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May 20, 2021
Episode 58 of the NewRetirement podcast is an interview with Jack Brennan — the handpicked successor to Jack Bogle at the Vanguard Group, where he was CEO from 1996 to 2008 — and discusses what it was like growing Vanguard, key lessons during Jack’s tenure, and his new book, More Straight Talk on Investing: Lessons for a Lifetime.
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Steve: Welcome to The NewRetirement podcast. Today, we’re going to be talking with Jack Brennan, the handpicked successor to Jack Bogle at Vanguard, where he was CEO from 1996 to 2008. We’re going to discuss what it was like growing Vanguard, key lessons during his tenure, and his new book, More Straight Talk on Investing: Lessons for a Lifetime. Jack joins us from Boston, Massachusetts, where I was born. And with that, Jack, welcome to our show. It’s great to have you join us.
Jack: It’s a treat to be here. Thanks for having me.
Steve: Yeah. I appreciate your time. Our community, I throw out in our Facebook group that you’re going to be joining us. We have a lot of questions from them later on, but I wanted to cover a little bit about you and your history with Vanguard and then your book, and then we’ll get to the user questions. So yeah, for you, why did you originally get into financial services and how did you end up at Vanguard?
Jack: So it’s probably genetic. My father ran a bank. My sister and my brother are bankers. So there’s some financial gene we have somewhere along the way. But listen, I sort of lucked into coming to work at Vanguard, actually. It’s a long story, no need to bore you with, Vanguard was really a bit player in the financial business, even in the mutual fund business at the time. It was seven years old in its current state. And to be honest, when I did a little homework with people from Boston, the two things they told me were, one, it has no future. And two, you don’t want to work for Jack Bogle. And my father had done a lot of that homework for me. And he says when he’s done, “You’re going to take the job, right?” I said, “Absolutely.” I’ve been a contrarian my whole life and I’m going to take it because I think, Jack, I could learn a lot and I’d enjoy working with him on the one hand and who knows.
Jack: I was young. We were just married, no kids, all that stuff. And it was a time you could take a bet, but there was something special about the unique aspects of Vanguard being owned by your clients that appealed to me at a gut level. And so, I took the leap and then you can imagine, it was a small place. It was a couple of hundred people. Four and a half billion dollars in assets. So anyways, that’s why I did it and loved the financial business. Between college and business school, I worked for an interesting financial firm in New York and I got the bug because… You have the same bug, something’s happening today that’s interesting in your world. And that’s very different than a lot of businesses. So I’m a huge fan of the business as a place to build a career.
Steve: Got it. So you were kind of, I guess, had a more traditional financial services background for a few years before you joined Vanguard and interesting to hear that Jack Bogle already had a reputation, it sounds like in the industry, even before, when you joined him seven years into it.
Jack: Yeah. Listen, Jack always said what he thinks. Vanguard had given up being a load fund company, which made you a lot of enemies in those days, back in ’77, ’78. And people couldn’t understand this quirky structure. That this is a place that’s owned by its mutual fund shareholders. So there are a lot of reasons that people just didn’t think it was going to go anywhere. And at 27 years old, you can afford to take that risk. I’m not sure I would have done it at 47 years old in the same circumstances, but it’s an interesting business. Ironically, and maybe we’ll get to this, but I started at Vanguard a month before the 18 year bull market started in August of ’82. That’s not a bad time. The yield on the S&P was higher than the PE on the S&P.
Jack: And I knew enough about economics and some other things that it seemed to me, things had to get better in the bond market. I didn’t know about the stock market. The bond market was an easier forecast. So it felt like some good stuff might happen, but obviously a lot of good stuff happened environmentally. And then importantly, the company did pretty well as well.
Steve: Right. The choices that Jack Bogle and Vanguard made, I think left clearly a ton of wealth, potential wealth on the table. And so you had to be aware of that too. Right? If I join this company, my future wealth generating prospects might not be as good. It probably turned out fine for you, but that you would get in a traditional Wall Street kind of job.
Jack: Certainly, for me, money’s never been a motivator. For me, it’s intellectual challenge, chance to lead. Now, frankly, compete and win. Money’s not, it never been, literally not… I never took a job for money, never would. And listen, 40 years later, that’s how we attract people. You’ll do fine financially. But if your goal is to cash a big check sometime or be the highest paid person in your industry, we’re not for you because we are motivated as an organization by things that are different. And I think people make a mistake. I council kids all the time coming out of business schools or college. There’s going to be a shiny object known as money, but don’t chase it. Chase fulfillment, chase challenge. Those things is what you should be looking for in a career.
