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Advice from the index-fund mastermind

Interview: John C. Bogle

If you can't beat the market, be the market: That's the logic behind index funds. More than 30 years ago, John Bogle set up shop to help investors capture market returns at minimal cost. He had realized a quarter-century earlier that complex mutual fund investing strategies don't consistently outperform market returns.

Even Bogle's detractors have had to admit that the wisdom of his investing model has been borne out by time. Somewhat uncomfortable in his status as a present-day folk hero, Bogle remains an ardent defender of the common investor, and his zeal shines through in his 2007 book, "The Little Book of Common Sense Investing," published by John Wiley & Sons.

At a glance
Name: John C. Bogle
Hometown: Valley Forge, Pa.
Education: Magna cum laude economics degree from Princeton in 1951
Career highlights:
  • Founded Vanguard in 1974
  • Voted one of the "world's 100 most powerful and influential people" by Time magazine in 2004
  • Institutional Investor's Lifetime Achievement Award (2004)
  • Named one of the investment industry's four "Giants of the 20th Century" by Fortune magazine in 1999
  • Received the Woodrow Wilson Award from Princeton University for "distinguished achievement in the Nation's service" (1999)
At age 80, the founder and former CEO of The Vanguard Group is still going strong. When he's not traveling to teach at a college seminar or to deliver a speech, he works 60 hours a week running Bogle Financial Markets Research Center, a unit of Vanguard that's funded by the company. His latest book, published in 2008, is "Enough: True Measures of Money, Business and Life." He took time out of his hectic schedule to talk about investing with Bankrate.

History of the index fund

q_v2.gifYou wrote your senior thesis 55 years ago on index funds. Did you understand their potential back then, or have you been surprised with the developments since you founded Vanguard in 1974?

a_v2.gifIt was just a thought that I had in my thesis, not about index funds, but about outperforming the market by managed funds. I'm quite happy I wrote it down, this little kid, one year out of his teens. In that thesis, I wrote: "Mutual funds may make no claim to superiority over the market averages."

We didn't have as much data as we do today, but I looked at performance of a great number of funds and found that they couldn't beat the market. That was the seed that was planted that by 1974 had burst into flower when I created the first index mutual fund.

Simplicity is key

q_v2.gifWhat is the most important piece of advice you have for someone who is new to investing?

a_v2.gifRely on simplicity; own American or global business in broadly diversified, low-cost funds.

q_v2.gifDo you think the average person could safely invest for retirement and other goals without expert advice -- just by indexing?

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a_v2.gifYes, there is a rule of thumb I add to that. You should start out heavily invested in equities. Hold some bond index funds as well as stock index funds. By the time you get closer to retirement or into your retirement, you should have a significant position in bond index funds as well as stock index funds. As we get older, we have less time to recoup. We have more money to protect and our nervousness increases with age. We get a little bit worried about that nest egg when it's large and we have little time to recoup it, so we pay too much attention to the fluctuations in the market, which in the long run mean nothing.

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