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By Don Phillips | 05-28-2009 05:36 PM

Bogle: The Past Is Not Prologue

The Vanguard founder and former chairman says we give far more credence to past returns in the stock market than they even remotely deserve.

Don Phillips: You made a point about international diversification, and I questioned that you had thought all you needed was the U.S. stock market, total market portfolio. You didn't need all the international funds. And your point was that while statistically it lowered your standard deviation, it really didn't lower your risk, because when you really get into a crisis, everything goes down.

John Bogle: Yeah.

Phillips: I think that's a lesson that you were citing in 2000 that a lot of investors had wished they had taken hold of before last year.

My question to you, though, is a little different. Is there another bit of conventional wisdom that you sort of bucked the convention on today that you think investors don't know that may be helpful for them to know in the future?

Bogle: Yeah. If I tell you I'm deeply into a subject and I'm going to give a major speech on it somewhere down the road, that's usually the kind of speech it's going to be. And I have one in mind.

That is, I think we give far more credence to past returns in the stock market than they even remotely deserve. The past is not prologue. The stock market is not an actuarial table. As has been mentioned, and John Maynard Keynes told us back in 1936--and I put a lot of numbers on this--it's the sources of the returns, the kinds of things that I was talking about a moment ago, that determine future returns, not the recurrence of an ongoing event that comes up on a standard probability distribution curve.

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