Everyone wants to know the secret to having the ideal portfolio when investing. Legendary investor John Bogle shared his philosophy on building the perfect portfolio that can withstand time. Keep reading to see what he had to say about how to construct the perfect portfolio.
Below is the transcript of an interview with John Bogle when he was asked his thoughts on the perfect investment portfolio.[1]
Interviewer question: “But now, this brings us to the main point of our discussion with you, which is to get your advice for our viewers about what you consider to be the perfect portfolio. Now, we know there’s no such thing as perfect, but I suspect that TIFs will play some role in this. What would you say to the typical investor now today, looking forward, how should we be managing our wealth?”
John Bogle responds: “Well, let me, um, I tried to cover this. You’d be surprised at some of what I’ve done in the asset allocation chapter of my book a little bit because I’ve come to the conclusion there’s really not a very good answer, and I’ve concluded that regular rebalancing is not terrible but not necessary. I’ve come to conclude that it’s 60%, 40% portfolio is probably the best option rather than going from 80 20 to 20 80 in a target retirement plan. I maybe right and I may be wrong on that, and I find it something very individual, and you know, and I mean everybody knows this intuitively at the beginning, there are no easy answers to this. So I’ll come to exactly what I’m doing, but what I was, what I did, I got a letter from clearly a young man who was really worried about how he should be investing and what his allocation should be, and he said, ‘You know the dangerous, risky world out there,’ and he didn’t mention it, but of course he’s right. You have potential nuclear war, global warming, much more than just potential, and racial division in the country, right now, threats to world trade, and division of wealth all over the world but most often very heavily in the US between the haves and the have-nots. All those things are worth worrying about, but I said to him, ‘You don’t know, and I don’t know what’s going to happen to any of them. The market doesn’t know. Nobody knows. So you just have to put them out of your mind and forget it. What you want to think about is how much risk you can afford, and that’s very much a personal thing, and it has a little bit to do with whether you’re investing regularly and things like that.’ And then I said to him, ‘If it’s helpful to you, I’ll tell you what I’m doing now.
“I’m 88 years old and have an unusual kind of planning my estate, and,’ I said, ‘I’m 50% bonds and 50% stocks. I don’t happen to rebalance around that. It just seems to come out that way, particularly in recent years, and it’s been higher than that and been lower than that, but right now, I’m very comfortable at 50-50, although I spend half my time worrying that I have too much in stocks and the other half of my time worrying that I have too little in stock, and I think that’s the way most investors feel. They don’t know what the right number is, and when the market’s going up, they say, ‘God, why don’t I have more stocks?’ when it’s going down, so you’re your own worst enemy in all this.'”
“Yes, but having some stability without automatically rebalancing, I don’t think you need to do that. And it’s very clear, you know, and anybody understanding economist certainly understands this, that the more, the less you rebalance, the more you’re going to have because you’re always selling the better-performing asset, and you don’t know whether it will do in the long run. But I also look at it as, as very importantly, uh, and this is, this is kind of an interesting thing. I think the most important thing you need to know about the performance of the stock market in the next 30, 40, 50 years is what is the GDP of the United States going to do. Corporate profits are correlated at 96 percent, S&P dividends are correlated at 96 percent with with the GDP of the United States. The GDP doesn’t grow quite as fast, but not a big difference, 6.7 compared to 7.5 or something like that, and then they’d be nominal, and uh, I think so what interests me is in Peter Lynch’s book, something about Wall Street, one up on Wall Street or something, he says there’s no number that could interest him less than the GDP number. Is it going up or down? And what that is is a statement that the short term is more important than the long term, and I don’t believe this. The short term is more important than long term. And then you even get in Freakonomics, those wise guys, they did a nice interview with me. I’ve heard all of it yet, but I will someday, um, say pay no attention to the GDP. Well, it’s everything, right? But it’s not everything today and tomorrow, right? You know, the GDP probably rose today about two, three hundred and sixty fifths of one percent or something, whatever it is, uh, we don’t pay any attention to it. But it all comes down to, for your, you know, the best portfolio is: are you an investor or are you a speculator? And if you’re going to keep changing things, you were speculating because we can’t know. If you’re going to put commodities in there, the ultimate speculation, it has nothing going for it: no internal rate of return, no dividend yield, no earnings growth, no interest coupon, nothing except the hope, largely vain probably, that you can sell to somebody else for more than you paid for it. How that could be even considered,gold let’s say, an investment, uh, I do not know. So it’s, I’d like to take the mystery out of it and say that the perfect portfolio, first, I think, for a huge proportion, over 90 percent certainly of the investors, should be limited to marketable securities. They don’t need the liquidity today, but and we may have, you know, too much marketability, and that is too much sensitivity to prices as they change day by day. But you want to get out of the idea that you always have to do something. And I have said in my books, and you know something happens and the Federal Reserve does something and the traders all at the beginning of the day, I think it’s going to cause the market to go down so they sell and everybody else says it has nothing to do with anything for you. And when you hear news, and your broker calls up and says, ‘Do something,’ just tell them, ‘My rule is: don’t do something. Just stand there.'”
