 I'll tell you to as many questions as we can before we do the car snack chat. The first question is from one of our visitors from Holland, Marius. He said, Dear Jack, what would you do if you today were 40 years old living in Europe and the effective cost of investing in a global index fund was 1% a year? Move to America. It is amazing and the cost structure in the US is terribly stacked against the investor. And this is probably the cheapest country to buy mutual funds in. I'm not sure the overall brokerage system is any cheaper but the mutual fund expense ratios are lower. And I can remember he used that after the index fund started to get a little recognition which took a long, long time. People would come in, I remember one group from Germany and they said that we'd move on to start the index fund. And not quite the way they said it but that was close. And we got a little bit, what a great idea, blah, blah, blah. And they said now, for it to work for us we need to take 1% a year out. Well I said, you know, there goes the index fund. There's not many points in the index fund that you're taking 1% a year out for distributing. You can probably charge another 1% for managing it and there goes all the magic. So they left and I really like to let people down easily but there's no point in beating around the bush either. And that is it all depends on the efficiency with which you provide the index. So for a European investor, first that involves I think extremely interesting asset allocation problems. But I'm just talking about the central problem which I think is the cost problem. The asset allocation problem is one I've tried to deal with a little bit intellectually which is I believe that it's fine to have all your money in the US. We beat that ground over and over again. Everybody tells me I'm wrong. I need a little reinforcement. I hope somebody else will tell me I'm wrong this week. The more I hear about the more I'm sure I'm right. But it's easily to be, I can easily be wrong. I can't predict the future of the markets. But when you get to a European investor or an Australian investor, they want some balance between their home country I think. But not if you're in Finland where there's only one company that's 80% of the finished market. Nokia. And so it changes from country to country for a European investor. Leaving the cost aside, I'd say it probably shouldn't. And even if you're on forbid in France and the UK, it's much better in terms of their economy and their prospects for none of this economic mess that we have all over the world. But maybe 25% in your home country, 25% or 50% I know it's a big difference. In other international, non-US, 25% to 50% in the US, something like that I think is the intelligent thing to do. But, and I'm glad I'm not facing that option. This nice person in France. Where were they? Holland. The next question is, dear Jack, would you recommend an individual to invest all of their assets into bank borrow crimes or spread the risk to one or four other index fund ventures? Well, basically it's a cost-benefit analysis. Clearly I would hold my own money as a banker and I'm not going to worry about the company going down. Although to bring up an issue I did not touch on, we probably are a systematically important financial institution, SIFI. And I think we giant fund managers are going to have to get used to a little more government oversight, whether we like it or not. Two trillion dollars, a lot of money. That's 5% of the US stock market. And the mutual fund industry is the top five firms. I think this later is reported when the government said this. Top five firms are 50% of the assets in the fund industry. And they're almost all index firms, by the way. Well, except PIMCO. And you could argue they were close to an index firm. Anyway, when you get to the bond area, and some of their correlations, probably 95 or something like that, very high as they tend to be in the bond area. So we have to be very, very much aware of all that. And still, you know, if you want to have, let's say, half of your money in bank or half somewhere else, first on hard press to tell you where to put the other half, and second, you're probably going to have higher costs. So with that higher cost, that's going to be worth maybe sleeping a night better feeling. And, you know, honestly, if I had money since some other mutual fund group, I would sleep less well at night. I'm an insider at Vanguard, sort of an insider, or a former insider, or a quasi-insider, or a virtual insider. Or some kind of an outsider, I'm not sure. But I'd say no problem. We often say, basically, protections, custodian shifts. And I'd say, given the character of our company, you should be able to be comfortable that there aren't going to be ethical breaches, or ethical breaches that jeopardize the value of your securities or administrative burdens that would, say, not give you liquidity when you need it. Although I worry about, you know, I worry about just about everything, I guess, but I worry about the value of liquidity in the mutual fund industry. And, you know, maybe if we were less liquid, we would have more long-term holders, for