By: John Bogle
I have read several investing books and a common theme keeps showing up. Quit getting cute with your investments. Keep it simple and invest in low-cost index funds.
This book is a classic that is on several top lists of books to read to learn investing in the stock market.
Actively managed funds are expensive and consequently often underperform the market.
Many investors choose not to invest directly into stocks because they lack the specialized knowledge or the desire to acquire the specialized knowledge required to invest in specific stocks.
Rather than sitting out of investing, investors instead put their money in an actively managed fund that is managed by a fund manager with expert knowledge that spreads the investment across a broad spectrum of stocks.
Unfortunately, the costs and fees associated with an actively managed fund (i.e. 2%) eats into your growth rate and drastically affects the compounding nature of investing.
For example, take a fund that averages 10% annual returns over 25 years.
Initial investment: $10,000
Actively Managed Fund (2% Fee): $65,383.63
Low-Cost Index Fund (0.01% Fee): $108,076.52
Few funds perform well, and there’s no guarantee even those few will continue to do so.
This may burst your bubble, but in the long term NOBODY BEATS THE MARKET. Meaning that over your investing career there is no one that can sustain buying and selling specific stocks and generate returns superior to what the stock market as a whole will do.
Over the last 35 years, only 24 of the 355 existing mutual funds have beaten the market. Many of the fund managers managing these have or will retire over the next few years.
Is it wise to trust these funds given their track record and higher fees?
Put the majority of your assets in safe, low-cost index funds.
By definition, an index fund holds a diversified portfolio that reflects the financial market or a specific market sector. However, instead of betting on the market, index funds hold their portfolios indefinitely, eliminating the risks of making short-term, volatile bets while simultaneously minimizing operating costs.
Because index funds track the performance of all stocks included in the index without betting on individual stocks, they’re called passive funds.
Since they simply hold shares, you will not have to bear operating fees for buying and selling shares, financial consultants, or fund management. BUT you get to reap the rewards of the market returns!
Remember…over the long term, no one beats the market!
Choose the cheapest index fund.
For example, Fidelity Spartan Index Fund has an annual expense ratio of 0.007%, while JP Morgan’s Index Fund is 0.53%. Over a decade, these differences add up.
Index Funds follow the overall market, so choose the fund with the lowest cost structure.
Be wary of new investing trends.
Be skeptical of new investing fads. No one has a track record that beats the market over the long term.
Examine the fee structure of all funds you are invested in. Keep it simple, stupid.
It is okay to take a small portion of your portfolio and bet on individual stocks. But to quote Dave Ramsey, “Use your entertainment envelope not your investment envelope.”