Bogle: Don't Take On Too Much Risk in Retirement

Investors in retirement should not be tempted to take on too much risk, says Vanguard's Jack Bogle. Yields are not as bad as people think, thanks to low inflation

Christine Benz 7 October, 2016 | 10:46AM
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This article is part of Morningstar's Guide to Passive Investing, helping investors make smart choices to meet their long-term investment goals.


Christine Benz: What would your counsel be to investors? It seems like for investors with very long time horizons it shouldn't be a big deal. They make it through sort of a tough next decade, but maybe better returns after that. But how about people who are retiring into this market environment? That's a fairly meagre return expectation. What should retirees be thinking about?

Jack Bogle: First, never underwrite the possibilities that I am wrong.

Benz: Okay.

Bogle: But having said that, I think an investor is wiser to plan on a lower return rather than plan on a higher return, because if you've got much more money when you retire than you expect, well, there are worst things that can happen to you in this life than that.

Benz: Right.

Bogle: But if you got much less, there may not be many worse things. You got to lean on your children or something like that. But I'd say a couple of things. One, stick with the market return, whether it's the bond market return. Don't try and do better. Don't go and buy commodities or gold. Don't buy hyped up real estate and master limited partnerships. Don't buy commodities. 

I mean the list of don'ts could go on forever. Just stick with the market. Don't try and do any better, because once you get – that means owning different portfolio than the market, the chances are just about the same that you'll lose, do worse than better in a low-return environment, and I think that's bad.

So, you are consigned to a low yield, although I should quickly add that yields are not as bad as people think, because real yields are not that far from their historical norms, because we had like 4% inflation in the last 50 years and now we're looking at maybe 1% or 1.5%. So, real yields are down. 

Real yields today are probably negative for the treasury bill, and they are probably positive by about 1% -- and not treasury bill – treasury tenure. And for the last 50 years, they've probably been about positive 1%. That's not a huge difference. So, it's difficult. So, here the options are, stick with the market return and draw down some capital. Do not reach for yield.

Benz: Well, that's been a big challenge with retirees. Many retirees have been gravitating toward higher-yielding sectors whether high-yield bonds or high-income stacks.

Bogle: It's risky. And those high-yield bond portfolios, I would warn any investor the difference between high-yield bond portfolio A and high-yield bond portfolio B can be enormous. And we like to think we're on the highest high-yield bond portfolio around, which we can afford to do because you've guessed it. 

We can provide the same yield because of our cost, which for our high-yield bond fund is probably 30 basis points or something, very low and the industry is probably 1.5%. So, we can take a 1.5% lower yield and therefore reach for less yield. So, be very careful about the selection and why we give investors.

And if you want to do that, it's not awful. But if you want to do it only in limited terms, should your bond portfolio be a third in high-yield bonds, for example? I would say that's too much. These are just judgements, personal judgements flawed. But be careful about going deeply into any other sector rather than seasoning your portfolio in it.

So, you can withdraw a little capital and if the market does a little better as time goes on, you maybe even increase that withdrawal. So, that's what you I think really have to do. And then for younger people, you have to save more. And it's not easy. I know that. You get all these conflicting things. You are trying to build up for college, your career, trying to do all these, I mean the demands are great and enormous and a family of modest means simply can't do it all.

So, it's save more if you possibly can, and as time goes on, I am not the great one for saying stay the course to say the least, but change your course a little bit if the returns out in the next five or six years, we get very good returns and those returns will bring us down to what I have talked about don't come to further off in time. You might want to withdraw a little or something, not for market timing, but I am – you can't do a family financial planning without thinking about some integration of the income that's actually being yielded, and those by the way are the returns on the funds that we talked about, not the income yields.

Stocks shield 2%, you can get a 2.5% portfolio of bonds. So, in a balanced portfolio you're getting 2.25% a year for costs. Here you're going to be lucky to get 1%. So, be careful about costs always, I mean it's just so obvious, most obvious the money market fund and which people are leaving now because of the gates that have been put up there, the possible gates go up, it would be interesting to see how that comes out. But I always in the editorial comment I thought it was better. The money market fund shouldn't be used as an investment account. If you need the money short-term, savings account is fine. You should be using short-term bond funds and…

Benz: Within your investment portfolio?

Bogle: In your investment portfolio, yeah. Short and intermediate is what I would do. I don't do long, because I just think most – I've been reading people's minds now, but most people can't deal with the volatility.

Benz: The volatility is very bond like, isn't it?

Bogle: Yeah, exactly. If you just don't look, you'll be okay.

Benz: Right.

Bogle: Don't peak.

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About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.