Bogle urges investors to avoid mistakes

John C. Bogle, retired founder of mutual fund company Vanguard.

Save me from myself: It's the kind of resolution many investors should make for 2011.

That's because they often behave irrationally when the stock market moves sharply up or down.

The Standard & Poor's 500 stock index is up 11 percent this year, and has surged more than 80 percent since March 2009. The long run up from the bottom has eased some of the pain of 2008's meltdown.

Now is a time when investors may be particularly prone to mistakes, warns Vanguard Group founder John "Jack" Bogle, a low-cost investing icon who helped pioneer index mutual funds.

Bogle recommends index funds to help meet long-term goals. But he's also quick to acknowledge that choosing these low-cost investments can't offset the damage from ill-timed moves in and out of them.

Over the long haul, "investments perform better than investors," says Bogle, who founded Vanguard, now the nation's largest mutual fund company, in 1975.

It's less taxing on your emotions to invest when stocks are rising, and sell when they're falling. Yet often the market reverses course in short order. If poor timing is chronic, the bad moves overwhelm any savings from choosing index funds rather than paying a fund manager to pick stocks.

Index funds track segments of the market like the Standard & Poor's 500, aiming to match their benchmark's performance rather than beat it. They now hold about one of every seven dollars invested in stock mutual funds.

That is a legacy of Bogle, who is now retired at 81, but frequently speaks and writes on the markets. In an interview with The Associated Press, he listed four common mistakes investors are especially prone to make now:

--Chasing past performance: The belief that stocks are likely to keep moving in one direction for a long time is typically wrong. Eventually, the trend peters out -- a bull market turns bearish, or the reverse. Or stocks of small companies perform better than large-company stocks for a couple years, only to switch positions the next two years.

--Underestimating the importance of expenses: At first glance, differences in fund expense ratios -- the charges that investors pay, expressed as a percentage of assets -- seem "trivial, and not worth talking about," Bogle says.

Will your returns really differ if a fund charges 0.9 percent rather than 0.2 percent? They will, Bogle says, especially if an investor is in the fund for several decades leading up to retirement.

Bogle points to a wealth of independent studies underscoring the importance of expenses, which cut into returns, year in and year out.

From 2005 through March 2010, U.S. stock funds charging the lowest fees posted average annualized returns that were nearly two-thirds higher than funds charging the highest fees, according to Morningstar.

--Getting careless about risks: Bogle thinks recent stock gains have led to overconfidence. He's not predicting a crash. He expects stocks will return around 7 percent to 8 percent next year. But he isn't expecting the double-digit gains some are forecasting.

Bogle reasons the stock market must eventually reflect the economic risks from running a record federal deficit. He also worries that China's real estate boom will go bust, which could ripple throughout the global economy.

"Don't get carried away, and don't have too much in stocks," he says.

--Failing to create a long-term strategy: Too many investors don't develop a long-term plan to meet their savings goals. Create one that reflects your tolerance for risk. If you can't stand seeing your portfolio fluctuate each time the stock market hiccups, consider adding more bonds or other investments likely to generate steadier returns. Even those with a plan often scrap it when stocks hit a volatile patch.

Most importantly, don't let daily news about the markets or economy drive decision-making.

"The old rule used to be, 'Don't just stand there, do something.' But for an investor," Bogle says, "often the best rule is 'Don't do something, just stand there.' "