Jack: Obviously, it worked out very well for me and it still works out well. Vanguard attracts really great people today, a much bigger organization, more complex, but again, you have to be willing to be in a quirky environment where the whole world is doing X and you’re doing Y. Happens to be the winning strategy in my view, and in the company’s view for a long time, but you’ve got to be comfortable being different. And I happen to like that anyways. Anybody who sits and says could have, would have, should have about anything in my view is looking backwards instead of forwards.
Steve: Right. That’s a great perspective. Just last question on kind of getting started. Did Jack Bogle make the decision, I don’t remember the timing for mutualizing the company. Was that a few years in or was that right from the get go?
Jack: Vanguard was the Wellington Group of Mutual Funds up until 1975. And then the board, Jack was the chairman of the board, took this unique step of saying, “We want to take the mutual funds and separate it from the management company,” in 1975. So that was the big step. It was tiny. They had 13 employees, a billion dollars or something. It was a big bet. It was a radical decision, but there was this core group of tremendously committed people who chose to do it. And all they really did was administration. All the money was run by Wellington and then Citibank ran some money later on.
Jack: When I got there, it was seven years old and bigger, but at seven years old, you’re a new company still. And so there was a lot of cultural stuff that was evolving, but it always came back to shareholder as the primary point of focus and it was disruptive and unpopular in the industry, fact of life. And the board deserves a lot of credit back then to support the idea of doing it because the easy path was a different path and they chose the tough path and it’s worked out great for investors.
Steve: For sure. For people, our listeners that don’t know, as many of them do, but Vanguard, Jack Bogle and your team has essentially been, I would say the biggest disruptor in financial services probably in history. You’ve changed the entire ecosystem through aligning yourselves directly with investors, driving down fees, creating the index fund, and passive investing. It’s changed the whole mutual fund space and that’s rippling through the rest of financial services and fees. And I think that it’s not done yet. I think that we’re actually still in early innings to some degree. Because you’re the only company that’s done it. Has any other-
Jack: There’s no motivation to do it. There’s no personal motivation to do it. And lots of people could have done it. It would be very hard to do today. Because does the world need a second Vanguard? Probably not. Probably not. And so that was one of the, obviously in the early days, my early days, there were entities that were mutual in structure who were far bigger than us, and could have said, “I’m going to motivate myself the same way.” And they didn’t choose to do it. But today the scale, the reputation and so on that Vanguard has, would be awfully hard to compete with. But come back to the, there’s no personal motivation to take a company neutral and so nobody did it. Enterprises that were around the edges had a similar, maybe a more formal, neutral structure that could have said, “I’m going to compete and try to squash this bug before it gets too big.”
Jack: Eventually you get to a hundred billion and a trillion and your resources are so large and more importantly, your reputation for delivering value to clients. And that’s one you just can’t buy. You can’t run an ad in the paper and say, “Trust me, I’m just like Vanguard.” It’s not going to work.
Steve: Right. Well, I think that transparency is important. I want to talk about this later, but you’re seeing some new companies like Robinhood that are saying, “Okay, hey, if there’s free trading…” But they’re not completely transparent about how they make money. And there’s money being made behind the scenes. And I don’t think people fully understand that and how that affects what they do and how they operate.
Jack: There’s something different to being a fiduciary for people’s assets rather than a facilitator of activity. It’s my own view why, if you look at the fund industry, the biggest companies are Fidelity, Capital Research, Vanguard. And if you count our history, going back to Wellington fund in 1929, T. Rowe Price, they are firms with long histories of being stewards and fiduciaries for other people’s assets. It’s a mindset that’s different than activity based rewards. And it’s a tribute to the intelligence and the discerning nature of investors. They put their money where the experience and trust is. And so the idea that zero and then something behind the scenes is a good business proposition for the client, is not one that’s even possible to try to implement in the mutual fund industry because of independent directors and prospectuses and the tight regulatory structure over it.
Jack: And I frequently, in lectures and speeches, talk about the fact that the bulk of the mutual fund assets are in the oldest companies, which is really interesting. They’ve evolved and adapted and become technologically savvy and do ETFs and do this and that. But at the core, the advisors who use them, and the individuals who go direct, again, they don’t chase the shiny object. They chase the tried and true and trusted enterprises.
Steve: Yeah. But so a lot of people are getting onboarded into like, “Oh, there’s speculation investment.” They’re kind of using it interchangeably, so that’s good, but they’re definitely doing it in a different way. And I don’t think they fully appreciate… Essentially they’re motivated by like, “I’d like to make money really fast.” And cryptos and other things give them that potential opportunity, lure them down to the dark side to some degree. And it’s like, “Hey, the reality is, it may take you 20 years. It’s boring, but the math is on your side.”
Jack: Well, that’s right. And listen, it’s a bull market phenomena. The dot com phenomenon would not have happened were it not for a 18 year bull market filling balloons full of air. And pouf, gone. House flipping wouldn’t have happened without the bull market. Declining rates, bull market and residential real estate, pouf, gone. We’re in a 12 year bull market. We’re past the 12 year bull market mark. So everything seems easy at this stage. And pouf, it’s gone. It’s going to happen. When is the question.
