Respected Expert Warns of ‘Financial Train Wreck’


Too many investors speculate rather than invest according to John Bogle, the founder of the Vanguard Group and the creator of the Vanguard 500 Index Fund, which tracks the S&P 500 stock index. Investing means buying and holding; trading (frequent buying and selling) is speculation. Speculation is what happens when sales people act as financial advisers instead of investment fiduciaries. Similarly, speculation is what happens when marketing people manage money instead of investment fiduciaries. Thus, according to Bogle, the exchange traded fund is the greatest marketing innovation of the 21st century.

Exchange traded funds have increased speculation. The SPDR 500 index, an exchange traded fund that tracks the S&P 500 stock index, is a case in point. That ETF is the most actively trade stock Bogle says. Buying and holding the Vanguard 500 mutual fund is an example of investing. Trading the SPDR 500 index ETF is an example of speculating. Needless to say, commodities and currency exchange traded funds and the myriad other exotic and niche exchange traded funds are just pure speculation.

Exchange traded funds are dangerous in the sense that, even if one buys and holds the ETF and does not trade it, the ability to trade, and the temptation to trade, is there. Holders of exchange traded funds are 25% more likely to trade than holders of mutual funds at least at Vanguard.

But what worries Mr.Bogle the most is the prospect of 70% of Americans being forced to rely totally on social security (“Bogle expects financial ‘train wreck,'” by John Waggoner, USA Today). A financial train wreck is coming, Bogle says, because the 401(k) is not a good retirement plan in that investors are not required to keep putting money in, are not prohibited from taking money out or borrowing from it. Basically, the financial industry caters to investors’ worst instincts, and our most common retirement savings vehicle is woefully defective.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.