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The Boglelization of America


I love Jack Bogle, and I love Harry Markowitz too . . . but I fear Kool-Aid drinkers.

Jack Bogle is the legendary founder of the Vanguard Group and father of many, many long cost mutual funds and exchange traded funds.  He is famous for minimizing fund expenses.  He is also famous to telling investors to “buy and hold” their investments, without regard to business cycles.

Harry Markowitz is the father of Modern Portfolio Theory (MPT) and won the Nobel Prize.  He is famous for determining that long-term investment returns are maximized and investment risks are minimized by spreading your portfolio across many different asset classes, such as big company stocks, small company stocks, real estate, bonds of all types, commodities, AND cash.  The trick is what percentage of your portfolio goes into each asset class, especially since that is a moving target.

While I subscribe to both theories, to some degree, I’m afraid the U.S. government fully subscribes to both theories.  If you don’t subscribe to the “buy and hold “strategy of ignoring business cycles, the Department of Labor’s new fiduciary rule, which starts taking effect next April, raises the question of whether you employ a “prudent process” in the management of client funds, as you have a fiduciary responsibility to do.  The same is true for MPT.  How do you manage the “optimization” of allocating across all the asset classes?  What “prudent process” do you use to optimize that allocation?

There is a difference between religious doctrine and conventional wisdom.  The theories of Bogle and Markowitz are conventional wisdom, but the government sees them as religious doctrine.  Enforcing these theories will limit originality and innovation among investment managers and make hedge fund managers even richer, because the movement of investment balances between asset classes (and therefore stock prices) will become more predictable.

I fear that the regulators will drink this Kool-Aid of investing, probably for intellectual convenience, and become “true believers.”  May God save us from true believers!  At least crusty, old Jack Bogle knows he is a mere human . . .

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