Jack: So all of speculation becomes easy and attractive there at the tail end of a bull market. The hard work is the discipline and believing in compound value. Listen, I’m pleased that people are interested in the markets. I hope it’s entertainment money that they’re using. But I have zero doubt. And listen, the fund industry has tens of millions of millennial investors who are there. The good news is most of their money is in their 401K. Right? And you’re not trading crypto in your 401K, and you’re not trading stocks minute by minute. So your serious money is being taken care of. Do you have the opportunity to take care of it well in a sensible way? If the other stuff is entertaining, that’s fine, but it’s not the way. There’s no evidence that any individuals have systematically and in large numbers gotten wealthy through speculation. Right? Everybody knows the person who bought crypto and it went up. You only hear about the ones who lost their shirts once the bubble burst.
Steve: Yeah. I think I was listening to another podcast recently, they were talking about crypto. And this guy, Jesse Livermore, was making the point. He’s not a fan because he’s like, most wealth in this world, in this country, has been created through innovations, new ideas, new companies, new ways of doing things better, faster, cheaper, whatever it is, that helps people. Right? And then you get, hopefully if you’re lucky, I remember Bill Gates saying this once, “Well I think we’ve added a lot of value, we brought software on PCs to many people. And we created value and we captured a little bit of it.” Right?
Jack: Eventually something has to have intrinsic value. And Microsoft had intrinsic value of producing massive cashflows from selling software. Right? Amazon took a while, and it produces massive cashflows from its business. And there’s intrinsic value. You can argue whether they’re over or undervalued now, but there is an enterprise there that is tremendously productive in producing returns to the owners of the company. When I came out of graduate school and was getting married, it was the silver and gold bubble. Gold had gone up from 32 bucks to 800 bucks. And eventually somebody says, wait a second, there’s only these marginal uses for gold, and it’s 200 bucks another time. Right?
Jack: And intrinsic value is something someone needs to always come back to as an investment principle. And when somebody pitches you an idea, you don’t have to be a professionally trained analyst, but you should always do a simple analysis and say, “If I owned it all, do I think that would have value to me?” Owning Amazon would have tremendous value to me, because it produces immense profits and actually does a lot of good, and it’s disruptive in the world. Owning gold doesn’t. Somebody may think it’s an inflation hedge, but you say, “Inherently, what’s the value in gold?” Then it’s somebody will pay you more for it than you paid for it. And that’s a hard way to make money in the long run, because you got to buy it well and sell it well.
Steve: Yeah. No, that’s an awesome way to think about it. I like that thought experiment, if you owned everything. Because sometimes you think about assets like a house, right? I remember I was talking with Zvi Bodie, who’s an economist. And he was like, “You know what?” He’s a BU guy, yeah, yeah. And he’s like, “Well, your house pays you a lifestyle dividend.” I was like, you’re right, you get to use it. Right? I’m happy to own my house because even though it’s not necessarily producing income, it produces a lifestyle dividend. Versus if you owned all of Dogecoin, what are you going to do with it? I mean, if no one else owns it, then it doesn’t have any value.
Jack: And listen, and there’s also an alternative use, right? You have to live somewhere. And so if you’re holding a house and it’s comparable to what you pay for rent, you get a free option of appreciation. And a tax deduction. I mean, these are good examples. Zvi is one of the great guys humanizing complex ideas actually, he’s brilliant at it. Listen, it’s motivation for the book. It’s, they try to bring people… You may not like what I have to say, and I will stand by it because, again, the fringes are headline making. It’s the core that creates financial security people, for people. And it’s, you used the term boring. It is. It is. But it’s powerfully boring to set up a plan, do it well, and add compound value in it.
Steve: Yeah. Like I was talking with Morgan Housel and some other folks. It’s like, the path to financial security and wealth is, it’s simple but not easy. It’s really like, hey, you got to just figure out how to save money. So cut your expenses, make enough income. Then you have to invest it. You have to keep doing that for a long period of time. Keep your fees low and ignore all the noise, right? This is a lot of stuff that’s in your book. It’s just that most people can’t get out of their own way. It’s like, so-
Jack: I would tell you that most people do. Most people do, interestingly. Tim Buckley runs Vanguard today, he has a stat which I totally believe. That by not panicking, over 99% of Vanguard’s investors did nothing during the month of March last year. They saved themselves a trillion dollars. A trillion dollars. And I’ll tell you, when I started market moved a little bit, the phone’s rang off the hook. Because people panicked. But through our efforts, the industry’s efforts, your efforts, the media’s efforts, the core of the population who invests, and it’s not enough of the population that’s a different issue, actually does a quite good job of being disciplined. Any data you see on 401K plans, they don’t trade. They know that this is a 40 year exercise. But you can never hit the principle of tamp down your emotions and tune out the noise. Right?
