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Bogle's Blueprint for Enlightened Investing


Some eight years ago, I was at a presentation by Vanguard founder Jack Bogle at a business journalists' conference in Denver, and when his PowerPoint crashed, and he had to use transparencies on a vintage 20th-century overheard projector. After the presentation, he let me keep them, and they still serve as a sort of Rosetta Stone for me for enlightened investing.

The slides outlined some truths in the fund business, ones that are well known but little heeded by investors: Hot money chases bubbles and gets in and out at the wrong times; investor net returns are lower than what most people think, and the outsized disparity between fund asset sizes and performance. Larger, actively managed funds don't often produce better returns at a lower cost.

Bogle, as the Godfather of index investing, has ideas that are timeless and based on simple math, and at the same time exhibit uncommon sense and a routinely overlooked view of how investors are consistently overcharged by the financial services industry. Fortunately, his wisdom is widely available to everyone.

Much of that wisdom has been assembled in Bogle's most recent book "The Clash of the Cultures: Investment vs. Speculation (Wiley, 2012)." While most of the insights are time-honored themes in the Bogle canon, they are very useful for individual investors.

1. Cost matters everywhere

This has been Bogle's mantra for decades. It emerged as an idea in his senior thesis at Princeton in 1949 and was one of the seeds for the creation of the Vanguard Group (Disclosure: My retirement portfolio is mostly in Vanguard funds).

His formula is simple: "gross market return. minus the cost of financial intermediation is the net return."

Boiled down, that means what you keep is the return of the investment, minus all of the fees managers and other middlemen load into your account. The math is always compelling. When the progressive think tank Demos did a study on 401(k)s earlier this year, it found that in the long run, the average stock mutual fund earns 7 percent, roughly matching the return of the stock market. When all fees were subtracted, however, the net return dropped to 4.5 percent. Expenses ate up one-third of returns, or about $155,000 over the working life (from 1965 to 2005) of an average American.