In case you haven’t heard of John C. Bogle, he’s the founder of the Vanguard Group and a pioneer in mutual fund investing – he started the first publicly available index mutual fund in 1975. I just finished reading one of his more recent books, The Little Book of Common Sense Investing. I’ve never actually read any of Bogle’s books, but from mentions on the web here and there, I thought I had a general grasp of what his philosophy entailed. I just didn’t realize the details of how he invests could be so interesting and compelling!
Bogle’s message is simple. To win at the investment game, own every single publicly held company at a very low cost, and own them forever. Impossible. But, the next best thing is to own an index mutual fund. An index mutual fund is a basket of stocks that represent the entire stock market. They hold stocks that closely follow an index such as the S&P 500 or the Dow Jones Wilshire Total Stock Market Index. Unlike actively managed funds, the stocks within index funds are not traded. They simply sit there and grow in value along with the market. Because the stocks are not traded, the fees and taxes associated with index funds are very low. Meaning, you get to keep more of your returns.
It’s a fairly short book, that would probably get repetitive if it were much longer. Not because Bogle is a boring writer, but because much of what he says is so simple and to the point. He does a great job of sprinkling in memorable one-liners such as “Don’t look for the needle in the haystack. Just buy the haystack!” and “The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.”
Throughout the book, conventional wisdom is turned on it’s head. At the end of chapter 8, he reminds us that the prospectus for every mutual fund contains the following warning in fine-print: “Past performance is no guarantee of future results.” Yet, this is how mutual funds are rated. The famed Morningstar rating system is “based on a composite of a fund’s record over the previous 3-, 5- and 10-year periods.” Those funds that stand out from the rest sporting a badge of 5 stars are not guaranteed to continue winning. In fact, they are more likely to fall back to earth over the next few years as the law of averages catches up with them. Index funds on the other hand make no promises of future performance other than they will faithfully stick to the market.
Bogle ends each chapter with a “Don’t Take My Word for It” segment in which he quotes various investing experts touting the positives of long-term index fund investing. Mark Hulbert is one of those he quotes. Bogle mentions Hulbert’s aptly titled New York Times Article, “Buy and hold? Sure, but Don’t Forget the Hold.” When many people think about long-term investing they think about 10 to 20 years. But, Bogle reminds us we need to hold on to our investments forever.
Needless to say, this book was a great read. It inspired me to cleanup an old IRA account I’ve had for years – a dumping ground, if you will, for ghostly 401k’s from former employers. I haven’t really paid much attention to what investments I have in there. But, after reading Bogle’s common sense message, I cracked open my online account and started shuffling. I consolidated the seven different actively managed mutual funds I had in there into three simple index funds – a S&P 500 fund, a small-cap index fund, and a foreign index fund. My portfolio is much cleaner now and should yield quite a bit more return in the long-run. Or, at least as much as the stock market.