Jack: It’s the single best advice. My best advice for anybody is live below your means, start with that. Because then you have firepower. But after that, if you tamp down your emotions and you tune out the noise, I’ve watched it for 40 years with people in entry-levelish jobs who retire with half a million dollars. They’re probably members of your group. It’s a compelling thing. And in a sense they were never really an investor, right? They were a saver in investment products, doing it every two weeks. It’s a fantastic way to create financial security.
Steve: Well, I think that there’s… I mean, people have Vanguard, people in Bogleheads, people that are part of our community at NewRetirement, I think they understand this. But there’s still half this country has essentially no money. 20% of this country owns 85% of the wealth. If you get it and you can do it, you can get there. That’s part of what we see our challenge is, how do we educate a lot of people? How do we make planning at scale? Bring more people under the tent. And not just in the US, but worldwide this is a problem.
Jack: I totally agree with it. Our first international operation was in Australia, which has an incredibly robust, they have mandatory superannuation 401K essentially. At 15% of your pay. They’re over, say, when they get to retire. And they just put it in 25 years ago, 30 years ago, and it’s compelling. And so there are public policy issues that we should get at. But the other issue that’s challenging, I think, is when members of your community get to retirement it becomes a different game. Becomes a different game. The risk of emotion taking hold is higher than if you’re 35 and getting paid and getting a little more pay each year. And I think to me, I think of this book as being targeted at my kids, who are late 20s, early 30s. And my contemporaries, right? Because you either need to be a very… If the minimum that comes out, and I’m not talking about my book, but the principles. You should be a great buyer of advice services, or you should be well-armed to do it yourself in retirement, either one. Because that’s the challenging point in time.
Jack: Right? And I’m not sure I appreciated it when I was 28, somehow be it 67 makes it more interesting. And I get a lot more calls from contemporaries saying, “What should I do?” Right? They didn’t call when they were 40 something. And that’s a daunting period, and you may have more time to get noise in your ears as well, which is the other part of it. And so one of the things that’s critical for people is find trusted sources. Right? Your community has become one of those, I think. Right?
Steve: Yeah, definitely. I mean, we’re full of do it yourself power users today. But we also have people that they’re trying to figure it out there. And I think we’re taking the view of, we believe like you do, community’s a big part of it. So we have people that are ahead. Right? Hey, I’ve done this successfully. I’ve saved a bunch of money. I’m a kind of 401K millionaire, right? Like you described. And then there’s people falling behind that are like… And say I’m 65 and I’ve retired. And there’s someone who’s 55 is like, well, can I do this now? Do I have enough money? How should I think about it? Should I get an advisor or not? Or I’m paying fees. And we’re not trying to answer the question, we’re just trying to facilitate a trusted place where people aren’t soliciting and selling. But you can learn, here’s what I did well or made mistakes. And it’s a better way, I think, than-
Jack: Oh, it’s tremendous. Because I have a little chapter in the book called Trust, basically. Right? You got to trust a whole bunch of things, the markets first and foremost. Because if you don’t buy T-Bills and lose ground to inflation every day. But the trusted people, friends, relatives, and so on, hopefully knowledgeable trusted people, because sometimes you get trusted people who aren’t so knowledgeable, are really important. It’s no different, like I have this joke. I tell people there’s only three things in the world, your health, your money, and everything else. Okay? You think about, where did you get your doctor? Probably asked somebody. Or your dentist. Financial advisors or trusted financial firms, those relationships are really important. And so it’s why firms want to be that, but it’s really important to have, whether it’s a community, whether it’s friends who are knowledgeable, have been ahead of you on this stuff. Because it provides comfort to you to make good decisions. And it, I think, puts up a shield of defense against bad decisions or bad advice, which is really important.
Steve: Right. I think one of the risks people face is one of the things we see out there is, so most of financial services is geared on getting paid on assets under management, or transaction fees. Right? And so those games are being played. And it’s knowing who you’re dealing with, how they’re getting paid, and also making sure that it’s reasonable. So, I agree, financial advice and planning is huge. You have to make sure you get someone trusted. And that the fees make sense. Because for our users, so the average user has a million dollars. And say they’re hoping to get a 4% real rate of return and live on that 40,000 plus social security and they’re good. When you’re saving money and you’re getting advice, 1% doesn’t sound that bad for a financial advisor, but it’s like fees on a fund. If it’s 1% is 10,000 of your $40,000 income that year, it’s 25% of your portfolio income. It’s a lot of money. And does that make sense? I think is one of the challenges.
Jack: It’s one of the great things that’s happened though in the last… I wrote the first edition of this book in 2002.
