses. We're simply buying the market and going along for the ride. In all honesty, this method of investing has made a hell of a lot of investors a hell of a lot of money. It's made a hell of a lot of just average Joe investors, people like you and me, it's made us a lot of money consistently over a long period of time.

But one thing I've felt lately, and chances are you've probably felt this too if you're a passive investor, is just how painful it is showing up at these current times, where every metric under the sun is showing us that the market is really quite dangerously overvalued. It's been quite painful showing up and continually sinking more and more money into the market at these levels. I mean, things start to go through your mind. Well, what if I know the market is so overvalued? What if a massive correction is around the corner? Do we persist even in these times, or do we kind of chill out and maybe not buy our beloved ETF so much over the next little while until the market is seen to be not so dangerous anymore?

Well, obviously, that's a very difficult question to answer, so I'm going to take the cop-out approach and I'm not going to answer it. But I am instead going to let the grandfather of passive investing, Jack Bogle, explain it instead. Interested? I'll see you in a second.

John Clifton Bogle was an American investor, business magnate, and philanthropist. But you guys probably know him quite simply as the founder of the Vanguard Group and thus the founder of the low-cost index fund, and thus the person that started this whole movement of low-cost, accessible passive investing. You may not have heard of him before, and in all honesty, when we think about people like Warren Buffett and Charlie Munger, he doesn't really get a mention among the most famous investing names. However, he really should, because by far he has helped more people on this earth create substantial wealth than any other investor.

Thanks to the power of YouTube, it was just yesterday I was watching a 1997 speech by Jack Bogle himself. That's why I love YouTube so much—you can literally find pretty much anything you want to consume on YouTube. Anyway, I was watching this speech, and what struck me was that he was talking about how passive investors should go about their investing at times where the market looks pretty dicey, when it's pushing like all-time highs and it's looking very overvalued.

So I want to share a couple of clips with you guys from this interview. First of all, listen to how he describes the market conditions that he was seeing then in 1997, and see just how well it matches up to what we're seeing in the stock market today. In short, it seems to me that speculation, betting on higher and higher valuations, is in the driver's seat. Investment, betting on the fundamentals of dividend yields and earnings growth is in the back seat—probably even in the rumble seat.

But when speculation drives stock returns in the short run, while it drives stocks returns in the short run, the crystal clear lesson of history, at least the past 200 years, is that in the long run, fundamentals drive returns. So that tension has to be resolved. Just like what he was talking about, the run-up towards the tech bubble. What we're currently seeing in the market is market returns—the market being driven up by speculation as opposed to people investing for the fundamentals of these businesses.

And as I've discussed on the channel before, this gives us two possible future scenarios, because here's the thing: price always at some point in the future will again align with intrinsic value. Okay, so yes, there are going to be periods of time where even if we just talk about the market in general, the price of the market will be substantially higher than its intrinsic value. And we'll also have times where the price of the market is below the intrinsic value.

As we see from history, as time goes on, it runs through cycles of being overvalued and undervalued. But the thing that we know is that at some point into the future, price will once again match up with intrinsic value. But in times when the market is really overvalued, what this means is it gives us two possible future scenarios with the idea that at some point into the future, price will once again match up with intrinsic value.

So that tension has to be resolved. Let me give you two extreme possibilities: one, a market drop of 35 percent just for the fun of it. This would lower price earnings ratio to a more normal level of about 13 times. Two, we're in a new era in which stock returns average 15, 14 earnings growth and a one percent dividend yield, rather than the long-term historic norm of about 10 and a half percent, six and a half percent earnings growth plus a four percent dividend yield.

In short, a new era of boom times and high valuations that would justify today's price levels. Now, of course, it could happen, but I wouldn't bet the ranch on it. The U.S. stock market, however, seems to be betting the ranch on it. It's priced, I think, for the best of times, and only for the best of times.

