Tags: Swan | stocks | Bogle | bonds

Bogle: Risk of Black Swan Event Low but Real

Monday, 13 August 2012 07:46 AM

Investors need to “wake up” and prepare for unparalleled uncertainty facing the global economy, where black swan events — unlikely occurrences deemed impossible to foresee but appear obvious in hindsight — cannot be ruled out, said John Bogle, founder of the Vanguard Group.

Stocks, Bogle said, remain a choice investment despite the perceived risks associated with delving into equities markets.

“It’s urgent that people wake up,” Bogle told The New York Times.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

“The economy has clouds hovering over it,” Bogle added. “And the financial system has been damaged. The risk of a black-swan event — of something unlikely but apocalyptic — is small, but it’s real.”

To deal with such uncertainty, investors must resist the temptation to avoid stocks on perception that they’re too risky.

Stocks will produce better returns than many fixed-income alternatives, though investors should avoid trying to beat the market.

“Wise investors won’t try to outsmart the market,” Bogle said, according to The Times.

“They’ll buy index funds for the long term, and they’ll diversify. But diversify into what? They need alternatives, bonds, for the most part. What’s so frightening right now is that the alternatives to equities are so poor.”

Political and economy uncertainty in the United States, a cooling Chinese economy and the European debt crisis that shows no signs of abating have sent investors worldwide flocking to U.S. Treasury securities.

Such aversion to equities have driven Treasury prices up and yields down to the point that returns are so low that they don’t even keep pace with U.S. inflation rates.

“[T]he outlook for bonds over the next decade is really terrible,” Bogle said.

“In investing, you get what you don’t pay for. Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course,” he added. “And they won’t be foolish enough to think that they can consistently outsmart the market.”

Dividend-paying stocks have grown in popularity recently, as their yields top fixed-income investments.

In the past 12 months, Standard & Poor’s 500 Index companies that pay dividends have outperformed non-dividend companies by more than 9 percentage points, USA Today reported.

"A dividend is a check in the mail. Investors are looking for income," said Howard Silverblatt, senior index analyst at S&P, according to USA Today.

"And there are not a lot of places to get it."

Interest rates on money market funds and one-year certificates of deposit are less than 1 percent, while the yield on the benchmark 10-year U.S. government note is hovering around 1.65 percent, a near record low.

General Electric, meanwhile, is sporting a 3.4 percent yield, while pharmaceutical giant GlaxoSmithKline yields 5.1 percent these days.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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Monday, 13 August 2012 07:46 AM
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