Jack: And I talk about a few things that have changed a lot. I think the ubiquity of advice options at various price points is really important. It’s really important. And so you don’t have to pay 1%. You can pay closer to 20 basis points now, right? And so 20 basis points feels a lot less challenging and you may want to pay more, that’s fine. But the availability from very trusted high quality firms of readily available advice options is really important. I think because I’m one of these people who, I’ve always done the shopping in the house. And I have my generic stuff that I don’t care about the brand I buy what’s on sale, right? And I think I save four bucks in a $100 grocery bill, and I feel great about it. And then you say, you’re going to pay $10,000 for financial advice. If you could pay two, why would you pay 10?
Jack: You may want to pay 10 and it’s fine. But I think the ability today… And listen, there’s plenty of places you can get one time now than you couldn’t before. So, again, there are so many people are so well-armed to do this themselves, it’s great. But if you’re at all concerned about it, to me, it’s imperative that somebody shop make a conscious choice. Go, no-go, high touch, low touch. It’s amazing how quickly advice choice has come to the retail market. And I think it’s a great thing for the investing public.
Steve: Do you think there’s a lot? I mean, I remember, I think Tim Buckley said this, he was like, “We’re going to do to advice fees, what we did to mutual fund fees.” I had that quote. Do you think that’s happening in a big way?
Jack: I think there’s one verity in the financial business in many ways, and that’s, today’s highest price you’re going to pay for just about everything, right? And there’s a Vanguard effect. And intentional in the sense that you have to compete, it’s never been a driving motivation. Motivation is deliver the most value that firm can. But already you’ve seen price points come down in advice. And with the advent of technology, artificial intelligence, a whole bunch of things, you can take a lot of the cost out of advice delivery.
Jack: You can enhance the productivity of the advisors because they spend so much less time on administrivia and even analysis. And more time with the two of us talking about your hopes, dreams, and fears, right? And so there’s no question that you think what the total cost of ownership of an advised mutual fund program. I don’t know exactly, but it’s a quarter of what it was 30 years ago. Used to be an 8.5% Load, maybe a 12B-1 on a couple of other funds and you just keep going, right? And today in a really great program, let’s say you have ETFs and advise you for 30 basis points. You get a whole program. Diversified tax efficient, pretty hard to argue with in some ways.
Steve: Yeah, no, it’s amazing. Sounds good. I mean, it still feels like there’s lots of business models over there predicated on the full white glove. I think 1.3% is the average advisor fee charged per year. I do get that, that’s going to… I think it’s going to go away or it’s going to get come under a lot of pressure.
Jack: Well, with every day, as I said before, the customer gets smarter. Competitive pressures come about. And listen, if you’ve got a complex family situation, that should be a much higher fee, right? If you’re in a wealth management business, so the family office business, but the buyer’s smarter. And so there’ll be a pressure. And again, I think it shouldn’t necessarily adversely affect profitability for the firm, right? You can deliver great service at a better price, but Vanguard’s a great example of the average 10 basis points or something in aggregate it if you want to buy a Vanguard program, right? Something like that, it was 60 when I started. Which was low cost, but that’s down a lot, right? It’s 87% decline. And the basket of services you get is so radically different.
Jack: You could wait on hold for three minutes if you called us for the privilege for 60 basis points, because we didn’t have enough staff. And so the value is a lot more than eight times. It’s 30 times or 50 times for radically different prices. And that’s one of the great parts about the business. This is such a highly, highly competitive… Vanguard’s a big place. BlackRock’s a big place, Fidelity’s a big place. Nobody has big market share when you think about it. So, that competition will remain intense. And this is not Google in the ad business. This is… And so in different models and that’s all to the consumers good. But you need to be smart. You need to be a smart buyer.
Steve: Yep. That’s great. So let’s move on to your book. More Straight Talk on Investing. Can you just give a couple minutes on, why you wrote the book?
Jack: I wrote the book because first I’ve asked a lot to write the book and I’ve always said, “Yes.” Meaning no. You politely say, “Yes.”, And then listen to the events of last year, the advent of speculation, instead of investing the lionization of crypto traders just struck me that it would be fun to provide the counter balancing point to it. The first version of this it’s called Straight Talk on Investing and continues to sell copies and people like it and find it valuable. So what I did was read the book, read the first version, say, “Is there anything in there I would say was a mistake or take out?” And there actually wasn’t, but there’s a lot of additive stuff and there’s affirmation. And so that’s the motivation, it’s really to be a voice, if you will, for your son, when he realizes that he’s not getting rich trading, right?
Jack: And then to affirm really tried and true principles of investing, but back them up with data. So there’s a lot of data in the book that proves the points about various things. And it’s fun to do. I’ve enjoyed it. I’ve enjoyed feedback already, it’s only been out for a week and the number of emails and texts I get from people. It’s fun to do. And obviously there’s a lot of sort of Vanguard principles in it because I’m a Vanguard guy. And that was why I did it. And I’m glad I did it.
