Here’s a quote from John Bogle regarding the subprime mortgage crisis and the part that the rating agencies played:
I have always been skeptical about the rating services. I think there was tremendous reliance on rating services. It is irresponsible for a giant financial institution to let someone else tell them the quality of the investments in their portfolio. Asking the rating agencies, who get paid to rate each of these CDOs, was like asking the barber if you need a haircut!
Good point. However, I don’t think the financial institutions had any idea what their portfolios were worth!
The other interesting quote came when Bogle was asked where he thought the Dow Jones Industrial Average would be ten years from now:
Well, the Dow is a peculiar piece of work. The Dow yield is 2.2 percent now, vs. the S&P’s 2 percent. Since I’m expecting a 6 percent to 7 percent return on stocks, the Dow ought to grow at 4 percent to 5 percent a year. So over ten years, growing 4.5 percent a year, it would grow by 55 percent and so it would be slightly over 20,000, give or take. But anybody who is expecting that ought to be prepared for a lot of bumps along the way.
I’m not a betting man, but if I were, I would bet (justified or not) that the Dow would be higher than that in ten years. This is pure speculation on my part, but I just think there’s a lot of foreign money out there and that money is going to prop up our stock prices.
Finally, did Bogle change his rule of thumb that states that a person’s bond allocation should be equal to their age? For example, a 40-year old should have 60% in stocks and 40% in bonds. When asked how a person who was 20 years from retirement should invest, Bogle said (emphasis mine):
People are retiring later in life nowadays. I’m 13 years past 65, and I still have plenty of energy to work every day. I got up at 5:30 this morning in New York and was ready for an 8:30 meeting in Philadelphia. If I can do it, I don’t see why anyone else can’t.
Take someone who is 45. They should be 70 percent stocks and 30 percent bonds. People think I’m being too conservative, but I would remind them that corporate earnings grow at about the rate of our GDP. Corporate after-tax profits as a percent of GDP have gone above 10 percent for the first time in history. Normally they are 6 percent of GDP. I don’t look for that to go any higher.
Hmmm… Interesting stuff. Be sure and read the rest of Bogle’s interview in the 2008 Fortune Investor’s Guide.