Common Sense on Mutual Funds: New Imperative for the Intelligent Investor by John C. Bogle (1999)
For the second month of my year-long journey into financial literacy (read about it here), I selected a rather voluminous book, Common Sense on Mutual Funds, written by one of the investment world’s most notable contributors, John C. Bogle. The founder of The Vanguard Group, Bogle makes a detailed, compelling argument on the importance of investing in index funds and maintaining a simple, low-cost, long-term investment portfolio to maximize profits.
Bogle breaks his book down into five main sections, each with several stand-alone chapters. I found the first two sections to be of greatest benefit for the individual investor.
The first section, On Investment Strategy, details the need for a long-term investment posture. As most of us know, the stock market can be rather volatile, especially in the short- term. As such, investors should be comfortable with monthly or yearly fluctuations, and “stay the course” to allow these fluctuations to average out over time. Bogle also discusses asset allocation and the need for simplicity in this section, arguing that keeping costs low is more important than figuring out the perfect allocations for your portfolio.
The second section, On Investment Choices, describes exactly what an index fund is and how to use them to your advantage: Essentially, an index fund is a form of passive investing, tracking a specific market index, like the S&P 500 or the Russell 2000. Bogle quotes Warren Buffett regarding index funds: “An investor who does not understand the economics of specific companies but wishes to be a long-term owner of American industry should periodically invest in an index fund. In this way, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”
His argument here is that finding a low-cost index fund is a great way for investors to find a simple way to diversify their portfolio. Additionally, if you don’t understand a certain sector of the market, such as international stocks, you don’t have to invest there! An index fund is a great way to cover a large portion of a market that you do understand and feel comfortable investing your money.
At times, Bogle seems to provide charts and graphics ad nauseum to back up his points. He also champions his own Vanguard funds quite often in the book, but it’s hard to blame him after providing such compelling evidence to invest in the funds. It does not seem that Bogle is championing his own funds for personal gain. Rather it’s because he truly seems to have the individual investor’s best interests in mind.
Personally, I found it quite beneficial to dive deeply into the reasoning behind investing in certain funds over others. While some may feel this book is too technical for their tastes, it’s good for
readers who want to understand the ‘why’ behind investment decisions.
This book is best for: More seasoned investors
Star Rating: 2 out of 3
Here are some of my biggest takeaways from the book:
- “Stay the course.” Bogle continuously makes this point throughout the book and provides chart after chart to convince readers of the importance of long-term investing. While investors may witness large fluctuations in the short-term, market returns average nearly 8% in the long-term (25-year periods) according to Bogle. Of course, these returns aren’t guaranteed, but variability is drastically reduced over time.
- Do your research. Find stocks/ index funds that are low-cost, because high costs can ruin returns in the long run. Annual fees that are mere percentage points higher than another fund may end up costing tens of thousands over the length of your time investing.
- Focus on what you can control. As investors, we cannot control future returns. But we can control risk, cost, and time. This plays into doing your research, being prepared to weather the short-term fluctuations by staying in a position for long periods of time and investing in low-cost funds. Bogle argues that investing in just a single broad-based index fund and dumping your money into it does better than a person who micromanages their portfolio every few months.
Where I’ll head from here:
I’ll be looking to read a more general book on saving habits and investing next. I have my sights set on Your Money or Your Life: 9 Steps to Transforming your Relationship with Money and Achieving Financial Independence by Vicki Robin. As always, I’d love to hear your thoughts on this month’s book! Have you made any recent changes to your investment habits?