Wow! So there you go, that fits pretty perfectly into the 2021 investing environment that we're currently seeing now. He goes into a bit of detail there, but he's still essentially just talking about two potential possibilities. What we can see within a market that's very overvalued, aka the price is much higher than the current intrinsic value is: scenario number one, you can see the stock price, or the market price, fall so that again in the future we will see price meet intrinsic value; or on the other side, scenario number two, what we could see is a new economic boom time, where businesses are able to grow very, very quickly—say not in the 10 percent per annum ranges but more in the 20 or 30 percent per annum ranges—and that increase in growth lifts the intrinsic value of the businesses, and thus the market, and then the intrinsic value rises to meet the price.

They're the two ways that price can once again meet value in an overvalued market. But then that begs the question: well, what should we as passive investors do about it? Should we still be investing, or should we be holding off and waiting it out? Well, luckily for us, Jack gives five timeless tips that should help passive investors navigate even the most expensive market situations.

On that note then, let me close with five simple principles—a few ideas of what you might want to think about—principles of investing that may help you. First, invest: you must. The biggest risk is the long-term risk of not putting your money to work at a generous return, not the short-term but nonetheless real risk of price volatility. Even though stocks seem very high, consider what I said in my book (a little plug there): never think you know more than the market does. You have to be wrong if you do so.

Step one: keep investing. The biggest risk you can take right now is not investing at all. I love this tip, and I wholeheartedly agree. I believe that no matter the weather, passive investors should, number one, continue to show up. Remember, it's the ability of this strategy that we follow to work across decades and decades regardless of what market conditions we see that makes this strategy just so, so powerful. So absolutely, the number one tip, and I totally agree with Jack when he says this: no matter what the market's doing, there's a far bigger risk in not investing than continuing to invest if you are a passive investor.

So first things first, don't stop. Second, give yourself all the time you can. At the extremes, if you're in the 20s, begin to invest in stocks; you've only got a little bit. If you're in the 60s, invest more in bonds and lessen stocks. But always remember that compound interest is a miracle and time is your friend. Second tip: time is your friend. Who cares what happens tomorrow, next week, next month, across the next year?

It really doesn't matter for passive investors. Passive investors should always go back and look at what are the ultra long-term trends of the stock market and buy into that. Buy into the long-term trends. If you're able to do that as a passive investor, basically everything looks great no matter what starting point. Like, pick your starting point. Go back through the history of, say, the S&P 500 or the ASX 300. Pick a starting point wherever you like. You can pick the highest of the highest starting points, and if you zoom out across 20 to 30 years, really doesn't matter where you start—you're pretty much always going to be making money.

Third, have rational expectations about future returns and be mentally prepared for market declines. Always remember in good times and bad times alike: this too shall pass away. I spend a full page in my book on that sage piece of wisdom. If this too shall indeed pass away, and your emotions can kill you, you should keep them out of your investment program because impulse is your foe. Your emotions can kill you. I love this quote: impulse is your foe. The reason that passive investing works so damn well is that the strategy is impervious to emotion. You just show up, you keep investing, and it works.

In fact, the only time when passive investing throughout history has not worked is when the investor has been sucked into doing something silly through their own emotions and has ended up not following this strict passive investing dollar-cost averaging approach. So don't let that happen. Fourth, rely on simplicity—simplicity above all. There are too many witch doctors in this business with too many complexities. Basic investing is simple: a sensible asset allocation to stocks, bonds, and reserves; a middle-of-the-road selection of diversified funds; a careful balancing of risks and returns; and lest we forget costs, which can kill long-run returns too.

Don't disregard low-cost index funds. That's my only plug. Warren Buffett just happens to agree on buttress by his support on the importance of cost and on the value of indexing—a nice third-party endorsement, if you will. Fourth tip: stay diversified. I mean, this is now easier than ever before to achieve. You can literally, by buying one single ETF, you can get exposure to every single stock in the entire market from wherever you're from, right?

