Speculation may do more damage to financial markets and the economy than the "fiscal cliff," Vanguard founder Jack Bogle told CNBC on Monday.
"When you think about our financial system, the role of the financial system is to direct capital to its highest and best and most profitable uses," Bogle said.
While companies raise about $250 billion a year in equity financing through IPOs and additional equity offerings, Bogle said there's $33 trillion worth of trading going on, "which is basically betting on the psychology of the markets. It makes no sense."
He proposes three ways to limit market speculation — a transaction tax, a tax on very short-term capital gains and federal rules to make certain money managers are looking out for their clients' best interest.
Bogle is optimistic that a deal to avert the fiscal cliff of automatic tax increases and spending cuts is close. "It has to be done," he said. "It has to be fixed, and therefore I assume it will be."
But whether the U.S. avoids going off the cliff or not next year, Bogle, a pioneer in index investing, continues to advocate taking the long view.
"If you can discipline yourself as an investor, don't pay a lot of attention to the short-term noise and focus on the long term," he told "Closing Bell.".
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He advocates owning the entire U.S. stock market, which can be supplemented with exposure to emerging markets and other developed markets. "That way you know you will capture almost all the markets' return," he said.
Asset allocation is also important. Bogle advises that even with today's low interest rates, investors will want to own some bonds in their portfolio. But they should favor corporate debt over Treasurys, he advised.
His general rule of thumb is "more bonds and less stock as you get older, more stock and very little bonds when you start."