Bogle Asset Allocation for Your 401(k)

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Among some investors, John Bogle is a legend. He was the founder of the Vanguard Group and a leading proponent of index investing. During his lifetime (he died in 2019), he revolutionized the world of mutual funds and developed an investment philosophy that is still very influential. His approach was based on simple, inexpensive and well-diversified investments.

Bogle’s investment philosophy is nothing but a philosophy. As such, it does not specifically define detailed investment “rules”. However, there is an asset allocation ‘rule of thumb’ – that you should keep your ‘bond age’ – associated with this approach. In this article, we will explain the background of this rule and how you can apply it.

Key points to remember

  • John Bogle was the founder of Vanguard and is known as the “father of passive investing”.
  • His approach to investing, as described in his book Common sense about mutual fundsadvocates low-risk, long-term, low-cost funds.
  • In order to achieve an acceptable level of risk in retirement portfolios, Bogle recommended investors add bonds to their portfolios alongside stocks.
  • He also suggested a rule of thumb for asset allocation into stocks and bonds: you should maintain your “bond age.” So if you’re 40, 40% of the value of your portfolio should be in bonds.

John Bogle’s investment approach

John Bogle’s investment philosophy was based on a number of key principles: simplicity, cost reduction and adopting a conservative approach to risk as the default position. He also believed that average investors would find it difficult, if not impossible, to beat the market over time, and therefore needed an inexpensive way to invest in well-diversified index funds. This led him to prioritize ways to reduce the expenses associated with mutual fund investing and eventually develop no-fee funds. This approach later became known as passive investing.

Following a Bogle-style strategy when it comes to your 401(k) starts with the same principles. The idea is to choose a strategic asset allocation strategy that you can stick to regardless of market conditions: a portfolio that strikes an acceptable balance between risk and return, and allows you to avoid the temptation to sell or buy assets in response to short to medium term market fluctuations. While it may not seem like it, changing your asset allocation in response to stock prices is essentially trying to “beat the market” in the short term, which is nearly impossible to do.

Instead, you should choose a range of assets for your 401(k) and stick to it. Some of them should be more risky but offer potentially higher returns, and some should be less risky. For most 401(k) plans, this means investing in both stocks and bonds. Stocks are riskier but can offer higher returns; bonds are less risky but offer lower returns.

John Bogle, in his book Common sense about mutual fundsrecommends holding a percentage of bonds that corresponds to your age: so if you are 40 years old, your portfolio should be composed of 40% bonds, and at 50 years old, 50% bonds, etc.

Bogle Asset Allocation

The precise combination of stocks and bonds (and other assets) in your portfolio is called your asset allocation, and investors who follow John Bogle’s investment philosophy use a number of methods to find the good combination. Holding more bonds will make your portfolio safer, while holding more stocks will expose you to more risk. Also, most investors will want to switch to a more conservative (less risky) portfolio as they approach retirement.

All of these considerations led John Bogle to formulate a simple rule for the percentage of your portfolio that should be in bonds: roughly, your age. In other words, if you are 30 years old, 30% of your portfolio should be held in bonds, and so on.

Bogle also suggested that during the distribution phase of retirement, investors include as a bond-like component of the wealth and asset distribution the value of any future pension and social security payments that they expect to receive. In other words, you should be looking at your entire portfolio, not just your 401(k) assets, when calculating the percentage of “bonds” you own.

Special Considerations

Of course, like all rules of thumb, this is a simplistic approach to asset allocation that should be adjusted to the needs of individual investors. As noted, this rule leads to a fairly conservative portfolio, which is not surprising given John Bogle’s general approach to risk. If you are able and willing to take more risk in exchange for the promise of higher rewards, it is possible to modify the formula in this direction by reducing the percentage of your portfolio held in bonds.

Conversely, many investors will need to withdraw money from their portfolios — and perhaps even their 401(k) — before retirement. If this applies to you, it may be worth building a more conservative portfolio to hedge against the risk of such a pullback occurring during a general stock market downturn.

Who invented passive investing?

John Bogle, the founder of investment management firm Vanguard, invented the index fund in 1975 and later became known as the “father of passive investing”. Its creation served as an alternative to the traditional method of active investing and was designed to help retail investors compete with the pros.

What asset allocation did John Bogle recommend?

John Bogle has suggested that as a general rule, investors should keep their “age in bonds”. However, like all of these rules, it’s not a good idea to apply it blindly without considering your personal circumstances.

Can I use a Bogle approach in my 401(k)?

Yes. John Bogle’s investment strategy focused on long-term, low-risk, low-cost mutual funds, exactly the kind of investments that are suitable for a 401(k) plan.

The essential

John Bogle was the founder of Vanguard and is known as the “father of passive investing”. His approach to investing, as described in his book Common sense about mutual fundsadvocates low-risk, long-term, low-cost funds.

In order to achieve an acceptable level of risk in retirement portfolios, Bogle recommended investors add bonds to their portfolios alongside stocks. He also suggested a rule of thumb for asset allocation into stocks and bonds: you should maintain your “bond age.” So if you’re 40, 40% of the value of your portfolio should be in bonds.

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