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b'John C. Bogle \\u2013 his nickname is Jack - is an investing legend\\u2026 he founded The Vanguard Group in 1975, created the first ever Index Fund and has grown Vanguard into one of the largest asset managers in the world \\u2013 Vanguard now manages over $2 trillion, that\\u2019s phenomenal!
The Magic of Compounding
Bogle recently wrote a guest article for CNBC titled \\u201cJack Bogle\\u2019s advice for a rocky market: Follow Ben Franklin\\u201d\\u2026 and I though this article was very timely because we\\u2019ve already had a rough start to the year with\\xa0the Dow down about 4.5% in January and high volatility in the first week of February\\u2026 and research shows that January performance often sets the tone for the rest of the year\\u2026 so let\\u2019s see what Bogle\\u2019s advice is for a potentially rocky 2014\\u2026 it\\u2019s actually pretty simple and easy to implement.

Bogle invokes Benjamin Franklin and extols his investment wisdom\\u2026 that simplicity trumps complexity in the stock market. And Bogle begins with what he calls\\xa0Franklin\\u2019s acute understanding of the miracle of compound interest. In 1794, Franklin bequeathed a thousand dollars each to his native city of Boston and his adopted city of Philadelphia, to be kept in an interest bearing account over a period of 200 years\\u2026 good ol\\u2019 Ben assumed a 5% average annual rate of interest and surmised that the $1,000 would grow to about $17.3 million in 200 years. In reality, due to various financial and legal reasons, Boston\\u2019s fund grew to about $5 million by 1994 while Philadelphia\\u2019s fund grew to less than half that amount - $2.25 million. And even though these amounts underperformed dear Ben\\u2019s calculations, they still handsomely showed the explosive mix of\\xa0rate of return\\xa0and\\xa0time\\u2026 the magic of compounding!
The Tyranny of Compounding Costs
But, of course, 200 years is impractical for most of us saving for retirement, so Bogle focuses on a 65-year time horizon that assumes a 45-year working career from ages 20 to 65, and 20 years in retirement\\u2026 and says $1,000 invested at age 20, compounded at about an 8% average annual rate of return, could grow to almost $150,000 through simple compounding... but before we get our hopes up, Bogle hastens to add that\\xa0in reality,\\xa0fees and commissions would eat up about 2.5%... and reduce your actual rate of return to about 5.5%... so that $1,000 will grow to only about $32,500 \\u2013 not $150,000 - that\\u2019s a whopping 80% reduction in wealth accumulation because of what Bogle calls\\xa0the tyranny of compounding costs\\xa0that significantly overcome the magic of compounding.

So while many investors take fees and expenses in stride, they do not realize that the reduction in effective annual rates of return take a really huge bite out of their total investment gains.

Think of it this way \\u2013 you put up all the capital, but money managers, marketers of investment products and stockbrokers \\u2013 who put up zero capital and assumer zero percent risk - receive fully 80% of the return\\u2026 a shift from owners\\u2019 capitalism to managers\\u2019 capitalism that devastated investor returns.

So the way to build wealth is to avoid the high cost, high turnover tactics that characterize our financial system\\u2026 and, instead, to rely more on the magic of compounding\\u2026 perhaps through low-cost index funds\\u2026 and, Bogle says, while the interests of a business are served by the saying \\u201cDon\\u2019t just stand there. Do something!\\u201d, the interests of an investor are served by the exact opposite\\u2026 \\u201cDon\\u2019t do something. Just stand there!\\u201d and let time do its magic.'