This is part of our Rockstar Book Review series.
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“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:
- Minimize fees (fees and risk)
- Keep it simple (passive, not active, no emotions)
- 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
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.
Other suggested books by this author: “Enough”
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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