Advice from the index-fund mastermind
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Money market investing
You 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?

Don't-miss insights:

• History of the index fund • Simplicity is key • Switching to indexing • Costs add up • How much to pay • Bogle's portfolio • Money market investing • ETFs vs. index funds • Investing for everyone

In 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
We 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?

It 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.

In fact, I wouldn't buy the Vanguard ETF because you pay a commission. What's the matter with that? The answer is nothing. So Stein and I are on the same square. What troubles me and troubles me deeply is: What are ETFs? They are index funds that you can trade all day and they are index funds you pay a commission on. Those two things strike me as a great disadvantage.

Trading is your enemy, because it's based on emotion. People do trade them with great rapidity. So I have a problem with trading ETFs, which you are lured into doing if you watch the market all day long, and also, the types of ETFs we have.

(In 2007) there (were) 690 types of ETFs, and only 12 are broad-market ETFs, like the S&P 500 or the World Stock index or similar total-stock indices. That leaves 678 funds that are vehicles for speculating. Whether it's in emerging cancer shares or the Taiwanese stock market, or the Nasdaq, those are speculative things to do. I can't tell you they won't work, but I can tell you that when you have a speculative instrument that you can trade all day long, I would bet an awful lot of money that you would be better off instead of doing a lot of trading over the next 10 years in those narrow, specialized, undiversified and, in terms of commissions, costly instruments -- you don't have a fighting chance of beating the kind of index strategy that I just described.