★ Rockstar Book Review: “The Little Book of Common Sense Investing”

Posted June 23, 2017 6:00 am by with 5 comments

book:
John C. Bogle
Price:
$10.63

Reviewed by:
Rating:
5
On June 23, 2017
Last modified:June 23, 2017

Summary:

John C. Bogle, the founder of Vanguard, shares his evidence on the one way to guarantee your fair share of stock market return: low cost index funds

This is part of our Rockstar Book Review series.
Be sure to check out all previous books we’ve covered!

“The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns” by John C. Bogle

rockstar rating 5 stars

Who it’s for: Any investor looking to optimize market returns over the long-term.

Readability: HIGH. A book about investing is not usually what I’d call “light reading” but this book really is an easy read. It contains a number of charts (the good kind, not the eyes-glaze-over kind), tables, summary statements and excerpts to keep the reader engaged. It’s a compact 216-page book that packs a punch.

What I liked about it: The book delivers on its promise. The cover suggests that we will learn how to get our fair share of stock market returns and it teaches just that. Bogle is very clear throughout about what it is we need to do and, more importantly, what we should not do, to be successful investors over the long-term.  He provides a great deal of proof, including third-party validation many times over, to increase the odds that we’ll heed his advice.

What I didn’t like about it: I’m always suspicious of a book that, on the cover, appears self-serving. When I first picked up this book. I was ready to pick it apart for biased thinking, given it was a book about low-cost index investing written by the man behind Vanguard, the first and arguably best-known low-cost index fund company around.

As it turns out, I was unable to do so because of the overwhelming evidence Bogle provides in it. This evidence includes advice from leaders in the financial industry who gain little, or even lose, by agreeing with his recommendations. You can find these highlighted throughout the book in appropriately named “Don’t Take My Word for It” text boxes.

The only advice I could find that is questionable, ten years after it was first published, is the blanket suggestion that Target Date Funds are a good option. Some of these funds carry a hefty MER (management expense ratio) compared to index funds and, as a result, their suitability for some investors is questionable.

Where to find it:

Amazon @ $10.63 || Free @ the library

“The Little Book of Common Sense Investing” Delivers Irrefutable Proof that Index Investing Works

Bogle packs a punch in this little gem of a book. He hits us hard with clear, concise statements and data. Lots and lots of data. But no worries, it’s the good kind of data, not the eyes-roll-back-when-looking-at-it type of data. He’s consistent in the use of this recipe: make a statement and back it up with solid information. He sometimes comes at an argument from every angle imaginable to exhaust the reader’s objections. If only all books could be that thorough yet still interesting to read.

The author wants us to be successful investors. And to be successful we need to maximize our returns over the long-term, which allows us to experience the magic of compounding. To help us do this, Bogle advises us to:

  1. Minimize fees (fees and risk)
  2. Keep it simple (passive, not active, no emotions)
  3. Select fee-only advisors

#1. Minimize Fees

Bogle identifies fees as the single greatest source of loss for investors. He doesn’t mince words either: he finds the fact that the financial industry keeps the lion’s share of market returns (70%+) repugnant, especially given the fact that these organizations put up none of the capital and take on none of the risk. The author also cautions that fees are everywhere, some hidden and some in plain view (front loads, back loads, MERs, trading activity within actively traded funds, transaction fees, advisor fees, etc.).

But there has to be some benefit in paying more because the funds must be outperforming the market, right? Not so, based on history. Looking back at mutual fund performance from 1970 to 2005, most actively-managed mutual funds don’t survive. For those that do, only 1/5 match market returns or better and only 1/14 beat the market (see exhibit 8.1 chart below). And out of these, less than 1% delivered sustained performance. That’s 3 out of 355 funds! Those are very slim odds that make paying higher fees for superior performance seem like a fool’s errand.

If the above didn’t seem compelling enough, Bogle has found a high correlation between fees and risk. The higher the fees, the greater the investment risk.

The best actions we can take to minimize fees in Bogle’s opinion? If you know him at all, this will come as no surprise: invest in low-cost index funds, buy and hold for the long-term, and work with an advisor who works with you, not against you (see #3 below).

