Vanguard Founder Advises Riding Out The Storm Investors have been pulling tens of billions of dollars out of stocks and mutual funds. But if history is any guide, this is probably not the time to panic and sell a lot of stock. John Bogle, the founder of the giant mutual fund company Vanguard, offers some advice for people trying to protect their nest eggs.

Vanguard Founder Advises Riding Out The Storm

Vanguard Founder Advises Riding Out The Storm

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Market Tips From Vanguard And Its Founder

Mutual fund pioneer John Bogle, the founder of The Vanguard Group, offers this rule of thumb for investors: Own the same percentage of bonds as your age. So when you're 45, your portfolio would have 45 percent bonds and 55 percent stocks.

Bogle says one simple technique is to hold just two different classes of assets, including U.S. bonds and U.S. stocks. Following this model, you could invest your funds in Vanguard Total Stock Market Index Fund and Vanguard Total Bond Market Index Fund.

For those investors who want some exposure to foreign stocks, Bogle recommends an investment of no more than 20 percent of your total stock allocation, divided equally, into two Vanguard funds: Developed Markets Index Fund and Emerging Markets Index Fund.

Bogle's approach is on the conservative side, because it means your portfolio would have substantial bond holdings even at a young age, and you would have international exposure only if you so choose.

Vanguard has a slightly different take than its founder on what to do if you're a 45-year-old investor, especially if you want to take on more risk in the hopes of higher returns. The company suggests investing in its Target Retirement 2030 Fund, which incorporates five different Vanguard funds in a mix designed to become less risky over time, so that it's more stable at the time you reach retirement age.

The Target Retirement 2030 Fund has the following allocation mix:

• Vanguard Total Stock Market Index Fund Investor Shares — 68.5%

• Vanguard Total Bond Market Index Fund Investor Shares — 14.5%

• Vanguard European Stock Index Fund Investor Shares — 9.2%

• Vanguard Pacific Stock Index Fund Investor Shares — 4.2%

• Vanguard Emerging Markets Stock Index Fund Investor Shares — 3.6%

The careening stock market is scary for a lot of people. The Dow is down 35 percent from a year ago, and investors have pulled tens of billions of dollars out of mutual funds. But John Bogle, the founder of the giant mutual fund company Vanguard, says if history is any guide, this is no time to panic and dump a lot of stock.

Bogle should know. He founded the not-for-profit Vanguard funds in 1974. They charge a fraction of the fees that other mutual funds charge. And Bogle has dedicated his life to finding better ways to help people save and invest for retirement. So what does Bogle think average investors should do right now, when a lot of people are wondering whether the stock market could fall even further?

"None of us know, of course," Bogle says, but "there are a lot of things you can do wrong that are easily avoidable." One of those things is selling a lot of stock. When stocks have already fallen so far, you don't want to charge off the cliff with all of the other lemmings who are selling.

Bogle says human nature leads people to want to sell stocks after the market has crashed, even though buying high and selling low like that is not a very good way to make money. People get emotional. But "the market is driven by speculators, and wise investors will just try not to watch the carnage," Bogle says.

Are Stocks Near A Bottom?

Bogle says nobody knows exactly where the bottom will be, or how long it will take before the market really turns around. But there are some signs that stocks may already have fallen too far, so you definitely wouldn't want to sell a lot of stock right now and miss the recovery, he says.

Some other very smart people agree. Late last week, billionaire investor Warren Buffett said in an op-ed piece in The New York Times that he was buying up U.S. stocks because they had gotten so cheap.

"As measured by the stock market," Bogle says, "the value of American business in its entirety (the total U.S. stock market) has dropped since last October from $18 trillion to $10 trillion." The Dow is down 35 percent from a year ago. Bogle says there's no way the value of most American companies has fallen that much. Still, he cautions against any big moves right now — either buying or selling stocks.

If you have a retirement account, you most likely made decisions about what percentage to put into stocks versus more stable bonds. Bogle says you should just hang in there. Don't even look, and don't change anything. "Times of market panic or extreme market conditions are usually terrible times to make fundamental investment decisions," he says.

Things You Can Do To Respond To Market Turmoil

One thing many investors encourage people to do at least a couple of times a year is "rebalance" their accounts to keep them in line with their predetermined asset allocation mix.

For example, if you wanted to have 28 percent of your holdings in U.S. stocks, and U.S. stocks have fallen so much that they are now only 25 percent of your retirement account pie chart, some say you should sell some bonds and buy some stocks to bring that number back to 28 percent.

Also, you can use the financial turmoil as motivation to take a hard look at how you've invested your savings and whom you've invested with. Scores of financial firms out there are trying to get your business, Bogle says, but the majority overcharge so much that you should just stay away from them.

Many charge annual fees of 1 percent, 2 percent and sometimes more than 3 percent, Bogle says. That may not sound like much, but those fees do a lot more damage for most people than the stock market crash of 2008 ever could, he says. They're sort of the silent killer of retirement accounts.

"If you invest $1,000 at 8 percent, after 50 years it's worth $47,000," Bogle says. But if you are paying 2 percent in fees, which many mutual funds charge, that reduces the effective earnings rate to 6 percent a year, which would reduce the amount earned after 50 years to just $18,000.

Because of compound interest — your money doubling every nine or so years, again and again — that little 2 percent fee, every year over 50 years, ends up wiping out most of your gains. It takes away nearly 70 percent, Bogle says.

Get Into Index Funds; Earn More For Retirement

Bogle says it's also important for people to invest using so-called index funds, which he invented in the 1970s. They are very low cost and let a person buy, for example, the entire U.S. stock market instead of trying to pick which U.S. stocks will do well.

Especially because you don't know which big company might implode next, you're better off owning the whole market, he says. Other investors, including Buffett and David Swensen, who manages Yale's endowment, offer the same advice. The average investor is far better off in the right mix of nonprofit index funds instead of the much more expensive mutual funds — which, for all their fees, have almost no chance of beating the overall market over time. So why pay the fees?

Own A Percentage Of Bonds Equal To Your Age

Stocks are riskier but get better returns. Bonds are safer but don't tend to do as well over time. So how do you balance the two? Bogle says one rule of thumb is to think about owning the same percentage of bonds in your retirement portfolio as your age. As you get older, you'll shift more toward bonds and will have a more stable nest egg.

Bogle is conservative on this point. Some other investors think people can tolerate more risk and should diversify in different ways. Even Vanguard itself suggests a more aggressive approach. But Bogle's rule of thumb is useful in understanding the shift toward a more conservative retirement account over time.

Don't Make Major Changes Too Quickly

Let's say you do some homework on what mix of stocks and bonds and other investments makes for a balanced, responsible retirement account. (Bogle, Buffett and Swensen all offer good advice on this subject.) Then you realize you own way too many U.S. stocks, and you want to make a shift in your portfolio. You still probably wouldn't want to make any big changes right now. Investment advisers say the changes should be made gradually over the next couple of years. That way, you're much less likely to sell a big chunk of stock at the worst possible time.