Good Investment Advice is a Hard Sell

Jack Bogle's recent presentation, The Coming Market Environment and Implications for Financial Innovation, is worth a read – and worth pondering.

Addressing a Financial Planning Association gathering, Bogle decries a long-term trend – the shift from long-term investing to speculation on the part of mutual fund managers. Back in the 1960's, a fund manager who turned over 20% of the fund portfolio in a year was considered a Nervous Nellie. In the 2000's, as this chart shows, a manager who doesn't turn over his entire portfolio annually is a dullard.

Bogle then shows why he believes equity returns are likely to average only 7% or so in the next decade. (He's pretty persuasive.) After subtracting inflation and investment expenses, investors won't have much return left. If individuals persist in achieving below-average performance, buying high and selling low, their returns may be close to zilch.

How to improve net investment returns? Bogle's estimates suggest two possibilities: control expenses and avoid buy-high-sell-low syndrome. And, more generally, buy and hold; don't speculate. Bogle winds up telling the financial planners

I understand, I think, the pressure that you financial planners face in assuming the awesome responsibilities of serving your clients, even as you endeavor to build firms that will prosper and endure. I understand the pressure you face from concerned clients who want to follow the traditional response of “don’t just stand there. Do something,” especially in these turbulent markets. But I suspect that your instincts suggest, as mine do, that far more often, the best strategy is likely to be “don’t do something. Just stand there.”

Best strategy? Sure. But it's a strategy many individual investors can't stomach. That's why Charles Schwab commercials show guys complaining about how their brokers never call them.

What about it, dear readers? Is there a way to sell the idea that buy-and hold beats portfolio-churning?