The World's Most Honest Money Manager Tells All

Those that gave up at that point got a double whammy --- crappy performance on the way up, and lousy performance on the way down. They didn't even get the upside when the bubble crashed.

Investors should prepare for the extreme realities of the stock market and have the discipline to stay the course, to use another of Bogle's pet phrases. If you can't, you shouldn't invest with us, you should be in index funds. It's no accident that GM and the other institutional clients we have also invest a sizable chunk of their assets in passively managed funds.

4. Why do you think so many individuals, then, have the mistaken notion that the so-called smart money is in actively managed funds, when the reality is that institutions have a greater percentage of their assets in passive funds from the likes of Vanguard and DFA?

I really don't know, but I definitely wouldn't say all institutional investors get it right. Some would say investment committees at these big institutions raise idiotic behavior to a power. The recent explosion in interest in hedge funds illustrates the point.

There's a reason Harvard's investment committee has dozens of investment firms working for it and has a triple-A rating. They have a fortune to invest. Can my mother follow that smart money? I don't think so. Why not? Again, think of precept No. 2 discussed earlier.

Now, Wall Street is telling investors, even you can get in on these red-hot hedge fund returns! These funds of funds. Oh, and how about a load, plus extra high management fees. Honestly, what's left for the client? Will returns be good? Probably, yes. What about after fees and taxes? Most likely not. But that's Wall Street for you -- always looking for new ways to separate you from your money.

5. This sounds distressing, like Glengarry Glen Ross. If Wall Street really does constantly find ways to separate us from our money, why do we keep returning to the table?

Hope springs eternal. That's why Glengarry Glen Ross stuff is always there.

Forgive the clich¿s, but we all think it's different this time. Money magazine's Jason Zweig recently wrote of an image that stuck with me since he first used it: The very nature of the "revolution in investing" that has occurred over the past few years has allowed investors to pick their own pockets. This isn't just referring to hyperactive Internet trading, but the ability to, at the speed of electrons, get returns out there and momentum out there. We've created a situation where investors can now pick their own pockets, thanks to excessive trading and the like.