Steve: I think it’d be interesting for you to go on a panel at some point with the founder of like Robin hood or something, or some crypto people and just have a discussion around, hey, intrinsic value. Getting some historical frame of reference because I agree, there’s nothing like living through thinking your total net worth is getting cut in half and hopefully coming out of that on the other side okay. And this is where most retail investors fail is, they’re buying on the way up because they get sucked into the hype things crater, they think the world’s ending, they sell at the bottom or close to it. Then they sit out of the market while the recovery happens. And that’s why most they suffer.
Jack: And yeah and you know the data on that. I mean, you miss six months in 10 years and your returns are cut by 40%, right? But the reality is, if you look at rolling 20 year returns, which is what people should do, you don’t notice ’87 or ’99, 2000 or ’08, ’09, or March of 2020. And that to me is… I’m a big fan of graphs because I think people don’t like to read as much as they used to. You just look at rolling returns and you say, “Okay, so by…” You probably know the quote from, I think it’s Charlie Munger that slot and lethargy or corridor investment philosophy at Berkshire Hathaway, right? But do nothing is generally the best answer to any catalyst. And if it isn’t your assets aren’t positioned correctly. So, and again, as I said, speculations a bull market phenomenon.
Jack: This bull market will end at some point and it’ll end badly for a bunch of people as it always does. You’ve seen the data leverage is up a ton margin loans, classic side, right. And so anyways, but you’ve only had to be investing in since 1999, to have lived the NASDAQ bubble, the global financial crisis. If you live through that, say you’re 45 years old, you’ve had a lifetime of experience. That’s one of the points I make in the book is, you don’t think you have to be my age to understand this you’ve been tested. And if you couldn’t sleep at night, you should be more conservatively invested.
Steve: Yeah. Or if you just be comfortable that you can ride it out and keep investing when it’s going down, right?
Jack: It’s one of the gifts of defined contribution investing, frankly, is you dollar cost average through a lifetime. And you do it in many ways with big impediments to doing something harmful to yourself, it’s all good.
Steve: Yeah. Awesome. One thing in the book, you have a postscript about income. This is something that’s super interesting for our users, right? So our users are kind of 50 to 60, many of them they’re mass affluent. And they’re like, “Okay, how am I going to have income? Where’s it going to come from? And fixed income is in the tank, it’s not doing great.” What’s your perspective on what people can do and how to think about this?
Jack: So a couple of things, zero rates has been really damaging to that sector in the retiree sector, right? Because you do want some stability and you want income. And five years, your income’s down 98% on a treasury bill, it’s a stunning number. And I say in the book, I actually believe people need to take a step back and say, “Where am I getting my income? Am I willing to take some principle risks, but not income risk to fulfill my income requirements?” And so I think, I get asked all the time about 60, 40, is it dead kind of thing? I actually think people need to look at their asset allocation and say, “Could I, and should I consider more stocks in my portfolio?” The best income hedge over any period, you want to look at it over time, a meaningful period, not a year or two. But a decade, have been dividends on high-quality stocks.
Jack: And roughly the total stock market fund yields about the same as a 10 year treasury bond. And so ask yourself, “Could I close my eyes to the fluctuations in the net asset value of the equity fund, but get a comparable yield, which will be historically, would say grows faster than inflation and get it call on growth on the principal side of the total stock market fund?” First time my life, I thought that that is something that particularly retirees need think about it because the worst tax on retirees is inflation. And if you want to have inflation adjusted income for a stride portfolio of high-quality stocks, is the best way to get that. So that’s sort of the big punchline. The other thing is, Steven, much more watch outs, don’t go out the risk spectrum.
Jack: Don’t go out the maturity spectrum without eyes open. If you bought a 10 year treasury in August of last year, you had 20 years of your 10 years of income wiped out in principle decline between August and this winter. That’s a bad bet. And so at these low yields, the volatility of any fixed income interest, the duration is much higher than it’s been historically. And so any move you might make, whether it’s to a longer maturity to lower quality, you really have to do with your eyes open about what that means. So I think strategically, and I’d say, “Would you be willing to take more volatility risk on your NAV for a better income prospects, from this starting point.”
Jack: … become prospects from this starting point. Something I think your members should look at.
Steve: Okay. That’s great. I appreciate that. What do you think of … How about annuities? Do you ever think about that? Because I know, insurance companies, they’re also hit by the low returns and fixed income, but they’re mutualizing mortality risk so they can give some mortality credit, essentially.
Jack: Yeah. Annuities can play a role. I think people have to understand both the cost, which is kind of hard to figure out at times, and then there’s some complexity in them in what you can and can’t do with them, what are the benefits? They can play a role, they’re just a high cost role.
