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Recently, the founder of The Vanguard Group, John Bogle, sat down with The Wall Street Journal editorial board to discuss the current market climate. You can read the full conversation here.

As the founder of index funds and the pioneer of funds with rock-bottom expense fees, Mr. Bogle drew his line in the sand a long time ago. With recent market swings leading wealthy investors like Mavericks owner Mark Cuban to argue against holding the same stocks for the long term, Mr. Bogle has continued to stick to the same investing precepts that have guided him for almost forty years.

When asked what ought to be the most important consideration for investors, Mr. Bogle dryly retorted, “Diversification, diversification, and diversification.” Although Mr. Bogle is quick to acknowledge the riches that can potentially await individual stock pickers—putting money into Wal-Mart Stores (NYSE:WMT) or Microsoft (NASDAQ:MSFT) in the 1980s, or Starbucks (NASDAQ:SBUX) in the early 1990s would have made you quite rich—he readily points out that this is not the investment track record of most Americans.

Bogle pointed out that not only do most Americans earn subpar returns, but they pay investment managers high fees to do so. These costs add up over time. Paying just 1% on a $200,000 portfolio would cost you $2000 annually in fees. Bogle would prefer that you invest in index funds that only charge about a tenth of 1% annually, which is the difference between paying $2000 in fees and $200 in annual index fund fees. Of course, if you have the acumen to pick individual stocks—you could load up on shares of Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), Colgate-Palmolive (NYSE:CL), Pepsi (NYSE:PEP), and Proctor & Gamble (NYSE:PG) for a fraction of the cost.

Buying those five stocks in a brokerage account ought to cost you around $45 (Charles Schwab charges $8.95 per trade), and you wouldn’t have to pay any fees at all until you sell. Bogle doesn’t seem to encourage this strategy for investors, arguing that most people don’t have the knowledge to invest in superior companies nor the temperament to hold onto them when times get tough. Bogle argues that corporate America will exist long after we all die, but very few of us have the ability to accurately pick which companies will still exist in thirty to forty years.

Bogle also downplayed the need for individual investors to put money into international funds. Because most mega-cap stocks in the U.S. derive a significant portion of their income from overseas, Bogle thinks it’s silly for investors to worry about international diversification by buying companies headquartered outside the U.S. Bogle says that if you are someone who “pays his mortgage in dollars, buys bread and butter in dollars, and pays for gas in dollars, it’s unnecessary for investors to worry about hedging against the dollar.” Bogle didn’t make many macro-economic forecasts throughout the interview, but he did indicate that he thinks the US dollar will not continue to fall. As he said, “Some forecasters think the US dollar will become worth zero before not too long.”

Bogle’s advice to allocate a sizable chunk of your portfolio to fixed income securities and bonds was perhaps the most thought-provoking insight of the interview. Let’s say that you’re 45 years old and have a $300,000 portfolio. According to Bogle, your stock allocation should be roughly one hundred minus your age. So if you’re 45, you should have 55% of your money in stocks, and 45% in bonds—giving you $165,000 in stocks and $135,000 in bonds. Bogle argues that the bond allocation will not only smooth over your “jittery nerves” during market downturns, but they will also provide you with dry powder to invest in stocks if the market is declining. Let’s say your bond funds generate 4% annually—that gives you $5,400 each year, or $450 each month to either reinvest in the bond fund or plow into undervalued stocks.

Bogle’s advice to retirement investors to practice widespread diversification is spot-on. You don’t want to turn 65 and then deal with the consequences of having 5-10% your portfolio invested in Enron, Lehman Brothers, Bear Stearns, or the like. And plenty of smart people got burned investing in these companies--hubris is probably the most dangerous character trait an investor can have.

Following Bogle’s advice is an easy way to mitigate risk. But Bogle does downplay the ability of common-sense investors to reap market beating gains. It doesn’t take a rocket scientist to figure out that if you purchase shares of Pepsi (PEP) below $60 with a 3.5% dividend yield, you’re going to have a decent chance to beat the market. Currently, investors can buy Berkshire Hathaway (NYSE:BRK.A) for just over 13x earnings at around $67 per share, which is cheaper than the S&P 500, which is trading at 16x earnings.

The fact that you can get Warren Buffett to be your money manager for a cheaper price than the market average ought to give you some perspective. But John Bogle doesn’t seem to think that most investors are capable of weeding out these kinds of opportunities. To be sure, retirement investors need to mitigate losses to the best of their ability. But reaching out for that extra 1% might be worthwhile to many—the difference between 7% returns and 8% returns on a $100,000 initial investment over a 40 year-period is the difference between $1.6 million and $2.4 million.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: John Bogle's Advice For Retirement Investors