Jack Bogle's wisest retirement investing advice

Smart tips from the father of index funds

Jack Bogle founded a financial services company, The Vanguard Group, that now has 16,600 employees and more than $5 trillion in assets. Bogle, who died last week at 89, could have parlayed that success into an unmatched fortune, but he proudly proclaimed that he was never close to becoming a billionaire. Instead, he focused on helping other people build wealth for retirement.

"Jack could have been a multibillionaire on a par with Gates and Buffett," said William Bernstein, an Oregon investment manager and author of 12 books on finance and economic history, as quoted in The Inquirer's Bogle obituary. Instead, Bogle's Vanguard "exists to provide its customers the lowest price. He basically chose to forgo an enormous fortune to do something right for millions of people. I don't know any other story like it in American business history."

How did he do it? The short explanation: Bogle was essentially the father of index funds, mutual funds that keep fees low by simply buying stocks tied to stock-market indexes, rather than using highly paid fund managers to buy and sell shares aiming to beat the market. Bogle launched Vanguard in 1974 and the company's first index fund, the Vanguard 500 Index Fund, two years later. Index funds been rising in popularity ever since.

But Bogle also became something of a sage with a devoted following of investors: bogleheads. These investors are committed to his brand of low-fee, low-stress investing. It's an approach that has enabled millions of Americans once shut out of the world of high finance to build wealth and prepare for a worry-free retirement.

His advice was simple, and consistent across his many books, papers, and interviews. In the flood of coverage of Bogle's influence published since his death, several publications, including MarketWatch and CNBC, mined an essay Bogle wrote about his investment strategies in the CFA Institute's Financial Analysts Journal to provide a list of his seven essential tips:

Tip 1: Invest you must.

The biggest risk facing investors is not short-term volatility but, rather, the risk of not earning a sufficient return on their capital as it accumulates.

Tip 2: Time is your friend.

Investing is a virtuous habit best started as early as possible. Enjoy the magic of compounding returns. Even modest investments made in one's early 20s are likely to grow to staggering amounts over the course of an investment lifetime.

Tip 3: Impulse is your enemy.

Eliminate emotion from your investment program. Have rational expectations for future returns, and avoid changing those expectations in response to the ephemeral noise coming from Wall Street. Avoid acting on what may appear to be unique insights that are in fact shared by millions of others.

Tip 4: Basic arithmetic works.

Net return is simply the gross return of your investment portfolio less the costs you incur. Keep your investment expenses low, for the tyranny of compounding costs can devastate the miracle of compounding returns.

Tip 5: Stick to simplicity.

Basic investing is simple — a sensible allocation among stocks, bonds, and cash reserves; a diversified selection of middle-of-the-road, high-grade securities; a careful balancing of risk, return, and (once again) cost.

Tip 6: Never forget reversion to the mean.

Strong performance by a mutual fund is highly likely to revert to the stock market norm — and often below it. Remember the biblical injunction, "So the last shall be first, and the first last" (Matthew 20:16, King James Bible).

Tip 7: Stay the course.

Regardless of what happens in the markets, stick to your investment program. Changing your strategy at the wrong time can be the single most devastating mistake you can make as an investor. (Just ask investors who moved a significant portion of their portfolio to cash during the depths of the financial crisis, only to miss out on part or even all of the subsequent eight-year — and counting — bull market that we have enjoyed ever since.) [Jack Bogel, Financial Analysts Journal]

In truth, even that list is a bit longer than necessary. For one thing, you can fold Tips 3 and 7 into what Bogle described as his most basic rule: Once you've picked a smart investment plan, stick with it. The New York Times this month put "Stay the Course" at the top of a list of five Bogle investment tips. "Wise investors won't try to outsmart the market," Bogle said, as quoted in the Times. "They'll buy index funds for the long term, and they'll diversify." The Times' list also included "Beware the experts," a logical next step, because if you're going to stay the course you've got to tune out the chatter from "highly skilled, highly paid" experts, most of whom missed the warning signs before the financial crisis, as Bogle noted.

Even on the Times' shorter list, the remaining tips — "Keep costs down," "Don't get emotional," and "Own the entire stock market" — can be boiled down to the foundation of Bogle's strategy: Buy just a few index funds covering the entire market — "The S&P 500 is a great proxy," he told The Wall Street Journal last year — and leave it alone until you retire. You should keep pumping in more savings, of course, and keep your balance of stocks and bonds on target, but stick to your plan.

"One lesson is to rely on the math. The fundamental underlying success of indexing is not based on any mystique, it's based on gross returns in the stock market minus cost equals net return," Bogle said. "Hold high the idea of simplicity in investing and avoid trading because trading gives more money to Wall Street and less money to the investor."

If you aren't sold, there's plenty to read about Bogle and his ideas. If you are sold, remember: Once you're in, stay in.

"Buy and hold the total stock market, or the S&P 500, or the total bond market; buy and hold forever," Bogle once told The Street, "and that is the secret of investment success."


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