Crash Warnings Are Piling Up on Wall Street. Jack Bogle Had a 6-Word Rule for Exactly This.

Jack Bogle’s rule for a week like the one that just ended was six words long: "Don’t do something, just stand there." The founder of Vanguard, who launched the first index fund for ordinary investors in 1976 and died in 2019 at 89, said it on CNBC in January 2016 during a global sell-off, had written it in his 2007 book, and repeated the 6-word rule for the rest of his life.

It is worth hearing again this weekend. The S&P 500 finished Friday 6% below its October 6 record after a 4.4% drop on Thursday and its worst week since April, and the crash warnings arrived in a pile: by Sunday afternoon four separate pieces predicting a crash or a bursting bubble sat near the top of the most-read lists, beside a fifth calling Berkshire Hathaway’s record $377 billion of cash a warning. Those warnings are a sign of how nervous Wall Street has become after one bad week; they are opinions about what could come next, and none of their authors knows the date, and Bogle did not claim to. When he gave the rule in 2011, as MarketWatch later reported, he added that it was good only 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 one matters as much 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 a month in Social Security and $90,000 a year of spending. Her husband set the accounts at 60% stocks in 2019, and the bull market since has carried them to 70%: $1,050,000 in stock index funds, $450,000 in bonds and cash. If that sounds like you, the numbers below are yours.

Rule one: stand there

The first rule is about the sale you are tempted to make this week. A dollar in the S&P 500 fund at the October 2007 peak was worth 44 cents at the March 2009 low. Held through it, the same dollar was worth $4.70 on Friday, before counting a single dividend. The 2007 to 2009 fall took 56.5% off the index and 5.4 years to get back to the old high. The 2020 fall took 34.1% in five weeks and was back in six months. The 2022 fall took 25.4% and two years. Each recovered for the investor who stood there.

Standing there is easier when the money you spend this year is nowhere near the stocks. That is where the second rule comes in.

Rule two: your age in bonds, with the check counted

Bogle’s second rule was roughly your age in bonds. He added a part most people leave out. In his 2012 book The Clash of the Cultures he wrote that your asset allocation should count the value of any pension and Social Security you expect to receive as a bond-like component of your wealth, and in interviews he priced a new retiree’s check at about $300,000 to $350,000.

For the widow, the check is $34,800 a year. Priced as a 20-year bond at the 10-year Treasury’s 4.84%, it is worth $439,629. Her wealth with the check counted is $1,939,629. Seventy percent of that in bonds is $1,357,741. Take away the check, and $918,111 of bonds belong inside the portfolio, which leaves $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 is at 70/30, and by Bogle’s arithmetic she has held too much stock for her age since long before Thursday. If you are 70, the same four steps work for you: price your check, add it to your savings, take 70% of the total in bonds, and subtract the check.

What each mix loses in a real fall

Here is what the three mixes do to $1.5 million in each of the last three big falls, with the stock side taking the full index loss and the bond side flat.

Where she is now. A 2007-size fall takes $592,974 and leaves $907,026; her $450,000 of bonds covers 8.2 years of the $55,200 a year she draws beyond Social Security. At 40/60 the same fall 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 table was 5.4 years after 2007. At $55,200 a year that is $299,690 of spending she would need from the bond side while the stocks came back. She already has $450,000 there, so standing there was survivable for her even at 70/30. The move to 40/60 is about the size of the loss she would have to sit through, and whether you can sit through $592,974 is a different question from whether you can sit through $338,842.

How to make the move without a tax bill

The move is $450,000 from stocks to bonds, and where you make it decides 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 of stock and $270,000 of bonds to $330,000 and $720,000. No tax is due on a trade inside an IRA.

The brokerage account is the wrong place. Its $270,000 of index fund has a $120,000 cost basis, so selling it realizes a $150,000 gain, $22,500 of federal tax at 15%, and it lifts her income that year from $90,000 to $240,000, far past the $109,000 line where a single filer’s Medicare premiums go up two years later. Leave the brokerage account alone.

What the bond side pays her

Once the move is made, $900,000 in Treasuries at the 10-year’s 4.84% pays $43,560 a year. With her $34,800 of Social Security that is $78,360, or 87% of her $90,000 of spending, before she sells a share of anything. The $11,640 gap comes from the stock side in good years and from the cash in bad ones. Hold the bridge in Treasuries or CDs held to maturity; a bond fund can lose value too, as 2022 showed.

In a repeat of 2007 to 2009 her portfolio would fall to $1,161,158, and she would not need to sell a share 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 life make it worth less. Inflation raises the $90,000 over 20 years, and the stock side is what pays for that, which is the argument for 40/60 over 30/70. And selling stock after a 6% drop is also doing something. Bogle’s answer was that your allocation is set by your age and your spending, not by the headlines: if 40/60 was right on October 6, it is right now, you make the change once, and then you stand there.

The bottom line

Four crash warnings in one weekend are a reading of Wall Street’s nerves after its worst week since April, and no one knows which of them, if any, is right. Jack Bogle’s six words say not to sell into them. His second rule, your age in bonds with Social Security counted, says a 70-year-old widow with $1.5 million belongs near 40/60, not 70/30. Made inside the IRA, the move costs $0 in tax, cuts her loss in a 2007-size fall from $592,974 to $338,842, and leaves $900,000 of bonds paying $43,560 a year, which with her Social Security covers 87% of her spending while she waits.

Contact [email protected] for any questions or corrections.