example. I mean, the promise of liquidity, as we all know, is something that not everybody can have at the same time. And so when you get to our level, particularly in subliministic bonds for the markets are very not-so-darn liquid, so you do have those kind of problems. You could have those kinds of problems, and I would, by far, the largest municipal bond manager. And I should have the answer to this question, and I don't, but I require that to have the 20% to 15% liquidity reserve at all times, because we had such a cost advantage that we had still had a competitive yield, having 15%, basically, in very short-term, municipal cash ready, just in case. And that came up in 2007 when we had a crisis in the municipal bond market. Ian McKinnon, who ran our bond funds in the hospital at the time. So I was running the bond funds. I was, you know, the portfolio managers basically were reporting to me during this period. And it was an awful period, because the bond market was falling apart and our shareholders wanted a lot of liquidity, and we had to provide it. And that's the first thing you do, you say, we're going to have the liquidity. And no matter what, I can remember the bond managers being handed one more anecdote. Come in and saying, well, you know, we're bidding, we have to sell some bonds, and Goldman Sachs is bidding 95.5 of these bonds, and they're worth 98. And what should I do? And I said the answer is very easy, but I didn't think about selling them, because that's the going market, that's what you can get for them. You have to have the cash, there's no way around that. And believe me, if I know Goldman Sachs that they're bidding 98.5 today, they'll be bidding 95 tomorrow. So get the heck out of there. And so we survived that crisis. And that's where the whole idea of the Army came up for the first time and training people at Vanguard to be the guys that would think answering the phones was open even perhaps. And just, they were always ready. We had, they were all trained to handle telephone so we didn't get lines backed up in all life. And they also learned something very important, particularly portfolio managers. They were human beings who owned their funds and what just some big numbers came. And I think that was at least an equal part of it compared to being ready for an emergency, which of course, when you're ready for an emergency that doesn't usually happen. So we've been from 2007, no, 1990s. That year was that crisis. I guess in 1987, 1987 when all this happened, when we were much smaller, but it was still a big problem. And that's when the Swiss Army began. And I think that's been a good thing for us until it's so much as electronic now compared to telephone that probably is less necessary. But I think the training of letting people know that they're human beings on the other end of that telephone is absolutely central to everything I believe about company philosophy. I think this question relates to, if I remember correctly, in Oracle in the Financial Times, Victorian asks, Jack, are we parasites? Well, I could have talked about that earlier, but that's where these diversions come in and intrude on my day and make me push things aside to respond. And there was a very, I think, naive article by a U.K. money manager saying that indexing was parasitical because it took advantage of the efficient markets created by active managers. So we didn't contribute to the efficiency, but we capitalized on it. And first place, that has nothing to do with, you know, put a mark on me. I've never believed totally in the efficient markets. I believe sometimes yes, sometimes no. Long run almost certainly yes. Short run almost always no. But I did take the guy on. He mentioned me and he mentioned Vanguard about being foe-meters of this parasitical behavior. But I took a moment and actually cheered and I changed the question a little bit. And I said, look, a parasite, there's this host body over here and the parasite is taking something out of it. And in this business we're all parasites. And no question about that. We're a parasite that takes six, one hundredths of one percent out of the host body. That's the mark of return. And you, sir, are a parasite that takes two and a half percent on the host body. And if you don't think that's important, you'll have it over a while. So we had a little back and forth. He brought it back. I didn't answer his third name. But I felt better at having done it. The FT has always been extremely kind to me and my ideas. And it's kind of nice. Maybe a little bit financially snobbish friends who won't read The Wall Street Journal or read The New York Times. They read only the FT. And it's a good paper. And I like to joust. And sometimes I do, and sometimes I don't. And if I can tell you, can I give you one more anecdote? This was the most fun one. So my granddaughter is coming into the office to have lunch with me. And at ten o'clock in the morning I get a note from the op-ed age editor, Tunku Badjanarian, his name is, of a book at that time, a book journal. And he said, just a little bit, and had a title and no message. Don't chew dot dot dot. Hate da books. And I wrote