Here's how you should invest your money for retirement, according to the founder of a $3.9 trillion fund giant

The man who transformed investing for Main Street has some advice for how to save for your retirement — focus on the big picture.

More specifically, factor in Social Security into your bond portfolio, stay away from traditional mutual funds and accept the occasional market dips that will come along the way when investing primarily in index funds, Vanguard founder John C. Bogle told Business Insider in an extensive interview.

Bogle formed Vanguard Group in 1974, and created the first index fund soon thereafter. An index fund passively tracks the markets, allowing investors to capture the returns of the market — both good and bad — at a low cost. Index funds have reaped in assets over the past few years, as investors grow tired of expensive, actively managed mutual funds that try (and often fail) to beat the markets.

Here are more of Bogle’s thoughts on saving and investing money (emphasis added):

“It seems to me — particularly for these retirement-plan investors, the vast majority of whom are not particularly financially sophisticated — by far the best way is to invest in index funds. I’m sure you’re not surprised to hear me say that.

It guarantees your fair share of the market returns at a very low cost. With actively managed funds, people have big behaviour problems. With funds that have done well, they put their money in, and when it has done bad, they want to take it out. The index fund always gives you the market return. It may be bad sometimes — it will be bad sometimes — but there’s just no evidence that active managers can win [long term].

Vanguard founder John BogleVanguardVanguard founder John Bogle.

Investors also need to factor in Social Security into their fixed-income investments, Bogle said (emphasis added):

“You have to include Social Security in your fixed-income position. It’s very large depending on the circumstances of the investor, to capitalise the value of that Social Security is going to be as much as $300,000 to $350,000. So if you have an all-equity plan outside of that for $350,000, you’re 50-50. Social Security, you don’t have a capital investment in it, you have a stream of income, which depends on your age and actuarial things like that.

So it’s not just put the maths in and do it — it’s consider it. The basic idea of retirement income is, to me, to get a check, two checks every month, one from your fixed income and one from equity account. And you want them to grow over time. Social Security is a cost-of-living hedge, and in the equity account dividends grow over time.

The record of the S&P 500 dividends is almost a complete up trend with only two big declines going back into the ’20s. One would be in 1930s — ’33 or ’34 — and the other is when the banks stocks eliminated their dividends, back in 2009. Those are really the only significant declines in the dividends.

Investors make a big mistake by thinking too much of the value of the account and not enough about the monthly income they want to get. We could have a significant decline in the market with dividends unchanged.”

To read the full Business Insider interview with Bogle, head over here.

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