If you can buy one stock and that can track the S&P 500 or the Wilshire 5000, whatever, you can buy one stock and achieve massive diversification. And with economies of scale now, it's easier and also cheaper than ever before to get into these low-cost index funds, especially when you're looking at companies like Vanguard or BlackRock—you really can't go wrong. It is easier and cheaper than ever before.

Fifth and last: when you followed all of these four rules, as I said, and I've meant a thousand times, if not ten thousand times: no matter what happens, stay the course. Good luck in investing in these interesting times. Thank you.

Step five: hammer it home—just stay the course. I always say that passive investing is one of the easiest but also one of the hardest strategies to follow. It is very, very simple. It requires no brain power, so in that aspect it is a very simple stock market investing strategy that is proven to work and generate great returns. But it's very hard to stay disciplined and continue to show up periodically in those same time intervals, investing that same amount, following that dollar-cost averaging strategy.

That is where the difficulty lies in the passive investing strategy. It requires a lot of discipline to stay the course over decades and decades and decades to get that wealth building that we're all in it for. Okay, so tip number five: just stay the course.

So overall, they are Jack Bogle's five timeless tips that should help passive investors out literally in any market condition. But to really hammer home his points, I wanted to do an example. Imagine you are someone sitting in the room in the audience listening to this speech in 1997. And like probably a lot of you guys that might be watching this video, you want to get started with passive investing, but somehow, you still, even after watching the video, you still decide, "Now I'm gonna wait on the sidelines."

I'm going to put you in that situation back to 1997. Imagine if you're sitting in the crowd, listening to Jack Bogle, thinking the same thing: "No, no, no. I'm still not going to buy in, because the market's too expensive. I know I want long-term wealth creation, but it's too pricey right now." Well, even if you bought in at the most expensive point in 1997, what would you have achieved, what, 23 odd years later?

Well, look at this: you would have had a good time initially in the run-up before the tech bubble, but then you would have had a very bad time as the tech bubble popped. Then you would have enjoyed a nice run up again before the GFC tore everything apart. You would have been down again, and you know you would have had some turbulent emotions going on at that time, but you hung in there, and over the last 10, 10, 11, 12 years, you would have just seen a fantastic run-up.

But where would you be? Well, back then, at the highest point in 1997, the S&P 500 was at 983 points, and now in 2021, the S&P 500 is at 3,800 points. So it's almost three times higher in 23 years. Okay, if you invested 10,000 into the S&P 500 when you were at the highest point in 1997, the year that Jack Bogle gave this speech, and you just held on through thick and thin, 23 years later, you're now sitting here in 2021; you'd have about forty thousand dollars to your name.

And what did you have to do in the meantime? Nothing. You just had to stay invested—that's it. That's why Jack Bogle says block out your emotion and just stay the course. But anyway, I thought that was an interesting example to finish on. They are Jack Bogle's timeless tips for passive investors to navigate every single market condition. Even if the market's falling off a cliff, even if it's at all-time highs like what we're seeing right now, all five of these principles apply.

So I definitely encourage you to really listen to him. He is the grandfather of passive investing, so take what he says on board, and it will help you out a lot with your passive investing. But overall, that is it for this video. If you wanted a step-by-step approach to how to get started with the passive investing approach, definitely check out Profitful down in the description below.

Check out the links down there. The course you want to check out is Stock Market Investing for Beginners. That is a four-hour in-depth course which just describes and explains, with examples, the full passive investing idea and how to actually get started with that approach. So if you're interested, check it out down in the description. But that'll do me for today, guys. Leave a like on the video if you did enjoy it. I say this all the time, but I definitely mean it every time I say it—it helps out the channel a lot.

It is the easiest way to help out the channel, and it really does make a difference. So if you want to hit the like button, it takes you all of one second, and I really appreciate it. So thank you guys very much. Thanks for watching. Subscribe to the channel if you haven't done so already, but that's it from me. I'll see you guys in the next video.