December 17 2007: 11:57 AM EST
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'Be prepared for a lot of bumps'

As confidence on Wall Street continues to erode, Vanguard founder John Bogle, a diehard champion of the individual investor, takes your questions.

By Matthew Boyle, Fortune writer

Vanguard founder John Bogle
Questions for... Martha Stewart
Martha Stewart
Author, TV host, and the founder of Martha Stewart Omnimedia answers your questions in the Dec. 8 issue of Fortune.

Now's your chance to ask Stewart about launching your own company, how the market turmoil has impacted her empire, and whats next for the titan of homemaking?
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(Fortune Magazine) -- At an age when most of his peers have shuffled off into retirement or irrelevance, the 78-year-old founder of mutual fund giant Vanguard remains sprightly and energetic. With $1.3 trillion in assets, Vanguard, based in Valley Forge, Pa., is now the second-largest mutual fund company. Author, sailor, and indefatigable rabble-rouser, John Bogle is as legendary for pioneering index funds as he is for his blunt criticism of his industry's high fees and aggressive marketing - opinions that have put him at odds with his peers while endearing him to legions of investors, or "Bogleheads," nationwide.

Fortune's Matthew Boyle asked Bogle questions you submitted to about the subprime crisis, retirement and his favorite CEOs.

What are the odds of a recession right now? - R. CIBIC, WHEATON, ILL.

I would put the odds of a recession at 75 percent. This economy is very much consumer-based, and I believe that 70 percent of the GDP is consumer spending. That's a very high number. Two things are happening there: Consumers have fewer resources because from 2001 to 2005 they took $5 trillion out of real estate. That will not recur. This is a big drop. We also see weakness in auto sales and retail spending - we even see it at companies like Starbucks. There is another, equally important factor in consumer spending, and that is confidence. Consumers are not going to spend if they are worried about the future.

Where do you see the Dow ten years from now and why? - JAIME DESOUSA, WAXHAW, N.C.

Well, the Dow is a peculiar piece of work. The Dow yield is 2.2 percent now, vs. the S&P's 2 percent. Since I'm expecting a 6 percent to 7 percent return on stocks, the Dow ought to grow at 4 percent to 5 percent a year. So over ten years, growing 4.5 percent a year, it would grow by 55 percent and so it would be slightly over 20,000, give or take. But anybody who is expecting that ought to be prepared for a lot of bumps along the way.

Will the real estate market improve anytime soon? - ERNESTO VICTORIA, CULICAN, MEXICO

It doesn't look so good. I really don't see it improving soon. At some point homes will have to be built. But right now there is not much incentive to build new places when there are so many old places on the market. When those lines cross I don't know.

It's complicated by the fact that many people have gotten into ARMs [adjustable-rate mortgages] who didn't know what they were doing. I don't know what is going to happen to those people when lenders foreclose. When banks were community banks, they were more careful. But when banks sell loans in a bundle, they are clearly not going to be concerned about mortgage quality. So we have to have a better system in the future to make sure we have a much better element of credit quality in mortgages.

How does the U.S. subprime mess compare with other crises you have seen in your career? - MICHAEL FERSTER, ZURICH

I'd say the most similar example was the S&L crisis of the late '80s and early '90s. The issues were somewhat the same: Institutions borrowed short and lent long.

What recommendations would you give investors 20 or so years away from retirement? - CHRISTOPHER CVIJIC, PHILADELPHIA

People are retiring later in life nowadays. I'm 13 years past 65, and I still have plenty of energy to work every day. I got up at 5:30 this morning in New York and was ready for an 8:30 meeting in Philadelphia. If I can do it, I don't see why anyone else can't.

Take someone who is 45. They should be 70 percent stocks and 30 percent bonds. People think I'm being too conservative, but I would remind them that corporate earnings grow at about the rate of our GDP. Corporate after-tax profits as a percent of GDP have gone above 10 percent for the first time in history. Normally they are 6 percent of GDP. I don't look for that to go any higher.

What would you do to fix an income tax system that's become too complex, and what do you think of a flat tax? - RICH STEINER, ANN ARBOR, MICH.

I think a multilevel flat tax is a pretty good idea. I don't think a flat tax, where everyone pays the same income tax rate, is right at all. The problem with our system is to do that, you need to get rid of some of the most treasured things, like the charitable contribution deduction. The political reality is that we have to shape a flat tax that takes into account those deductions.

The immediate concern for most investors is the subprime market, but over the long term what do you see as the biggest challenges facing the U.S. economy? - BEN LERMAN, CHICAGO

Externally, we are faced with $1.5 trillion already poured into Iraq and Afghanistan. So you have enormous expenditures in a corner of the world that is important to us, but it is very unwise to think we can bring democracy to a place that doesn't share our values. There are also the challenges from low-cost production in China and India.

At home, we have a tremendous future financial problem with the federal deficit. We'll have to take action on Social Security someday. Government spending has gotten to the point where we will have to either cut spending or raise taxes. Another problem is this deadlocked Congress. And I see the quality and caliber of our presidential nominees, and I am not impressed. It raises the question of whether this country is even able to run itself anymore.

Whom are you backing in the presidential election? - FORTUNE

I try not to get into making a decision until we have two nominees. One thing that does excite me is the idea that Michael Bloomberg might make an independent run at it, although the signals now say he's not. But he has a lot of time to decide, and maybe he can be lured into doing it. I'm a great admirer of his. He's a mover and shaker. We need a little moving and shaking down in D.C.

Which CEOs today do you admire and why? - JEFF LIANG, CAMPBELL, CALIF.

That's a very hard question to answer. I don't have a big list of them. You've got to admire Warren Buffett. I like what Immelt is doing at GE (GE, Fortune 500). It must be obvious, for whatever it's worth, that names are not tripping off my tongue.

Fortune's Matthew Boyle asks...

Everyone asks your advice. What's the best investing advice you've ever received?

It was the best advice and the earliest advice. I was working at a brokerage house one summer while in college, and one of the guys who was another runner at the firm delivering securities said, "Let me tell you all you need to know about the investment business." I said, "What's that?" He said, "Nobody knows nuthin'." That sounds cynical, but we don't know what the markets hold, certainly not in the short run. We have no idea.

What will your next book be about?

I have a couple of ideas. I am thinking of expanding a speech I gave at Princeton five years ago called "Don't Count on It: The Perils of Numeracy." It gets into this reliance we have on numbers. I'm concerned that we've moved to a society where everything can be counted and nothing can be trusted. We think earnings produced by corporations are the gospel truth, but they are anything but that. Earnings are whatever they are, but dividends are reality.

What was your biggest mistake?

When I was 38, I became head of Wellington Management, and I did an extremely unwise merger. I got wrapped up in the excitement of the go-go era, and the go-go era ended. As a result of that stupid decision, I got fired. The great thing about that mistake, which was shameful and inexcusable and a reflection of immaturity and confidence beyond what the facts justified, was that I learned a lot. And if I had not been fired then, there would not have been a Vanguard.

More of the Bogle interview To top of page

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET

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