What’s Ahead for Stocks and Bonds— and How to Be Sure You Earn Your Fair Share Remarks by John C. Bogle, Founder, The Vanguard Group at The Money Show Las Vegas, Nevada May 15, 2006 Annual Returns of the S&P 500, 1906 - 2005 80% 60% 40% 20% 0% -20% -40% 19 06 19 12 19 18 19 24 19 30 19 36 19 42 19 48 19 54 19 60 19 66 19 72 19 78 19 84 19 90 19 96 20 02 -60% 1. Investment Return: Earnings Growth and Dividend Yield 12% 10.0% 10% Earnings Growth Dividend Yield 8% 6.0% 6% 4% 2% 0% 4.0% 2. Speculative Return: The Impact of Changes in the P/E Ratio P/E Goes From: 4% 3% 15x to 20x 15x to 12x 2.9% 2% 1% 0% -1% -2% -2.2% -3% 2a. 3. Investment Return Versus Market Return Growth of $1: 1900 - 2005 Annual Growth Rate $100,000 $10,000 Investment Return (earnings growth plus yield) Market Return (includes speculative return*) 9.5 % 9.6 % $1,000 $100 $10 $1 1909 1919 1929 1939 *Impact of change in price-earnings ratio 1949 1959 1969 1979 1989 1999 Investment Returns on Stocks, Past and Future Dividends and Earnings Growth, annualized 12% 10% 8% 9.6% 10.6% 8.0% 4.4% 7.4% 6.8% 6% 6.0% 4% 2% 5.7% 5.2% 3.2% 1.1% 0% 1980s 1990s 2000 - 06 2.0% Next 10 Years 4. Speculative Returns on Stocks, Past and Future 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Cumulative Start P/E End P/E 5. Change in P/E Ratio 7.7% 7.2% -0.8% -7.6% 1980s 110% 7.3x 15.2x 1990s 100% 15.2x 30.4x 2000 - 06 -38% 30.4x 18.9x Next 10 Years -7.4% 18.9x 17.5x Total Returns on Stocks, Past and Future 6. Investment Return plus Speculative Return 20% 17.3% 17.8% 15% 10% 7.2% 5% 0% -0.8% -5% 1980s 1990s 2000 - 06 Next 10 Years Investment Returns on Bonds, Past and Future 7. Yield at Start of Each Period 12% 10.4% 10% 7.8% 8% 6.3% 5.1% 6% 4% 2% 0% 1980s 1990s 2000 - 06 Next 10 Years 8. Bonds: Current Yields and Future Returns Yield and Total Return of IT Gov’t Bonds 16 Yield at year-end 14 Total Return, next decade 12 8 5.1% 6 4 2 6 -0 ay 01 M 20 96 19 91 19 86 19 81 19 76 19 71 19 66 19 61 19 56 19 51 19 46 19 41 19 36 19 31 19 26 0 19 % 10 Total Returns on Bonds, Past and Future 9. Beginning Yield, and Return for Following Period 14% 12% 11.9% 10.4% 10% 7.8% 8% 7.2% 6.3% 6.0% 5.1% 5.1% 6% 4% 2% 0% 1980s 1990s 2000 - 06 Next 10 Years Return on a Balanced Portfolio, Past and Future 16% 15.1% 13.6% 14% 12% 10% 6.5% 8% 6% 4% 1.9% 2% 0% 1980s 60% stocks, 40% bonds 1990s 2000 - 06 Next 10 Years 10. Average Fund versus 500 Index Fund, 1980 - 2005 Gross Return Fund Lag 11. Fund % 500 Index Fund Avg. Fund of Index Rate Profit on $1,000 Rate Profit on $1,000 Profit 12.5% $17,920 12.5% $17,920 100% -0.2 Pre-tax Return 12.3% -2.5 $17,080 Time/Sel. Penalties Investor Return 12.3% Inflation -3.3 Real Return 9.0% 10.0%* $9,820 57% -2.7 $17,080 7.3% $4,820 28% $1,670 22% -3.3 $7,620 4.0% *Lipper reported return reduced by 0.6% for estimated survivor bias and 0.3% for sales charges. The Timing and Selection Penalties: Net Flow into Equity Funds Net Flow (bil) Nasdaq 4500 $350 $300 $250 12. Aggressive Equity 4000 Other Equity 3500 Nasdaq 3000 $200 2500 $150 2000 $100 1500 $50 1000 $0 500 0 -$50 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Strategic Insight Average Fund versus 500 Index Fund, 1980 - 2005 Gross Return Fund Lag 13. Fund % 500 Index Fund Avg. Fund of Index Rate Profit on $1,000 Rate Profit on $1,000 Profit 12.5% $17,920 12.5% $17,920 100% -0.2 Pre-tax Return 12.3% -2.5 $17,080 Time/Sel. Penalties Investor Return 12.3% Inflation -3.3 Real Return 9.0% 10.0%* $9,820 57% -2.7 $17,080 7.3% $4,820 28% $1,670 22% -3.3 $7,620 4.0% *Lipper reported return reduced by 0.6% for estimated survivor bias and 0.3% for sales charges. Average Fund versus 500 Index Fund, 1980 - 2005 Gross Return Fund Lag 14. Fund % 500 Index Fund Avg. Fund of Index Rate Profit on $1,000 Rate Profit on $1,000 Profit 12.5% $17,920 12.5% $17,920 100% -0.2 Pre-tax Return 12.3% -2.5 $17,080 Time/Sel. Penalties Investor Return 12.3% Inflation -3.3 Real Return 9.0% 10.0%* $9,820 57% -2.7 $17,080 7.3% $4,820 28% $1,670 22% -3.3 $7,620 4.0% *Lipper reported return reduced by 0.6% for estimated survivor bias and 0.3% for sales charges. 