“It’s, a lot of the rules that apply to the investment are not rules that apply to ordinary life, right? And, so don’t do something. Just stand there. So, get a rough idea of what you want to allocate your money to. Now I, I do, I’m really entirely indexed at my 50 50, although, oh my, and I can’t give you the proportions because I don’t remember them, but my bonds that are in my retirement plan are bond index funds, and the bonds that are in my, my, personal account are municipal, Vanguard municipal bond short intermediate. And so I’m reasonably comfortable with that. So, I think I’m too conservative for the average investor. So I’d say the perfect portfolio, and it should be, well, let me just mention one other issue and try a little bit differently.”
“Blair Academy, I have a scholarship fund that I’m allowed to manage, and I don’t want to spend any time on, and I don’t, so here is exactly what I’ve done on the assumption that nobody will touch it for a long time and when I’m gone. I mean, maybe they will, maybe they won’t, but what I did, this is probably ten years ago, we say put half of it in Wellington Fund and have it balanced index fund. The idea was not all on balance index fund because there could be things that happen that a manager needs to adjust to. Neither of them have an international component, and that’s fine with me. That’s, I believe that’s the better strategy. So that’s, and they would be together 90% of the fund, and then against two contingencies, just in case I put five percent in the emerging market index and, I hope you’re sitting down, five percent in gold.”
Interviewer: “Really?”
John Bogle continues: “Yeah, in the event, just a five percent hedge against some kind of catastrophe. Now, I wouldn’t call that the perfect portfolio, but I mentioned only because that’s one, there’s distinctive meaning you cannot touch it and, uh, at least theoretically can’t touch it. It’s designed to be held through all extremes. And so that’s going to give you with the two balanced funds, roughly 62% in equities. That’s going to be with Wellington Fund more corporate bonds than the index fund has. I think the index is something that we should be very, very careful about because it has the one of a better expression, too damn much in governments. I don’t think any individual would have a a bond account 70% in governments and 30% in corporates. Maybe it should be the reverse. I think that makes more sense. Can I prove that? No, I can’t. So it’s looking at the long term, looking at the numbers, looking at cost above all. There’s no there’s no ideal portfolio, perfect portfolio that ignores cost.”
“Now you know, I’ve seen these articles saying, for example, commodities, no internal rate of return, silly, including gold, except that’s the if nobody’s gonna, nobody’s looking, and we have something explosive that will help, and it probably shouldn’t hurt you too much. This portfolio actually had done rather well in the last couple of years, and it’s fine in the long run, and uh, so you know, and actually it may be doing better than my own, but I don’t, but I look at my performance because I’m so conservative, right? I look at, I look at the funds. Yeah, but it’s almost all indexed and I do have Wellington Fund from those days with Mr. Morgan and I wouldn’t give that up as a sentimental matter, but, but I should…”
Key Takeaways:
- There is no single perfect portfolio. Asset allocation depends on your personal risk tolerance and investing time horizon.
- Regular rebalancing may not be necessary. Letting winners run can lead to better overall returns.
- A 60/40 stock/bond allocation is a reasonable starting point for most investors. Adjust based on your specific situation.
- Focus on long-term GDP growth rather than short-term market fluctuations. GDP drives corporate profits and stock returns over time.
- Limit costs by using low-fee index funds for the majority of your portfolio. Excessive fees hurt long-run returns.
- Avoid speculating on assets like commodities that have no inherent return. Focus on productive investments.
- Maintain an allocation you can stick with in good times and bad. Don’t chase recent returns.
Conclusion
Ultimately, Bogle believes the perfect portfolio involves low-cost, diversified, and productive assets aligned with your risk appetite and time horizon. It should be set up to endure over the long term without constant tinkering. By tuning out short-term noise and focusing on key growth drivers like GDP, investors can create an ideal portfolio to meet their needs and stand the test of time. The ultimate goal is locating your personal sweet spot on the spectrum between risk and return.
