There is something truly remarkable about the intersection of something old and something new. First, a World War II veteran of the Battle of the Bulge has an idea for building a better world for investors. A decade later, modern technology begins to create unprecedented opportunities for the development of social networks, opening a whole new world for interpersonal communication. That combination of man and technology led to the creation of an investor-driven website for individual investors.

The Army combat veteran, born in 1924, is Taylor Larimore, distinguished citizen of Miami, Florida, and a truly wonderful human being. The new technology is the Internet. The idea: to allow investors in the Vanguard mutual funds to share their ideas, their investment experiences, and their financial strategies with one another, as it is said, “without fear or favor.”

Founded by Taylor in 1998 as the “Vanguard Diehards,” the name of the new website was changed to the “Bogleheads” in 2007. Their first meeting—Diehards I—took place in March 2000, when I joined some 20 Vanguard investors in Taylor’s Miami condominium for dinner, friendship, and lively conversation about investment strategy and policy.

Then to Vanguard’s home in Valley Forge, Pennsylvania, on June 8, 2001, with 40 Bogleheads in attendance. Then to Chicago, where Morningstar hosted the three-day gathering for 50 dedicated investors. Next, to Denver and the Chartered Financial Analysts Conference in 2004, with 90 Bogleheads in attendance.

On to San Diego 2008, and to Fort Worth in 2009, before settling down to roost each year thereafter at a mid-size hotel near Vanguard’s headquarters in the Philadelphia region. The hotel’s capacity limits the attendance to some 225 Bogleheads and the openings are quickly filled—a full house every year since then.

I’ve talked to the Bogleheads at all of these meetings. Each October, for ten years now, I’m asked to summarize the major events at Vanguard, in the mutual fund industry, and in the financial markets, and to place them in historical perspective. (The format has barely changed.)

Taylor Larimore is known unofficially as “the King of the Bogleheads”; his friend Mel Lindauer is known as “the Prince.” Mel runs these annual gatherings, at which a range of experts speak, including authors (and investment advisors), Bill Bernstein and Rick Ferri. In recent years, Gus Sauter, former Chief Investment Officer at Vanguard, now retired, has become a regular speaker.

But the limited size and scope of these gatherings merely scratches the surface of the vast network the Bogleheads have developed. To date, the Bogleheads.org forum has been receiving up to 4.5 million hits per day, and in a single day the site has been visited by as many as 90,000 unique individuals. I believe the forum is the most popular financial website in America.

And why not? The members want to help one another. There are no financial incentives for doing so, nor are there any costs for participating. “Selfless” is the modus operandi.

THE THREE-FUND PORTFOLIO

Taylor Larimore has participated in the writing and publication of two earlier books, both reaching large numbers of investors: The Bogleheads’ Guide to Investing (2006) and The Bogleheads’ Guide to Retirement Planning (2009). In The Bogleheads’ Guide to the Three-Fund Portfolio, Taylor goes on his own to explore one of the subjects dearest to his heart—using three all-market index funds: Vanguard Total Stock Market Index Fund (U.S. stock market), Vanguard Total International Stock Index Fund (non-U.S. stock market), and Vanguard Total Bond Market Index Fund (U.S. bonds).

Taylor’s idea combines the nth degree of diversification, a sensible investment balance between stocks and bonds, efficiency, and economy. “Simplicity” is the watchword. Yes, as he notes, investors’ allocation among these three asset classes depends on their particular investment goals, risk tolerance, age, and wealth. Even investors’ temperament comes into play, for financial markets are volatile. Sometimes the financial markets giveth, and sometimes (with far less frequency) they taketh away.

I’d estimate that thousands of Vanguard investors have subscribed to the idea of “The Three-Fund Portfolio.” As originally conceived by Taylor, the initial allocation into each of the three index funds would be based on the investor’s goals, time frame, risk tolerance and personal financial situation.

A WORD ABOUT NON-U.S. STOCKS

In my first book, Bogle on Mutual Funds, published in 1994, I wrote that a long-term investor need not allocate any of his or her assets to non-U.S. stocks. But if they disagreed, I argued, they should limit their holdings to 20% of their stock portion, given the significant extra risks involved (such as currency risk and sovereign risk).

