Among some investors, John Bogle is a legend. He was the founder of the Vanguard Group and a major 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, low-cost, well-diversified investments.
Bogle’s investment philosophy is just that—a philosophy. As such, it doesn’t specifically define detailed investment “rules.” However, a rule of thumb relating to asset allocation—that you should hold your age in bonds—is associated with this approach. In this article, we’ll explain the context behind that rule and how you can apply it.
- 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 on Mutual Funds, champions low-risk, long-term, low-cost funds.
- To achieve an acceptable level of risk in retirement portfolios, Bogle recommended that investors add bonds to their portfolios alongside stocks.
- He also suggested a rule of thumb for stock and bond asset allocation: that you should hold your age in bonds. For example, if you are 40 years old, 40% of your portfolio’s value should be in bonds.
Bogle’s Investment Approach
Bogle’s investment philosophy rested on a number of key principles: simplicity, reducing fees, and adopting a conservative approach to risk as a default position. He also believed that average investors would find it difficult or impossible to beat the market over time and that what they therefore needed was a low-cost way of investing in well-diversified index funds. This led him to prioritize ways to reduce expenses associated with investing in mutual funds and to eventually develop no-load funds. This approach later came to be known as passive investing.
Following a Bogle-like 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 with no matter what the market conditions: a portfolio that has an acceptable balance of risk and returns, and that allows you to avoid the temptation to sell or buy assets in response to short- or medium-term market fluctuations. Though it might not feel like it, changing your asset allocation in response to stock prices is, essentially, trying to “beat the market” over the short term—which is nearly impossible to do.
Instead, you should pick a range of assets for your 401(k) and stick with them. Some of these should be riskier but offer potentially higher returns, and some should be lower risk. For most 401(k) plans, that means you should invest in both stocks and bonds. Stocks are riskier but can offer higher returns; bonds are less risky but offer lower returns.
Bogle, in his book Common Sense on Mutual Funds, recommends holding a percentage of bonds that corresponds to your age: If you are 40, your portfolio should be 40% bonds; 50-year-olds should hold 50% bonds; and so on.
Bogle Asset Allocation
The precise mix of stocks and bonds (and other assets) in your portfolio is referred to as your asset allocation, and investors who follow Bogle’s investment philosophy use a number of methods for working out the right mix. Holding more bonds will make your portfolio safer, whereas owning more stocks will expose you to more risk. In addition, most investors will want to transition to a more conservative (less risky) portfolio as they near retirement.
All of these considerations led 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 forth.
Bogle also suggested that, during the retirement distribution phase, investors include as a bond-like component of wealth and asset allocation the value of any future pension and Social Security payment expected to be received. That is, you should look at your entire portfolio, and not just your 401(k) assets, when calculating what percentage of “bonds” you hold.
Of course, like all rules of thumb, this one is a simplistic approach to asset allocation that should be adjusted to the needs of individual investors. As stated, this rule leads to a fairly conservative portfolio, which is not surprising given Bogle’s general approach to risk. If you are capable and willing to take on more risk in exchange for the promise of higher rewards, it’s possible to tweak the formula in that direction by reducing the percentage of your portfolio that is held in bonds.
Conversely, many investors will need to withdraw money from their portfolio—and maybe even from their 401(k)—before retirement. If that applies to you, it can be worth building a more conservative portfolio to guard against the risk of such a withdrawal occurring during a broad downturn in the stock market.
Who invented passive investing?
John Bogle, the founder of the investment management firm Vanguard, invented the index fund in 1975 and subsequently became known as the father of passive investing. His creation served as an alternative to the traditional active investing method and was designed to help retail investors compete with the pros.
What asset allocation did John Bogle recommend?
Bogle suggested that, as a rule of thumb, investors should hold their age in bonds—40% for 40-year-olds, 50% for 50-year-olds, etc. However, like all such rules, it is not a good idea to blindly apply it without regard to your individual circumstances.
Can I use a Bogle approach to my 401(k)?
Yes. 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 Bottom Line
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 on Mutual Funds, champions low-risk, long-term, low-cost funds.
To achieve an acceptable level of risk in retirement portfolios, Bogle recommended that investors add bonds to their portfolios alongside stocks. He also suggested a rule of thumb for stock and bond asset allocation—that you should hold your age in bonds. So if you are 40 years old, 40% of your portfolio’s value should be in bonds.