15. Growth Over Ten Years, Nominal Returns 120% 106% 102% 100% 80% 63% 60% 40% 20% 0% Ann. Ret. Index Index Fund Avg. Fund 7.5% 7.3% 5.0% 16. Growth Over Ten Years, Real Returns 120% 106% 102% 100% 80% 63% 60% 63% 60% 40% 28% 20% 0% Ann. Ret. Index Index Fund Avg. Fund 5.0% 4.8% 2.5% Picking the Short-Term Winners Annual Returns 1999 - 2002 1996 - 1999 Rank Time-wtd. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Avg. 65.8% 62.5 59.5 58.5 54.8 53.3 51.5 51.5 50.0 49.7 55% Rank 841. 832. 845. 791. 801. 798. 790. 843. 851. 793. Based on 851 funds with more than $100 million of assets. 17. 96 – Time-wtd. Ann. Ret. Time-wtd Cum. Ret. -37.1% -31.2 -40.7 -27.4 -28.6 -28.2 -27.2 -39.1 -51.7 -27.9 -34% 13.3% 39.5 -15.7 51.8 34.8 33.2 34.0 -21.2 -61.7 25.8 -57% Picking the Short-Term Winners Annual Returns 1996 - 1999 Rank Time-wtd. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Avg. 65.8% 62.5 59.5 58.5 54.8 53.3 51.5 51.5 50.0 49.7 55% 1999 - 2002 18. 96 – 02 Rank Time-wtd. Time-wtd. Cum. Ret. 841. 832. 845. 791. 801. 798. 790. 843. 851. 793. -37.1% -31.2 -40.7 -27.4 -28.6 -28.2 -27.2 -39.1 -51.7 -27.9 -34% 13.3% 39.5 -15.7 51.8 34.8 33.2 34.0 -21.2 -61.7 25.8 -57% Based on 851 funds with more than $100 million of assets. Dolla Picking the Short-Term Winners Annual Returns 1996 - 1999 Rank Time-wtd. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Avg. 65.8% 62.5 59.5 58.5 54.8 53.3 51.5 51.5 50.0 49.7 55% 19. Cum. Returns96 – 02 1999 - 2002 96 – 02 Rank Time-wtd. Time-wtd. 841. 832. 845. 791. 801. 798. 790. 843. 851. 793. -37.1% -31.2 -40.7 -27.4 -28.6 -28.2 -27.2 -39.1 -51.7 -27.9 -34% 13% 39 -16 52 35 33 34 -21 -62 26 7% Based on 851 funds with more than $100 million of assets. Dollar-wtd Cum. Ret. -61.7% -79.6 -85.1 -57.5 -17.7 -60.4 -56.0 -87.1 -65.6 -3.0 13% Picking the Short-Term Winners Annual Returns 1996 - 1999 Rank Time-wtd. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Avg. 65.8% 62.5 59.5 58.5 54.8 53.3 51.5 51.5 50.0 49.7 55% 1999 - 2002 20. Cumulative Returns 96 – 02 96 – 02 Dollar-wtd. Rank Time-wtd. Time-wtd. 841. 832. 845. 791. 801. 798. 790. 843. 851. 793. -37.1% -31.2 -40.7 -27.4 -28.6 -28.2 -27.2 -39.1 -51.7 -27.9 -34% 13% 39 -16 52 35 33 34 -21 -62 26 7% Based on 851 funds with more than $100 million of assets. -62% -80 -85 -57 -18 -60 -56 -87 -66 -3 -57% 250 Winners, Losers, and Failures Long-Term Returns of Mutual Funds 1970 - 2005 Number of 223 Equity Funds 1970: 355 2005: 132 200 150 Non-Survivors 100 50 6 6 20 28 27 21 15 7 0 2 2% 3% 4% or more 0 -4% or less -3% -2% 60 Losers -1% 0 to -1% 0 to 1% 48 Market Equivalent 1% 24 Winners 21. Now, About Those Nine Winners Annual Performance vs. S&P 500 Since Fund’s Peak 0% N/A N/A N/A -0.8% -2% -0.4% -1.9% -1.7% Fund One Fund Fund Fund Two Three Four Fund Five Fund Fund Six Seven Fund Fund Eight Nine 1991 1983 2005 1993 2005 2005 -2.8% -4% -3.9% -6% Year of Peak 1993 1983 1982 22. Equity Mutual Funds: Returns vs. Costs 23. (10 Years Ended February 2005) Cost Quartile Gross Return Costs Net Return One (lowest) 12.6% 0.9% Two 12.5 Three Four (highest) Low Cost Enhancement Risk Risk-adj Return Cum. Gain 11.7% 16.0% 11.9% 207% 1.5 11.0 17.0 10.9 181 12.8 2.0 10.8 18.5 10.1 163 12.0 3.0 9.0 21.4 8.1 118 +47% +75% +5% -70% +30% -34% Gross return was calculated by adding costs back into each group’s net return. Odds of Actively Managed Fund Portfolio Outperforming Index Fund 100% 80% 60% 40% 29% 15% 20% 9% 5% 2% 25 50 0% 1 5 10 Years 24. www.johncbogle.com