"Don't Count on It!: Reflections on Investment Illusions, Capitalism, "Mutual" Funds, Indexing, Entrepreneurship, Idealism, and Heroes" by John Bogle
"Don't Count on It!: Reflections on Investment Illusions, Capitalism, "Mutual" Funds, Indexing, Entrepreneurship, Idealism, and Heroes" by John Bogle - 
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Tess Vigeland: One thing a lot of people wish they could return? All the lousy investment choices they've made this year. Whether you panicked and sold when you should have held or stayed with something way past its prime, investing is not for the faint of heart. If you think you know what you're doing, don't count on it. And appropriately enough, that's the title of the latest book from Jack Bogle. The inventor of the index fund and founder of Vanguard.

Jack, welcome back to the show, and let me start by asking, what are we not supposed to count on?

Jack Bogle: Well, you're not supposed to count on the fact that the past will be prologue to the future, number one. The past doesn't tell us very much about the stock market, and indeed, there's a great deal of evidence that the past totally misleads you, because often the things that have done best in the past will follow with a period where they do worse.

Vigeland: Well, if past is not prologue, then how should we be thinking about future stock market performance? How do we plan to invest for the future?

Bogle: Well, investing is a risky business. But I think the first thing we do is think about our asset allocation, how much we want to have in bonds and how much in stocks. I like to think of it, the rule of thumb, when you retire that your bond position equaling your age, 'cause you've got your money at stake, you got less time to recoup and you're going to start to need income. Stocks don't provide it, bonds do.

Now, in terms of the stock market itself, to me, investing is owning corporations and getting the earnings growth that should parallel our economy over time.

Vigeland: You mention in the book that years ago, when you were a younger man, your senior thesis dealt with the psychology of investing, which of course, is all the rage these days. You suggested that experts, like portfolio managers, would be leading the direction of the market based on evaluation of the performance of a company's value -- not the average person's opinion of the value of a share. Why do you think you were wrong?

Bogle: Oh my goodness, how wrong I was! Lord Keynes, John Maynard Keynes's the great British economist, said that that's just what would happen: That the institutions would follow the individuals. And I said, "No no. Institutions will be much brighter and they'll invest and not speculate." What happened is is that we became -- I think, we financial institutions -- followers rather than leaders, because the focus became a very short-term focus in stock market. As I've often said, we have a rent-a-stock business, not a own-a-stock industry. These institutions aren't really investing money for the people who have entrusted to them. They're agents and they're putting their own interests first before the interests of the principals that they're obliged to serve first. And they aren't doing that. Back when I wrote that thesis -- believe this or not -- these financial institutions owned 8 percent of all the stock in the stock market. And now they own 70 percent.

Vigeland: Well, if we are surrounded by speculators, by short-term stock renters, why should we have any of our money anywhere but under the mattress?

Bogle: Well, the one guarantee you will have if you put under the mattress for the next 40 years, each dollar you save will still have that same dollar look about it. But it'll probably be worth about 20 cents, because of inflation. So the question is: Where can you earn the kind of return that you want? It is in intermediate-term bonds; the yields can be in the 4 to 4.5 percent range. And in the stock market you should be able to get -- with risk, I want to underscore -- something like a 7 percent return. You're able to average 5 percent on your total portfolio, you know, your money will double in 14 years. It'll re-double in 28 years and so on out.

Vigeland: But even if you are long term, how can you be in a market that is so filled with these short-time renters, with people like Bernie Madoff, with companies that end up causing the kind of flash crash we had in May. You don't have any control over so much of it.

Bogle: Well, you know, the fact that the flash crash the market dropped, I think, 500 points or something in a very short period of time, you don't have to act on that. It's basically trying to ignore the short-term fluctuations in the market, which is, I've often said -- quoting Shakespeare here -- are like "a tale told by an idiot, full of sound and fury, signifying nothing."

Vigeland: You also talk about quite a bit in the book about fixing the way that people invest. You say money managers need to be better, but also the individual investor has to be more well-informed. What's the best way to get yourself to that point?

Bogle: There are two solutions to this mess we're in. One, if each investor would just wake up and look after his or her's own financial interest, the system would get fixed, because people would move the money in the intelligent places, which are highly diversified, very low cost funds that look long-term. Now, that's going to take a long time to happen. So what I've recommended if we want a more global solution quicker, and that is to have a federal statute that says these investment institutions must put the interest of their clients first, before anything else. Cost would come down, investment would take over speculation and these giant institutions would then tell our corporations in this country, "You better get well-managers, or we're going to change the board of directors and the management."

Vigeland: John Bogle, thanks so much for speaking with us. It's been a pleasure as always.

Bogle: OK Tess, good to be with you.

Vigeland: You can read an excerpt of the book at our web page dedicated to all things literary. It's called "The Big Book" and has more book selections and author interviews.