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Bogle on Bonds, Rebalancing, and Washington Portfolio Matters | Christine Benz

equity portfolios, given that we’ve had a tremendous runup in stock prices.

Bogle: Well, we have had a wonderful runup—no question about that—but it’s been pretty much because corporate earnings have been maintained at such a good level. There’s a lot of cheating going on, if I may say so, Christine, in calculating price/earnings multiples. The traditional way of looking at them was your reported earnings in the last 12 months relative to the current price. And those reported earnings, of course, all those bad things have happened in them—so-called nonrecurring things, write-offs, bad decisions that were made in the past. And that’s obviously what earnings really are. If you make a bad decision, it’s got to come through the P & L somewhere along the way. So, past 12 months’ reported earnings [was tradition- ally used in calculating P/E], and yet Wall Street looks at the next 12 months of operating earnings— operating earnings without all those bad things. So is the P/E maybe 20 or 21 , or is it 14 or 15 , depending on which you’re using? The truth is, and probably a reasonable way of looking at it, it’s probably some- where in the middle. That’s not usually the way I feel about things. So I’d say there is not much sign of excessive valuation. Corporate profits are very high relative to GDP , actu- ally higher than they have ever been in the recorded history of [this] great nation. So, I don’t think we can expect them to grow anymore. I’d look for some soft- ness there. But not a lot of danger ... Bogle: Put it this way: a 2% dividend yield, which is roughly where we are today, and possibly—maybe a little optimistically— 5% earnings growth from here, that would be a 7% what I’ll call investment return, a fundamental return—the real return, not real in the inflation sense, but the actual return earned by cor- porate America. And that looks to be around 7% ; it could be a point or two more. Benz: At current valuations you think ...

I recently attended the annual Bogleheads Confer- ence, where I had the opportunity to sit down with Vanguard founder Jack Bogle. We discussed the current market environment and trends in indexing, among other topics. Christine Benz: Last night, Congress resolved the debt-ceiling impasse, but just for a few months. Does it seem to you that we will just lurch from crisis to crisis? I’d like to talk about what the impact is, in your mind, for investors. Jack Bogle: It’s pretty obvious that we are now just setting ourselves up for the next crisis. On the other hand, maybe, just maybe, our less-than-statesman- like politicians will have gotten the message here, which is, what is the point of what we’ve gone through? What is the point in trying to hold the admin- istration and the president hostage to a few people’s ideas about what must be done—and in this case, Obamacare. It’s just not a good way to run the country. And they lost finally—the people who took that position—finally lost. Now you can learn from your losses; you should learn more from your losses than your victories. This is probably more optimistic than I ought to be, but maybe you can bring some order out of the chaos, just because we’ve gone through this experience. I hope so. Benz: I know that you generally believe that most investors should try to tune out this sort of noise in relation to their portfolios, but we’re at a juncture right now where stocks don’t appear especially cheap, bonds don’t appear especially attractive.

Welcome to our new feature, Portfolio Matters, by Christine Benz, Morningstar’s director of personal finance. We’re thrilled to have Christine help you manage the port- folio challenges that you face each month.Christine will address personal finance issues with prac- tical solutions through- out the year.

Let’s start with stocks. I’d like to hear your thoughts on how investors should be thinking about their