My opinion was based on my expectation that the American economy would continue to grow over the long term, and that the market values of U.S. corporations would grow faster than the values of non-U.S. corporations. Since 1994, as it was to happen, the U.S. S&P 500 Index was to rise by 743%, while the EAFE (Europe, Australasia, and Far East) Index of non-U.S. stocks rose by 237%.

That I was right is beside the point. It may have been luck. But now that U.S. stocks have dominated for nearly 25 years, it may well be time for reversion to the mean, with non-U.S. stocks leading the way rather than following. Who really knows? No one knows what tomorrow may bring. But I’m inclined to stick by my earlier conclusion that holdings of non-U.S. stocks should be limited to no more than 20% of equities.

For U.S. investors, Taylor suggests that 20% of the equity allocation should be placed in a Total International Stock Index Fund. That suggested 20% is essentially a compromise between my suggested maximum of 20% and the minimum 20% recommended by a Vanguard study.

A GOOD BOOK BY A WISE AUTHOR

Please note that the fine points of asset allocation in The Three-Fund Portfolio constitute only a small part of this fine book. It is replete with sound advice and will effectively serve both experienced and novice investors. Taylor describes the investment lessons he learned the hard way—by risking his own hard-earned money and falling short of the market’s return. He tried to beat the market by picking individual stocks, both through an investment club and on his own; he chased the returns of hot mutual funds, only to suffer the inevitable fate of reversion to the mean; he followed investment newsletters that claimed to be able to beat the market, but, of course, did not; he invested with a stock broker who was good at collecting fees, but had no ability to beat the market.

Finally, Taylor read my first book, Bogle on Mutual Funds, and was persuaded by my unassailable Cost Matters Hypothesis: The gross return of the market, minus the costs of investing, equals net return to investors. If active investors in aggregate own the market, which they do, as a group they receive the market’s return minus the high costs of active investing. Index investors also own the market, but at rock-bottom cost. So the average actively-managed portfolio will, of necessity, underperform the average indexed portfolio. Investing in index funds is the only way to guarantee that you’ll receive your fair share of the market’s return.

Taylor goes on to list many of the other benefits of broad-market indexing, including the elimination of manager risk, individual stock risk, sector risk, and tracking error, just to name a few. He cites numerous experts who support index investing, such as David Swensen, Warren Buffett, and Paul Samuelson. Nobel laureate William Sharpe concluded his influential paper, “The Arithmetic of Active Management,” with these words: “Properly measured, the average actively-managed dollar must underperform the average passively-managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.”

The Three-Fund Portfolio will help you to develop a sound asset allocation strategy, make smart investment selections, and guide the implementation of your plan. Taylor offers one final piece of advice, and it’s a mantra I’ve repeated countless times throughout my long career in finance: Stay the course. As I said in my book Common Sense on Mutual Funds, “No matter what happens, stick to your program. I’ve said, ‘Stay the course’ a thousand times, and I meant it every time. It’s the most important single piece of investment wisdom I can give to you.”

“A POWER SEEN FROM AFAR”

In writing the Foreword to The Bogleheads’ Guide to Investing in 2005, I cited this expression from Democracy in America, written by Alexis de Tocqueville in 1835, nearly two centuries ago.

As soon as several of the inhabitants of the United States have taken up an opinion or a feeling they wish to promote, they look out for mutual assistance, and as soon as they have found one another out, they combine. From that moment they are no longer isolated men, but a power seen from afar, whose actions serve for an example and whose language is listened to. [Italics mine.]

Yes, with Taylor Larimore’s leadership, the Bogleheads have become a power in the field of independent, unbiased investment information. Be sure to visit the remarkable Bogleheads.org website. Test your investment decisions on the anvil of the ideas offered by the intelligent investors who frequent the site and are eager to serve you. You’ll find a family of fellow investors who believe in my rock-solid philosophy of long-term investing focused largely on broad- market, low-cost index funds. When joining the forum, you can exchange your own ideas with those of other investors who have had experience with their own asset allocations, as well as with many other issues.

Index funds are designed simply to assure you that you will earn your fair share of the returns delivered in each segment of The Three-Fund Portfolio—or any other indexing strategy that meets your needs. Enjoy Taylor’s wonderful book, learn about the benefits of index funds, and reap the benefits of low-cost investing. There will be times when the waters are rough, and fear, even panic, will hold sway. When those trying times come, be sure to, yes, Stay the course!

John C. Bogle

September 21, 2017