Vanguard's Bogle on surviving the bear market: Get back to investing basics

[RedEarth]

SAN FRANCISCO (MarketWatch) -- Jack Bogle, founder of mutual-fund giant Vanguard Group, is a longtime detractor of the speculative products and schemes that snowball individual investors and enrich Wall Street

MarketWatch: What's your take on the market's meltdown?

Bogle: We've had this orgy of speculation and it's crowded out intelligent investing. I'm certain we're in a recession and I'm certain it's going to get worse. But we have to get back to investing and not focusing minute by minute.

What's ridiculous about this is that back at the 2000 high, and again at last autumn's high, the Standard & Poor's 500 SPX) was valued at about $15 trillion. It's now about $9 trillion. Does anybody in their right mind think that the value of American business has dropped by $6 trillion? American business has grown every year in little ways and big, because that capital produces earnings.

In this speculative market we've forgotten the fact that investment fundamentals prevail. The dividend yield on the S&P 500 has gone from 1% to 3%, while the market is down almost 40%. The book value of the S&P has almost doubled, from $2.3 trillion to $4.2 trillion. Instead of having a market price of seven times book value, the market price is twice book. The market relative to the book value and dividends it pays is far cheaper than it's been in a long time.

....

Q: What should individual investors do now?
A: The fundamental things will apply as time goes by. What we're seeing is the madness of crowds. We've lost our way. We have too much in costs and not enough value, too much speculation and not enough investing.
The way to insulate yourself is to follow a couple of simple rules. First, allocate your assets intelligently. If you're in over your head, on margin, you have to get some of your money out of the stock market.
Second, have your bond position equal your age. If you're 70 years old and have 70% bonds in this market, you're not bad off. If you're in your 20s or 30s and 70% in stocks, you're going to be investing for decades.

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[MISSDem]

1. You have to just keep on keeping on. Stay diversified and keep

putting in your monthly amount. Remember, after the stock market "crash" is the 70s, 80s and 2000s it came back up to 42% higher than it was before. In a way, the stock market is the best place for your money right now.

[bhikkhu]

2. The same advice applied during the big crash in '29

...stock prices properly are a reflection of earnings, and it matters little if a selling panic drives your portfolio value to nothing. Ownership of stock is ownership of companies and therefore of a share of their profits, which are not necessarily impacted by the market value of the moment.

On the other hand, the crash in '29 initially crushed the market values of many companies that were still turning good profits. There was a significant "bounce" as the panic subsided and reinvestment based upon projected earnings and sound fundamentals returned; the market almost made back the ground it had lost to panic. But then (and to oversimplify things, of course), the tide turned as actual earnings began to plummet. The panic had, in essence, damaged the economic basis sufficiently that the broader consumer markets shrunk and a very real decline based on fundamentals dug itself in far deeper than the prior panic and entrenched itself for years.