Financial Literacy - Financial tuneup
Advice from the index-fund mastermind

Bogle's portfolio

q_v2.gifDo you own any actively managed funds?

a_v2.gifI'm largely indexed, 85 (percent) to 90 percent in my equity funds, but I've hung onto some of my, what I call "legacy funds" that I'd been investing in over the years that I was running Wellington Management Co. That would include Wellington Fund, Windsor Fund, Explorer Fund, Primecap Fund, other funds like that. I've owned them, and they're going to give me more or less a market return because they're very diversified, but that's 20 percent of my funds and I don't intend to change that.

I should say that on the bond side, in my retirement plan account, which is my largest investment -- because I never owned Vanguard, which is sad to relate because I'd be a billionaire, multibillionaire -- but I don't own that, so my retirement plan is my largest investment, and in my personal account I own 100 percent municipal bond funds, which are very indexlike in their nature.

Money market investing

q_v2.gifYou have said that most people hold five different funds, and that people should hold equity index funds and bond index funds. How much, if anything, should people hold in money market funds?

a_v2.gifIn general I look at investing as having no money market funds. If you're concerned about risk, you're better off holding a short-term bond fund. While the returns will be a little jagged if you draw them on a chart, they're upward about 95 percent of the time. Whereas a money market fund, if you put it on the same chart, will go in a straight line but will end up at a lower level, because that reduction in risk comes with a reduction in return.

When investing, do not own money market funds. In saving for your emergency reserves, yes, own money market funds. An important caution: Money market funds are pure commodities. What differentiates the highest- and lowest-yielding money market funds is cost. The correlation between high cost and low return or low cost and high return in money market funds is 0.99 -- almost perfect. Avoid high-cost money market funds at all costs in your emergency account.

ETFs vs. index funds

q_v2.gifWe published a profile on Ben Stein in 2007, and he mentioned you. Basically he said that you might disagree as to which are ultimately better -- index funds or exchange traded funds -- but that he finds them equally attractive. You have been critical of ETFs. What don't you like about them?

a_v2.gifIt is not the idea of ETFs that I find unpersuasive. After all, if someone wants to buy the Vanguard Total Stock Market ETF compared to the Total Stock Market fund directly, or to that point buy the SPDR, which is an S&P 500 ETF, compared to the Vanguard 500 (Index Fund), I don't have a bone to pick with them. I would tell smaller investors who are dollar averaging: Don't touch the ETF because every time you touch them, you pay a commission.


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