Jack: To me there is value in the diversified pool of risks that’s in there. You only want to buy one from a very high quality company. But if you ask me, do I recommend people go buy annuities? The answer is no, because I think it’s complicated and expensive. Not that they’re a fundamentally bad product, but you need to be a really smart buyer there.
Steve: Right. Our point of view is, we’re okay with SPIAs, like single premium immediate annuities, like income annuation-
Jack: That’s barely an annuity. That’s a CD.
Steve: Yeah. I know the rates are kind of bad, but variable, more complicated products. Then you’re marrying up funds inside of a insurance wrapper, and there’s potentially high fees. They get complicated. I agree. Things should be really simple and transparent.
Jack: In a sense it’s why the fund industry’s been as successful as it is. You know what you’re paying. You may be paying too much, but you know what you’re paying because it’s mandated that you’re doing it. It’s a pretty simple structure. It’s gross return, less expenses. I’m a fan of simplicity. I think a total stock market fund is one of the great inventions of all time. I just like it because-
Steve: Yeah, actually, with regard to your book, you called out at the end 12 principles. Any top things that you think people should really … You don’t have to reel them all off. We’ll put them in the show notes.
Jack: Yeah, no, I have the four-item shorthand that I use with people. It’s not going to be anything revelational to you or your users, but the first one we’re already talking about is, be knowledgeable. You don’t have to be the portfolio manager at Windsor Fund, but you need to be knowledgeable about investing.
Jack: The second thing, in my view, is discipline. Just developing good habits you set. Buy a little bit, buy a little bit, buy a little bit. The discipline matters. We’ve been on this a bunch, Steve. Be skeptical. Fads are never money makers. That’s the third point that, if somebody gives me the elevator ride, to tell them.
Jack: Then the fourth is really a bookend to the first, which is be observant. Just be a continual learner, because every once in a while something meaningful happens in the investment realm and it may be the difference between a regular IRA and a Roth IRA, or a regular 401k and a Roth. That’s a huge issue for people. They have to make that decision correctly. I think it’s the advent of ETFs. It’s a phenomenal thing. Tax advantage, tradable without paying fees, and other things. It’s tradable in the sense of buyable.
Jack: Being observant and just keeping an ear to what’s happening, but go back … But the key part about being observant is never forget point number three, which is be skeptical. Because most of what you’re going to see in here is not only not useful, it’s likely to be harmful. Those are the four things that I think about and have served …
Jack: Vanguard’s first fund was started in 1929, the Wellington Fund. Been through the Great Depression. A world war. You go through it all. It’s delivered about 8% compounded to its investors over coming up on 100 years. It’s 65% high quality stocks, 35% bonds. Market tanks, you buy stocks. Market rallies, you buy bonds. Pretty good strategy for 90 something years, delivering incredible wealth creation for people.
Jack: We use it as a metaphor. I use it in the book. We call it the blue sport coat. Nobody says, “Go out and buy a blue sport coat, But you can’t do better than” … If you had to own one sport coat, you don’t want to own a red one or a plaid one, you want to own a blue one. That’s how I think about … That’s the summary for me of the core principles. They’ve served me personally really well. They’ve served Vanguard’s investors incredibly well over its 40-something-year history. It will again, I have zero doubt.
Jack: I’m not big on forecasting, but I said to Tim Buckley the other day, “I’m going to give you the copyright to this book and you’re going to write the next one in 20 years when you’re 70.”
Steve: Nice. Yeah. That’s awesome.
Jack: Hopefully it won’t change much.
Steve: It’s great to have that historical context. I think that’s the key lesson. That compounding … When you’re young, it’s easy to be like, “If my friends are making 50%, 100%” … My son went from 1,000 bucks, to like 8,000, back to 1,000 in probably a month or two. For a while he was like, “I am crushing it. You should give me money. I’m going to keep matching it.”
Jack: But this is the time to learn the lessons. It’s the time to learn the lessons, when there’s not much at risk. You don’t want to do that from a million to eight million back to a million, or a hundred thousand to … Because it may be down to something else.
Jack: But, again, I give your son credit. He’s interested. He’s learning. He’ll learn about discipline, and he’ll learn about being skeptical the hard way. In a sense, you want to learn lessons the hard way, but on somebody else’s hard way, not on yours.
Steve: Yeah. I think the good thing is is that there is … It’s not just him. He and his fraternity buddies were all doing this stuff and learning together. Definitely there’s so much more information out there. They learn faster. They think they know more. But, yeah, history’s the main teacher here, and nothing ever goes up straight forever.
