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Bogle urges caution
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October 15, 1996: 3:12 p.m. ET
Vanguard founder says stick to the fundamentals to make money
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NEW YORK (CNNfn) - As the founder and chairman of the Vanguard Group of mutual funds, John C. Bogle has seen his share of bull markets and bear markets.
And after decades of investing other people's money, there is at least one lesson he always keeps in money: bull markets do not last forever.
"I think it's probably time for a little perspective," Bogle said Monday on CNN's "Moneyline with Lou Dobbs." "The Dow has gone 4,000 to 5,000 to 6,000 in less than a year and a half … I think there is a decent amount of speculation in the market, probably an excessive amount."
For average investors hoping to save money for a comfortable retirement, that kind of perspective could not come at a more critical time. The Dow Jones industrial average is on fire. It is setting new records at a blistering pace and has convinced many investors that a downside for the stock market is nowhere in sight.
"Speculation is in the saddle and riding the stock market," Bogle said. "One example: people are now paying $50 for $1 worth of dividends. The norm is about $25."
But Bogle is not entirely skeptical of the market's outlook. He is worried that overconfidence will eventually haunt many investors who lacked the historical context to understand that bull markets have there limits. He also believes, however, that stocks can grow 6 percent or 8 percent a year over the next three years, although the market is due for a slide next year. (WAV 188K) (AIF 188K)
Bogle recommends that investors keep their money in stocks, but with some reservations. They need to put fundamentals ahead of hunches. For the cautious investor, this can mean buying into an index fund. Index funds mimic the performance of the S&P 500, for example, and are often successful at capturing the upside in the market while limiting disproportionate fluctuations in individual issues.
Said Bogle: "Value in the stock market is going to determine the returns for the next few years -- earnings and dividends, fundamentals and not the kind of binge that carries the price one pays incredibly high."
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