back to him and said, of course I do, you know, it's a whole bunch of self-important people getting together to reinforce each other's misguided ideas. So he said, can you give me a thousand words on it? And I said, sure, Wendy, I need it. And he said three o'clock this afternoon. And I was not about to cancel lunch with my granddaughter, believe me. So I drafted up something real quickly and why I wasn't going to Davos. And then I came back from lunch after she left. Lovely young woman. I hated to see her go. Lunch was over. And I got it in by three o'clock. It had to be in time for the European edition. And so it got a lot of criticism. It was fun to write. Probably one of the best things I've ever written, actually. And it ended up by saying, well, one reason I'm not going to Davos is I wasn't invited. And the other reason is I had to get there. But I didn't read it. President Clinton was flying over for the final session. So if he reads this and offers me a ride on this plane, I will be there. So I hope you're all having a little fun in this business. I certainly had my share. Sorry to take that time. Glenn says, I agree with Jack's critique of the Total Bond Index tracking. How likely is it to change? And if not, what funds should we add to our portfolio to get better corporate exposure? Well, good question. And I want to emphasize that I may be a little bit of a purist on this. The differences are not large between, you know, I'd say the index properly weighted. We had things like, in 25% of all, treasuries were held by China and Japan, a little bit from the UK, I think. And so why are they counted when the idea is how are you going to perform relative to your neighbors? Let's call it US pension and retirement plans and US investment generally. They just aren't part of that equation. And people disagree with that fund, but that's my position. And then they have a lot of shorter term treasuries that are much more accurately, kind of in the short bill or very medium, you know, less than short term government bonds. And they're in the index. Why would anybody want to be that short? That said, the differences are not huge. At the main, you shouldn't be striving for perfection even though, you know, you'll never get there. But the option is, I think, and I actually did this when the spread's got so wide, a very rare move for me to make. I have a fair amount of my money out of Total Bond Market into corporate intermediate term index. And so, and that's done fine. I mean, all those gaps of 2008 have been pretty much ironed out. I'm not sure it matters that much anymore, but I just leave it in there. So there is an option of corporate intermediates. And I'm trying to think here, and I probably slept it a little bit. It could be a fund run by Welling and Active, but it's an index fund. It's going to have a correlation of 98 or 99 for the index, whether we call it active management or not. And that's what I want to double underscore. When you talk about ETFs starting to have more and more active management, every single one, except I think one so far, is a bond run. And active management and a bond run is day and night different from active management and stock run. The bond run tolerances are like this between active and index, and then equity funds are tolerated more like this between them. So that's what you can do if you want to do it. Although I think, you know, I think we need to lend a hand to the investor who probably many of you in this room are dying for more income. And yet my philosophy is, you know, if you're in the bond market, don't reach for more yield than the bond market is prepared in front to provide you with. It's like to use a very trite example, like crawling on the limb, and you crawl out further and further, and you're fine, and then all of a sudden, one step too far, snap, a vigorous metaphor. And so do it a little bit if you want to. I don't. I'm not a significant exception in my opinion that I have done it. But basically, the market returns a certain amount, and you just have to accept that. Don't reach for more. It's a little bit like somebody that lives out in an allergy. I think it was someone who lost the first seven of the eight races on the court. I think there are eight races on the court that go to the race tracks. And like taking every penny you have, betting it on them, long shot in the eighth race. Well, you may recoup. The odds do not vary at all. So try and stay within the simplicity both across the index, bond stock, and the like. Here's a related question from Dan Smith. He says total bond is what it is, and the index of tracks is what it is, and my circumstances have not changed. How do I decide whether or not to hold my positions as long as I live? To put it one way, or hunker down into Mark Lee's aggregate to put it another way? Well, basically I'd go for hunkering down where you are. These relatively yield will change. The one thing we do know is today's yield has a 91% correlation, and we'll continue to have a 91% correlation, more or less, with the returns we'll get up in the next ten years. So if you buy a government bond today, 3% to corporate bond at 4%, 4.5%, the