Four crash warnings in one weekend, a 4.4% drop and the worst week since April. Jack Bogle’s rule for times like this was six words, and his second rule, your Social Security age mattered, says one…
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Jack Bogle’s rule for a week like the one just ended consisted of six words: “Don’t do anything, just stand there.” The Vanguard founder, who launched the first index fund for ordinary investors in 1976 and died in 2019 at age 89, said it on CNBC in January 2016 during a global sell-off, wrote it in his 2007 book, and repeated the 6-word rule for the rest of his life.
It’s worth hearing again this weekend. The S&P 500 ended Friday 6% below its Oct. 6 record after a 4.4% decline Thursday and its worst week since April, and the crash warnings came thick and fast: As of Sunday afternoon, four separate items predicting a crash or bubble burst topped the most-read lists, alongside a fifth calling Berkshire Hathaway’s record $377 billion a warning. These warnings are a sign of Wall Street’s nervousness after a bad week; these are opinions about what might happen next, and none of their authors know the date, nor did Bogle claim to. When he gave the rule in 2011, as MarketWatch later reported, he added that it was only good about 99% of the time.
So what should a 70-year-old with $1.5 million actually do? Bogle left two rules, and the second is as important as the first. Take a 70-year-old widow with $1,050,000 in an IRA that was her late husband’s 401(k), $450,000 in a brokerage account, $2,900 per month in Social Security, and $90,000 in expenses per year. Her husband set the accounts at 60% in stocks in 2019, and the bull market has since increased them to 70%: $1,050,000 in stock index funds, $450,000 in bonds and cash. If this sounds like you, the numbers below are yours.
First rule: stay there
The first rule concerns the sale you are tempted to make this week. A dollar in the S&P 500 fund, at its peak in October 2007, was worth 44 cents at its lowest in March 2009. Held through it, the same dollar was worth $4.70 on Friday, before counting a single dividend. The drop from 2007 to 2009 sent the index down 56.5% and took 5.4 years to return to the old peak. The 2020 drop took 34.1% in five weeks and came back in six months. The 2022 drop lasted 25.4% and two years. Everyone recovered for the investor standing there.
It’s easier to stay put when the money you spend this year is far from inventory. This is where the second rule comes into play.
Second rule: your age in bonds, check counted
Bogle’s second rule was about your age in bonds. He added a part that most people forget. In his 2012 book, The Clash of the Cultures, he wrote that your asset allocation should take into account the value of any pension and Social Security you hope to receive as a bond-like component of your wealth, and in interviews he put the price of a new retiree check at between $300,000 and $350,000.
For the widow, the check is $34,800 per year. Priced as a 20-year bond at the 10-year Treasury rate of 4.84%, it is worth $439,629. His wealth with the check counted is $1,939,629. Seventy percent of this amount in bonds represents $1,357,741. Take away the check and $918,111 worth of bonds are in the portfolio, leaving $581,889 for stocks, or 38.8%. Call it 40/60: $600,000 in stocks, $900,000 in bonds.
Taken literally, without the check, the rule says 30/70: $450,000 in stocks, $1,050,000 in bonds. Either way, she’s 70/30, and by Bogle’s arithmetic, she owned too many stocks for her age well before Thursday. If you’re 70, the same four steps work for you: evaluate your check, add it to your savings, take 70% of the total in bonds and subtract the check.
What every mix loses in a real fall
Here’s what the three combinations do to hit $1.5 million in each of the last three big falls, with the stock side taking the entire index loss and the bond side remaining flat.
| Mix | Actions | 2007 to 2009 (56.5%) | 2020 (34.1%) | 2022 (25.4%) | $55,200 years pull bond coverage |
|---|---|---|---|---|---|
| Where she is now, 70/30 | $1,050,000 | $592,974 | $358,100 | $266,286 | 8.2 |
| Bogle’s rule with Social Security counted, 40/60 | $600,000 | $338,842 | $204,628 | $152,163 | 16.3 |
| Bogle’s rule taken literally, 30/70 | $450,000 | $254,132 | $153,471 | $114,123 | 19.0 |
Where she is now. A drop the size of 2007 costs $592,974 and leaves $907,026; her $450,000 in bonds covers 8.2 years of the $55,200 a year she withdraws beyond Social Security. At 40/60 the same drop takes $338,842 and leaves $1,161,158, and $900,000 of bonds covers 16.3 years.
The number that decides. The longest wait in the chart was 5.4 years after 2007. At $55,200 per year, that’s $299,690 in spending she would need on the bond side while stocks came back. She already has $450,000 there, so staying there allowed her to survive even at 70/30. The move to 40/60 is about the size of the loss she’s expected to take, and whether you can stand $592,974 is a different question than whether you can stand $338,842.
How to move without a tax bill
The transfer is $450,000 from stocks to bonds, and where you do it determines what it costs. Inside the IRA, it costs nothing: Sell $450,000 of the stock fund and buy Treasuries, and the IRA goes from $780,000 in stocks and $270,000 in bonds to $330,000 and $720,000. No tax is due on a transaction within an IRA.
The brokerage account is not the right place. His $270,000 index fund has a cost basis of $120,000, so selling it realizes a gain of $150,000, $22,500 federal tax at 15%, and that raises his income that year from $90,000 to $240,000, well beyond the $109,000 line where Medicare premiums of a single declarant increase two years later. Leave the brokerage account alone.
What bonds bring him
Once the switch is made, $900,000 in 4.84% 10-year Treasury bonds yields $43,560 per year. With her $34,800 in Social Security, that’s $78,360, or 87 percent of her $90,000 in expenses, before she sells a share of anything. The $11,640 gap comes from stocks in good years and cash in bad years. Hold the bridge in Treasury bills or CDs held until maturity; a bond fund can also lose value, as 2022 showed.
In a repeat of 2007 to 2009, her portfolio would drop to $1,161,158 and she wouldn’t need to sell a stock for years.
Where the rule is weak
The rule is a rule of thumb, and Bogle said so. Pricing the check as a 20-year bond is our assumption; higher rates or a shorter lifespan make it less valuable. Inflation causes the $90,000 to rise over 20 years, and the stock side pays for it, which is the argument for a 40/60 rate rather than 30/70. And selling stocks after a 6% drop is also doing something. Bogle’s response was that your allowance is set by your age and spending, not the headlines: If 40/60 was right on Oct. 6, it’s now, you make the change once, and then you stay there.
The essentials
Four crash warnings in one weekend are a testament to Wall Street’s nervousness after its worst week since April, and no one knows which, if any, of them is right. Jack Bogle’s six words say don’t sell there. His second rule, your Social Security age matters, says a 70-year-old widow with $1.5 million that’s nearly 40/60 owned, not 70/30. Made within the IRA, the move costs $0 in taxes, reduces her 2007 loss from $592,974 to $338,842, and leaves $900,000 in bonds paying $43,560 a year, which, along with her Social Security, covers 87 percent of her expenses while she waits.
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