Bogle to Moneynews: Pension Funds Face Troubles in Low-Return World

Tuesday, 09 Oct 2012 04:01 PM

By Forrest Jones and David Nelson

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Pension funds, and even customers who invest in them, aren’t prepared for the realities of investing in a low-return world, said John C. "Jack" Bogle, founder of the Vanguard Group.

Funds that promise returns of around 8 percent, an oft-touted promise, will fail to deliver, as not only will asset classes not meet that goal, but costs, inflation and even human error when picking stocks will take their toll as well.

A portfolio mix of stocks and bonds will fall short of that goal, as investors can expect stocks to return about 7 percent over time, while bonds will return 2.5 percent.

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“Let’s call it 10 percent — and divide it by two for a 50-50 portfolio, that’s 5 percent. And it’s 5 percent in gross returns, those are the market returns,” Bogle told Newsmax TV in an exclusive interview.

Not all investors, meanwhile, are going to beat the market average.

“These investors don’t capture the market return. They have costs, they have behavior problems and maybe they can get in the 5 percent balanced market for stocks and bonds and maybe they could get 4 percent if they were lucky, and if they index it they could probably get 4.5 percent — that’s a long way from 8 percent,” said Bogle, author of the new book “The Clash of the Cultures: Investment vs. Speculation.”

Editor’s note: To order ‘The Clash of the Cultures’ at a great price — Click Here Now.

Stretch that over time, and lower returns will seriously disappoint investors pitching their clients plans that provide returns of 8 percent.

“I think they have all forgotten their compound interest tables — the difference between 5 percent and 8 percent over 10 years is staggering. It’s probably 2-to-1 in terms of the expected results.”

Many noted investors have argued that global markets have settled into a new reality, marked by lower returns and economies reporting lower growth rates and higher unemployment figures.

U.S. markets, meanwhile, are dealing with increasing regulations in the wake of the financial crisis, particularly those outlined under the Dodd-Frank financial reform law, which gives regulators greater say-so on bank capital requirements, liquidity levels and risk-management practices and would also ban banks from trading their own money for profit in capital markets.

Regulations are here to stay, Bogle said, though resurrecting the Glass-Steagall Act, which banned commercial and investment banks from operating under one roof, would have been quicker, easier and less painful.

“There’s a lot I like about Dodd-Frank,” he said, noting that it would have been simple to say, “‘Let’s bring back Glass-Steagall.’ … You’re either in the business of deposit banking or you are in the business of investment banking and you don’t mix the two.”

Many have argued that repealing Glass-Steagall in the 1990s allowed investment and commercial banks to merge and become too-big-to-fail financial institutions that threatened the health of the broader economy when they took large bets in the housing market that went sour.

“That law worked pretty well from, let’s say, 1933 or 1934 to about 1995. That’s 60 years and it survived the test of time, and doing away with it was a terrible mistake.”

Meanwhile, banks are spending time shifting through pages of regulations and compliance demand outlined under Dodd-Frank, the product of excessive risk taking on Wall Street.

“But the fact is that the behavior of the Wall Street community demanded some sort of regulation. I basically don’t like regulation, but if you behave badly, you’ve got to expect it and live by it.”

Editor’s note:
To order ‘The Clash of the Cultures’ at a great price — Click Here Now.



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