odds are very high. You'll get a 4.5% return over the next ten years, or a 3% return over the next ten years. So it favors getting a little more aggressive with the yield side. That said, we all have to try and take it as impossible to do. The idea of human behavior is how will investors react, and I'm afraid that once you get a little opportunistic and reach out for something else, and you'll be much too sensitized to the prices that the bond fund has, and bond funds have gone down a lot, although the reality is they haven't gone down nearly as much. These scare things is a very important point. These scare things in the favor of how much a terrible year this is for bonds. And I can tell you, in my own experience, I do a bond portfolio that's gone down 0.9% this year. And that's because I have half of the unis, or my direct holdings, and tax free unis, and the limited term fund is down 0.1%, and the intermediate term, I don't do long because it's behavioral reasons, and I don't want to mess myself up. It's about 1.8%, so you put 50-50, and you can see it's going to be 0.9%. And that's Charles over for me, and I wish I'd ever eaten stocks. I always wish things like that. I always wish I'd ever been the best performing asset. But my magic, such as it may be, is I never act in most beliefs. And that's really an important thing, and don't let your behavior overcome. And, you know, in the Lowe's in February, and a little bit like the story I told you about Gus last night, I was scared. Why wouldn't I be scared? I mean, everybody must be scared. So, when you're scared and say, you know, I really ought to do something about this, I go back and read my books. They might want me to sleep a little bit, but... Jack, we have a comment here on your comparison. Comparisons of active versus index fund all end costs, included transaction costs only for active funds. Don't index funds have some smaller transaction costs? Yeah, that's a good question, and it's true that they do, that they are so small, that you can't find them in the performance. If you look at the Vanguard index funds, and you subtract our stated expense ratio from the return of the index, you get the return of the fund. There are, the evidence says, zero actual costs. In other words, they're so small, they don't even come out at the old 1.1%. And that's very intuitively satisfactory. There are ways to do trading, Gus is very good at that, has been winning a lot of staff from people, who we're very good at. And most indexes are the same way, there's a bunch of magic indexing anymore. We used to certainly be by far the best indexer. But everybody picks up the secrets, you know, there's no such thing unlike the Coca-Cola formula, which probably is worthless anyway. There's a parent that'll go for you. But yes, there are costs, but they're so small, they are not evidence in the data. This says, in common sense, your tenure forecast used average earnings growth, plus current dividend yield, or consistency, why not use average dividend growth? You could use average dividend growth instead of earnings growth. It doesn't give you as good a result as accurate a result, because companies' payout ratios change. So if someone wants to argue that it's the more pristine formula, and that's actually what we call the Gordon formula, fairly well known in academia, the market value relative to the future cash flow. And this is, they call my thing, the bogal variation of the Gordon model. I happen to like the earnings growth better. There's a great intellectual defense, isn't there? But it works in the data, and I think it's easier to follow. And you don't have to worry about changing payouts, which have changed a lot way down over time. But they're both approximations, and they're pretty good approximations. Amazing to me, how well that formula is worth. Not formula for what the market will do, but formula for establishing reasonable expectations. I think I mentioned earlier what the markets will do, and what the markets will do. And none of this stuff is perfect. And I think we all ought to be aware of the fact that if you're looking for precision in any of these things, please don't look to me for it. I don't have any precision. I have a directional idea, and I have a strong idea of what creates value in the marketplace. That is nearly an earnings growth of dividend yields. And that's about it, and that's all you can control, but it calls attention to being skeptical of what the market is doing with those fundamental returns, investment returns earned by corporate America. And that's why I say, and I'll repeat it once more, I think I said it last night, I'll repeat it again today. We're probably repeating it to our dying day, which I hope is not today. And that is the stock market is a giant distraction to the business of investing. And that's the way I did to these professors down in Southampton and Bermuda, trying to remember the exact point of action I used for them about the stock market is a derivative. The stock market is a derivative of corporate value underlying of creative like corporate value. So think about the stock market and the stock price is a derivative