When Vanguard Group founder John Bogle created index investing, it helped provide investors with a streamlined and low-cost way to buy broader market-tracking mutual funds. His contributions made such a lasting impact that there is an official Boglehead® community that holds conferences, writes books, and runs an informational forum with “. . . more than 120,000 registered members who have made more than six million posts.”
Warren Buffett once said, “If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle.” Though he died in 2019, his lessons continue to light the path toward a financially secure and happy retirement. Reviewing them is a healthy exercise for all those trying to make their hard-earned savings outpace inflation over time.
Bogle Quote #1
“Ask yourself: Am I an investor, or am I a speculator? An investor is a person who owns business and holds it forever and enjoys the returns that U.S. businesses, and to some extent global businesses, have earned since the beginning of time. Speculation is betting on price. Speculation has no place in the portfolio or the kit of the typical investor.”
This sentiment aligns with the idea that time in the market generally beats timing the market. It doesn’t feel good to see the market drop, and it’s a natural human urge to want to withdraw funds until the coast is clear. But, in this case, leaning on the perspective of history is typically more valuable than survival instincts. Timing the market would require a crystal ball, and those don’t exist. Market recoveries average a 30% rise in the first 30 days of that movement. Sure, the entire process is more gradual, but the first fraction of that recovery time, on average, makes the difference. Missing out on those gains can enormously damage your overall portfolio.
Reviewing S&P 500 data from 1995 through 2023 provides 29 years of evidence. Folks fully invested saw a compound annual growth rate of 8.4%, meaning the money typically doubled about every nine years. Missing the best five days out of those 29 years had a devastating impact: the return dropped to 6.6 percent, a 21% lower annual return. It worsens from there—missing the best 30 market days dropped the return to 2.0%.
Take John Bogle’s warning to heart. The risk of missing out on the market’s best days is too high to attempt that nearly impossible tightrope act.
Bogle Quote #2
“The greatest Enemies of the Equity investor are Expenses and Emotions.”
Good habits are one of the most effective ways to overcome life’s challenging moments. As they plan for retirement, investors are beset by a long list of concerns, not least of which is an unpredictable equity market. And no matter how poorly a portfolio performs, life’s expenses seem to rise. It takes courage to stay invested, and one helpful technique to cap equity exposure at a more tolerable level is to diversify with some percentage of safety-type assets, such as fixed income and cash. Specifically, racking up three years’ worth of dry powder can be highly constructive.
In finance, dry powder refers to the cash reserves a company or individual maintains to meet obligations during economic stress. It equates to the various ways to fill your Cash (savings, money market, certificates of deposit) and Income (treasuries, municipal and investment-grade bonds) buckets.
Follow these two steps to figure out how much you might need.
- Calculate your annual income gap.
Take your annual expenses (food, home, auto, medical, charitable giving, travel, core pursuits, taxes) and subtract your guaranteed or recurring income (Social Security, pensions, annuities, rental properties, deferred compensation, etc.). If you need $100,000 per year, and your guaranteed income from Social Security and pensions is $50,000, your portfolio requires you to cover $50,000 annually. That is your income gap
- Multiply your income gap by three.
Multiplying the income gap of $50,000 by three years shows a need for $150,000 of dry powder in your portfolio.
Running the scenario in reverse helps illustrate. Say your portfolio has $1 million, with $400,000 designated to the dry powder category. Your income gap is $40,000. Dividing $400,000 by $40,000 reveals you have 10 years of dry powder ready to cover yourself during high-stress periods.
For many, dry powder is an important psychological tool for sleeping well at night. Or, as Bogle might put it, it can protect against expenses and emotions. Preparing for volatile times by fortifying a reliable structure helps to prevent your nest egg from cracking when the world shakes.
Bogle Quote #3
“The greatest enemy of a good plan is the dream of a perfect plan. Stick to the good plan.”
Some future retirees worry so much about selecting the wrong plan that they never get around to picking one at all. Listen to John Bogle and accept that no plan is perfect. Adjustments can always be made later, so just get started.
There’s a common adage that it’s better to be lucky than good. Unfortunately, luck doesn’t last as long as your retirement savings need to. So, stop searching for the ancient alchemy or secret potion. There are multiple paths to accumulating wealth, but none are shortcuts. While time, patience, and planning may not sound sexy, the financially secure, happy retirement they could create sure does.
You may prefer to draw your own blueprint. Here’s a link to an interactive financial planner that pairs happy retirees’ lifestyle habits with the financial benchmarks to potentially fund them. A financial advisor can also help you formulate your portfolio allocation and budget strategy based on future spending goals, inflation protection, risk tolerance, and probabilities of financial success. All it takes is some personal reflection and a little research to find the right fit.
Bottom Line
John Bogle’s idea helped limit Wall Street’s control over making money from American workers’ hard-earned productivity. Future retirees willing to practice the disciplined patience it takes to allow their money to outpace inflation over time increase their probability of accumulating wealth sufficient to fund their needs, wants, and desires throughout their golden years.
John Bogle reinvented the wheel, but his teachings are valuable reminders that you don’t have to. Design a slow and steady retirement plan, and let that wheel’s momentum carry you to a happy retirement.