Steve: One quick story from me is, I remember in 1999, I had a company, but I had other friends that were … A friend of a friend was day trading, like early day trading. They got to like 300 grand. They’re probably in their late twenties. They’re like, “Okay. I’m rich.” Then literally they lost everything in a couple days. They were like, “Okay, what just happened?” They were margined up. Everything was good. Everything tanked. They were forced to sell, and it was a mess. It’s like, “Okay.”
Jack: It was true in 1929, and it was true in the tulip bulb thing in the Netherlands. It’s different, but it’s the same. It’s greed and fear. Greed gets accentuated in easy times, and then fear gets overwrought when the music stops.
Jack: One of the great parts about this business is you can’t change yesterday. You can learn from it, but you can’t change it. Your son’s got 1,000 bucks instead of eight? Start again. The eight was never really eight, just to be clear. That’s the other part. It’s all paper.
Jack: That’s why I love the business, generally. I like writing about the business and speaking about the business. Because if I can help 10 people in the audience or 20,000 people who buy a book be smarter, I feel great about that. Because, in the end, it is what motivates people who work at a place like Vanguard, is the success of the client owners.
Jack: It’s great to have somebody … I had somebody stop me walking down the street in Boston today, say, “Are you you?” Always tempted to say, “I get asked that question all the time,” but I figured I might get caught. I said, “I am. Hi.” They said, “Vanguard investor for 25 years. Sent my kids to college, and happily retired. I just want to say thank you.”
Jack: I didn’t need to walk the rest of the way to my apartment. Just floated down the … But that’s what gets you up in the morning and drives you. It’s what drives you. That’s what you’re … You’re doing something to try to give people better financial futures. How cool is that?
Steve: Yeah, no, I appreciate that. Hopefully it works. It’s pretty amazing when people see what you’re trying to do. You’ve done it, and Vanguard’s massive, and we’re tiny, but some people still see it. They’re like, “I get why what you’re trying to build is so different from everything else that’s out there.”
Jack: But it comes back to, actually … You always have to think one by one. The other thing, I’ll have people … “I’m a small Vanguard investor.” I say, “I’m sorry, this will sound flip. There are no such thing as small Vanguard investors.”
Jack: I liquidated my fidelity cash reserves account in July of 1982 to open my first Vanguard account with 1200 bucks. It was my entire network. My accounts were worth a little more than 1200 bucks, but they never treated me like a small investor. The place is built one by one. Great firms, not just Vanguard, are built by thinking about each individual’s success, not the collective numbers or anything else. That to me … It’s what you do with your community. It’s Mary, and Bob, and Joe. It’s not the collection of them, but collectively they’re stronger and better.
Steve: Yeah. I’ll share my one Vanguard story that kind of brought it home for me. Which is, I was at a conference full of … It was a financial conference, and it was full of all the financial shops. Then I saw this basic … I don’t want to say dumpy, but it was kind of like … Little display area, like what we would do, which is super not built out or anything. Some books, and a couple of pens laid out. Couple people standing there.
Steve: I roll up and it’s like, “Vanguard.” I’m like, “Aren’t you guys like … Giant company?” But it was some product person. Pretty senior people that were just standing around there. They talked to me, and it was clear. It was like, “This company is frugal, and walks the walk.” Because you look across the room, there’s a small city built for your competitors that’s clearly 50,000 bucks of spend.
Jack: I’m laughing because I love it. We sent out signed books to people who helped us, and other things. I signed 700 books last week.
Jack: The mail guys at Vanguard say, “We’re going to send them FedEx.” My assistant says, “No we’re not. We’re going to send them three-day FedEx, because it’s a quarter the cost, and most of them will get there the next day anyways.” Sure enough, she gets a return receipt on all the books she sent. I just laugh. She says, “Why would I pay 30 bucks if I could pay 10,” or whatever the numbers are, “for the same utility?” It’s kind of the metaphor for Vanguard. Why would you pay 100 basis points what we’ll give you for seven?
Jack: Listen, if you look at the back cover of the book, somebody just pinged me today, said, “You got your watch in the picture on the back of the book.” My … If you can see, this is my watch.
Steve: Nice. Yeah. Timex.
Jack: It cost 27 bucks. I would never let my picture be taken for PR stuff without my watch showing.
Steve: That’s awesome.
Jack: Anyways. Listen, I apologize. I actually have to go do my day job.
Jack: This has been fabulous. Thank you for the great preparation, and literally, all fun aside, for what you do. As I said, the advent of communities like this, podcasts like yours, I think are one of the great things that’s happened to temper the risk of noise. Congratulations to you for what you’re building.
Steve: No, I appreciate your time, Jack. Thanks for being on our show.
Steve: Davorin Robison, thanks for being our sound engineer. For folks listening, appreciate your time. Hopefully found this useful. Check out Jack’s new book, More Straight Talk on Investing: Lessons for a Lifetime. You can find us at newretirement.com. We appreciate your time. Thank you very much.
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