of the value of the corporation or the value of American business as a whole. And that gets you into the whole area of derivatives, what sense do they make and the magnification of returns you saw on those charts, magnified way up, magnified way back and ignore it because you know it's going to be in the long run, zero. That's the nature of things. So my dogmatic about this, you better believe I am. That's my need out. Anybody want to raise a hand? Oh, by the way, can my ask a question? We've had a little discussion about and I talk about this in my financial analyst internal article about how to charge advisory costs outside financial advisory costs sales of whatever against the accounts, against the returns that investors earn and you kind of end up trying to approximate it. But I just want to ask you all I'll express it in a simple way and then just give me one second to explain. Let's see a show of hands of how many of you consider yourself doing yourself investors and if you're not how many of you consider yourself you need an investment advisor and there's a lot of ground between those to pure do it yourself means you get started and you don't have somebody telling you anything to do but your fellow bogal heads you know, whatever you feel and the other is you rely on an advisor to tell you everything. So I just see a couple of hands on the number of hands that are available how many of you consider yourself doing yourself the message is getting across and how many would say they need significant help? I presume that excludes the help I'm giving you this morning. Thank you I'm not amazed of the dominance of doing yourself but I am amazed that she seems to be unanimous. The next question is very timely Jack it says given the very low level of interest rates and the bull market and bonds for the last 30 years can you tolerate the assertion that a person in his late 50s should have no allocation to bonds in his portfolio? Well they're digging into economics versus emotions the economics would suggest that no bonds is the correct decision because we know the stock market returns or we have reasonable expectations that's all we can do stock market returns will be about 7% which will double your money in a decade and that bond returns will be about 2.5% maybe I'll use three before which will get your money up 35% so you've got three times as much money in stocks as bonds and as stocks let you down I just have very much that they will let you all the way down below that 2.5% of bonds it would take an unusual combination of certain circumstances where some kind of a crash and then there's the issue of we live in everything is a risk we know that an uncertainty cannot be eliminated but we know there are certain uncertainties out there that would destroy the value of both stocks and bonds those are bonds that would be exempt the meteor strikes the earth and it really won't matter whether you own a bank order for that only I don't think I'm still hanging on to my bank order but it's that's the economic side and if you profoundly believe that do that and pay attention as I mentioned before very importantly the income stream you get and not to the variation in price because that gets you into the emotional side and so when your emotions start to affect your behavior we get another 50% market decline is something like this earlier whatever it is you're going to want to change some little protection whatever you will and that's probably the worst time you can find to do it so if you think you can accept yourself for emotional problems I would say that's a good basis for investing just go all the way now a lot of defense in your time horizon one thing if you're 22 years old maybe you're 111 like yours truly or something but very few of us can really isolate our emotions in the economics and investing so I'd say if you really feel like that it might be let's say 60-40 is a kind of conventional balance and you really believe in equities make it 85-15 you'll get most of the return of stocks which will still have that little comfort level when things fall apart so economics, all stocks emotions maybe 85% in fact this next one is based on a book that you supposedly made and I'll just read some of the highlights but it's relating to the general state and mutual fund industries specifically regarding money market funds well you supposedly stated that if the money funds got in trouble that other funds would chip in to make the funds whole so this question is if you were running Vanguard and the money market funds got in trouble would you assess the holders of Wellington and Windsor or other Vanguard funds to bail it out well I'll give you sort of a hedged answer do you want to make my position clear? I'll just follow up to that it says if you wouldn't do that would you just let it go down well let me say my whole framework for money market funds is here is an instrument that can help a lot of people a better way to save the money in the bank yes the yield is nothing right now essentially nothing but no one will be that for a way forever but the asset value of the money market funds fluctuates and the concealed asset value