Successful investing is not a complicated matter. In fact, it’s all about common sense, emphasises founder and former CEO of the Vanguard Mutual Fund Group, John C. Bogle, in “The Little Book of Common Sense Investing.”
There is a winning strategy when it comes to playing the stock-market game, Bogle says, and it boils down to one, simple strategy: investing in index funds.
He’s referring to the “classic index fund,” which he defines as broadly diversified, holding many, many stocks, and operating with minimal expenses and high tax efficiency.
“It is a simple concept that guarantees you will win the investment game played by most other investors who — as a group — are guaranteed to lose,” Bogle writes.
Investing in index funds works for two main reasons, he says: They’re broadly diversified, which eliminates individual stock risk, and they’re low-cost.
It may not be as glamorous as trying to beat the market — Bogle equates this strategy to shooting par during each round of the stock-market game — but it works, he writes, and hot-shot investors like Warren Buffett and Charlie Munger agree with him.
“A low-cost index fund is the most sensible equity investment for the great majority of investors,” Buffett told Bogle in “The Little Book of Common Sense Investing.” By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.”
He wrote to shareholders of his company Berkshire Hathaway in 2014: “My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”
Munger, Buffett’s partner at Berkshire Hathaway, warns against complex investing, which inevitably gets expensive after hiring financial planners and consultants, and tells Bogle in “The Little Book of Common Sense Investing” to opt for simplicity:
At large charitable foundations in the recent years there has been a drift towards more complexity … There is one thing sure about all this complexity, the total cost of all the investment management, plus the frictional costs of fairly often getting in and out of many large investment positions, can easily reach 3% of foundation net worth per annum …
The wiser choice is to dispense with the consultants and reduce the investment turnover, by changing to indexed investment in equities.
It’s important to note that not all index funds are necessarily low-cost.
“All index funds are not created equal,” Bogle emphasises. “Some have minuscule expense ratios; others have expense ratios that surpass the bounds of reason. Some are no-load funds, but nearly a third, have substantial front-end loads … Others entail the payment of a standard brokerage commission.”
One option for investors looking to follow the advice of the pros, of course, is to open an account online with Bogle’s company, Vanguard, and invest in their index mutual funds, which charge relatively low fees for investing directly (an average of 0.13%).