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John Bogle’s Million-Dollar Advice

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Among the smartest things I have done as an investor and a financial educator is to soak up the wisdom of people who have more smarts than I do.

One of those people is John Bogle, creator of the first public index fund and founder of The Vanguard Group of mutual funds.

In this article I want to look at a few of my favorite John Bogle quotes and see what they mean for retirees and other investors:

No. 1: “The multiple failings of our flawed financial sector are jeopardizing, not only the retirement security of our nation’s savers but the economy in which our entire society participates.”

That’s a very strong statement. But if you have any doubts, I suggest you watch “Frontline” The Retirement Gamble.

The traditional pension plans of previous generations are getting scarcer and stingier. Half of American workers say they cannot afford to save for retirement. One-third of U.S. households have virtually no retirement savings.

Many people reach their 50s or even their 60s before they fully realize the shortfall they are facing. By then, most of them don’t have sufficient time to make up for what they might have been able to save — but didn’t — earlier.

Faced with bleak options, many people decide to take considerably more risk with their investments and even “go for broke.” Wall Street is all too happy to sell expensive, inappropriate and often high-risk products to such investors. After all, the product producer and the salesperson will be paid no matter what; the investor is the only one taking the risk.

And the risk to our economy and our society?

When large numbers of people retire with insufficient resources, they still need social services, medical care, food, clothing and shelter. Much of that burden falls to the larger society, especially to adult children who often wind up weakening their own futures by “doing their best to help Mom and Dad.”

Is there some million-dollar advice here? Very few individuals have any reasonable opportunity to change “the multiple failings of our flawed financial sector.”

I think Bogle’s implied advice is that we must take care of ourselves by saving more money and investing our savings more sanely.

No 2: “Fund investors are confident that they can easily select superior fund managers. They are wrong.”

Overconfidence is one of the biggest enemies of investors. For many people, it’s an enemy that doesn’t go away until late in life, if ever.

If we believe we can choose superior managers, we’ll probably expect superior returns. And if we get superior returns, we shouldn’t have to save as much as investors who are “only average.” This line of thinking is likely to lead to the opposite of the desired effect; less money in retirement instead of more.

Brokerage firms and mutual fund companies are eager to convince us that they know better answers if we’ll just bring our business to them. And of course there is no shortage of investment newsletters promoting all manner of managers and systems that promise much but deliver disappointment more than success.

Advice: Don’t join the millions of retirees who are now paying for overconfidence and bad decisions when they were younger. Establish reasonable, moderate expectations and act accordingly.

No. 3: “The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.”

Every investor knows the magic of compound interest, which can turn 65 years of saving $1 a day into an eventual $2 million. But this rule works in reverse, too. If you pay unnecessarily high costs, those costs multiply over the years. Most people don’t think of things this way, but they should.

One by one and year by year, the excess costs you pay for management, commissions, taxes and turnover can easily reduce your return by two percentage points. As I show in my free e-bookFirst-Time Investor: Grow and Protect Your Money, after a lifetime of modest investments, a return of 8% can leave you $2,755,274 to spend in retirement; but at 6%, those same investments can leave you with only $1,209,551.

Another quote on this topic, one I like a lot, comes from his The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. Bogle wrote: “We investors as a group get exactly what we don’t pay for. So if we pay nothing we get everything.”

In other words, you only get what’s left after you pay everybody along the line. And it’s a long line, I assure you.

No. 4: Bogle’s other great claim to fame is, as noted earlier, the modern index fund. Here’s his blunt advice to investors who are trying to beat the market by picking stocks: “Don’t look for the needle. Buy the haystack.”

The “haystack,” of course, is the whole market or an entire asset class such as U.S. small-cap value stocks. Buy them all, he says, instead of spending countless hours and angst trying to find the relatively few that might have spectacular returns.

He also said: “Index funds eliminate the risks of individual stocks, market sectors, and manager selection. Only stock market risk remains.”

If this advice gets you to do only one thing — give up trying to beat the market — I think it can easily qualify as being worth a million bucks.

Richard Buck contributed to this article.