fluctuation by holding to a so called dollar price is I think leaving the public a misleading impression of what they are so I would say let the fund share value fluctuate and then the marketplace will work if someone thinks they're not moved to a $10 asset value and so it goes to $9.98 $9.96 $10.03 $10.04 and whatever it might be just treat it like a normal fluctuating value asset with very small fluctuations and then you don't get runs because the price is adjusting and investors what happened the last time everybody I think knows is the they were trying to maintain the bed bothering some brothers what's called institutional index fund or something like that and all these institutions could see what was happening when Lehman collapsed they had a huge amount of Lehman paper and over 1% I think and all of a sudden Lehman collapses and everybody knows that it's not yet in the asset value but it will be tomorrow so you get out of today's price because you've got to be watching these things like a hawk as corporate traders have to do what they're supposed to do so you get this cascading effect and you want to be the first to go and you can get a dollar even though they're giving you a dollar for something worth let me say $0.99 or $0.98 and that means for the half of the old they're left in the fund it's not $0.98 but $0.96 so I think it's an industry that was built on the wrong premise and you know, one of my I tell people to be quite blunt about it but I, you know I'm thinking about writing one more book I want to know this is Tug and Cheek and it's going to be the largest book I've ever written it's called Mistakes I Have Made and the reality is that I look back on those mistakes the most pull-up were made for marketing reasons for marketing reasons to make the thing look more attractive or to jump on the bandwagon of a trend like real estate or specialty funds and that kind of thing and it was just unfortunate and opportunistic and words I don't like to use about myself and I lived and learned from that going back to the first merger in 1966 with the Boston Group and we started the first money market fund I mean I was really speaking from the book that I just told you about in fluctuate ways so let's show the world the fluctuate and nobody wanted all these funds for the $1 asset value that was the mode so reluctantly but I did it was my decision no one else's and so we changed to a $1 asset value so my instincts led in the right direction and it has not cost us anything I don't regard our money market as a big mistake I hope that some group of statesmen in this business will get together and say look the value fluctuates how bad is it to just recognize that and if a lot of people don't want their money market funds well that's just too bad we're going to do it right and put the money in some CD somewhere or something like that and that's going to be painful very much more painful for fidelity and it is for us although we have a decent size money market business I guess about and I don't know exactly so it is a point at which you have to do what is right for the market place for the economy and if it's painful well there's a lot to be learned take it a little more in this one Jack it would also be painful for the investors because many investors use the money market funds for the checking account so every time they wrote a check it would be a taxable event so how do you address that situation well it's the easiest thing in the world I hate that excuse did I make myself clear I have a tax exam short term but it's a basically a money market fund actually I use limited term a little bit longer and it's basically a money market fund with a floating vest and that's invaluable and so I get a little statement saying here are the gains here are the losses here are the washed sales here are the tax return well what's the matter with that it's a simple one number easy to understand easy to calculate not easy for us to calculate but Vanguard and I presume other people calculate it for you and it's no different from having an equity fund and you get a little $10.99 and it says here what your income was and your capital gains were if any so I don't see that that's a problem it's my moral value it's kind of slipped here a little bit but before we ever got into that kind of accounting system I still use the short term limited term unibod fund and I knew every year I had some gains and some losses and I didn't know how to take into account washed sales because when you put money in and you're taking money out that always comes up and when you're getting paid I didn't know quite what to do so I guess I put in my tax return $138 long term capital gains and the next year I put in $272 short term capital losses and the next year I don't know what I put in but I was never challenged I wasn't trying to cheat I just didn't know but within a couple of years of doing that we've got the whole tax thing straight that's complicated from a computer standpoint but simple from an investor standpoint so I don't have to guess anymore and guess what the gains were $138, the losses were $274 whatever one wants to say about so it's I think a trivial