#2. Keep It Simple

Bogle considers simplicity a cornerstone of any good investment strategy. According to him, much of the action taken is not only unnecessary, but destructive to any portfolio over the long-term. When it comes to investing, the motto “Don’t do something. Just stand there.” is often times far superior to the common “Don’t just stand there. Do something.”

It may not be as exciting, but owning the classic stock market index fund is the ultimate strategy. It holds the mathematical certainly that marks it as the gold standard in investing, for try as they might, the alchemists of active management cannot turn their own lead, copper, or iron into gold. Just avoid complexity, rely on simplicity, take costs out of the equation and trust the arithmetic. (pg. 135)

#3. Select Fee-Only Advisors

As noted in point #1, fees kill a portfolio’s potential for future long-term returns. That includes the fees we pay to our financial advisors.

Bogle has no objection to paying for good planning and solid advice, but he suggests that we need to know what we’re paying for. If an advisor’s fees is based on commission, s/he by definition has a conflict of interest and is not a good choice as an advisor. And, and if we don’t know how our advisor is being paid, we can bet it’s on commission. This advisor will only make money when they take action (buying & selling) and will make more or less on each transaction based on the potential commission. The result is that the advisor is more likely to recommend actions and products that are not in our best interest but will put money into their own pocket.

By selecting a fee-only advisor, we can pay for their expertise and their third-party perspective without worrying that other motivations are fueling their advice. The fees are either à la carte, or as a percentage of our portfolio, though for the latter, Bogle suggests that the advisor’s percentage should be in line with the size of the portfolio:

  • < 1% to 1% for a portfolio of under $1M
  • < 0.75% to 0.75% for a portfolio of $1M
  • < 0.5% to 0.5% for a portfolio of $5M

Bottom Line

This book is the antidote to much of the investment information we’re bombarded with as we work to manage our money. When it comes to investing, John C. Bogle has a clear message for us all: less is more.

Where you can find the book: Amazon @ $10.63
Where you can find the author: johncbogle.com

Other suggested books by this author: “Enough

Books on investing: “I Will Teach You to Be Rich” by Ramit Sethi, “Unshakeable” by Tony Robbins, “The Behavior Gap” by Carl Richards. “The Simple Path to Wealth” by J.L. Colllins

Books about money and life: “Your Money or Your Life” by Vicki Robin and Joe Dominguez, “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko, “The Total Money Makeover” by Dave Ramsey, “The Richest Man in Babylon” by George S. Clason, “Early Retirement Extreme” by Jacob Lund Fisker, “Broke Millennial” by Erin Lowry

*****

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Hélène is Rockstar Finance’s Curator of Books, and Blogger at FreetoPursue.com. A perpetual student, speaker, writer and coach, you’ll often find her reading, researching or writing. She also likes travelling and hanging out with her husband and their greyhound Belle.

5 responses to ★ Rockstar Book Review: “The Little Book of Common Sense Investing”

  1. Lily He-Prudhomme June 23rd, 2017 at 6:19 pm

    Gah! I was literally looking at this 3 hours ago on Google Play. They have a BOGO free book promo! Thank you for the recommendation! But gosh now that it’s summarized…should I still get it?!

    Reply

    • Hélène Massicotte June 23rd, 2017 at 6:35 pm

      Yes! It’s a compelling read. I really enjoyed that book. It was hard to put down at times…pretty amazing for a book on investing. I don’t think you’ll regret reading it.

      Reply

  2. Brandon June 24th, 2017 at 8:40 am

    Hey I just wanted to let you know I read every review you post and I enjoy them! Keep this up. I find that you tend to review the classics and those geared towards my FIRE aspirations.

    Reply

    • J. Money June 24th, 2017 at 3:30 pm

      So glad you like ’em! We’re about to hit pause for a few until we get some stuff redesigned/built out on the site, but then we’ll be bringing them back shortly there after :) So stay tuned!

      Reply

    • Hélène Massicotte June 24th, 2017 at 4:13 pm

      What a nice note. Thanks Brandon! I’m glad to hear you enjoy them. We’ll definitely be keeping it up, at least for the foreseeable future.

      Reply

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