Little Book of Common Sense Investing
By John “Jack” Bogle
The Little Book of Common Sense Investing is a book in a series of “Little Books” that pertain to the markets, investing, and the economy. This was the first of this series of books that I read but I have already ordered a few more. I have so many books on my reading list so I like how this book is very concise and to the point without too much fluff and filler. I’m hoping the rest of the series is similar.
This book did a nice job reaffirming something I've been hearing and reading a lot lately. It emphasizes that you're better off investing in a broad market index fund rather than trying to beat the market through selective trading or investing in an actively managed fund.
About the Author: John C. Bogle
John C. Bogle founded The Vanguard Group in 1974 and introduced the concept of index investing. In 1976, he launched the first index mutual fund, the First Index Investment Trust (now known as the Vanguard 500 Index Fund). This revolutionized the mutual fund industry by offering low-cost, passive investment options. Bogle, known as the "Father of Index Investing" and "Father of Passive Investing," pushed for lower investment costs and long-term investing. His philosophy emphasized tracking the broader market instead of trying to beat it through active management, leaving a lasting impact on the investment world.
Main Theme of the Book: Index Fund Investing
The story of this book can almost be summed up with this phrase from John Bogle near the end of the book:
“Deep down I remain absolutely confident that the vast majority of American families would be well served by owning their equity holdings in a Standard & Poor’s 500 Index fund (or a total stock market index fund) and holding their bonds in a total bond market index fund. To repeat, while such an index-driven strategy may not be the best investment strategy ever devised, the number of investment strategies that are worse is infinite.” ~ John Bogle, The Little Book of Common Sense Investing
This is a very simple statement on the issue, and Bogle goes into data and history on this issue, but it’s the central theme of this little book.
He includes quotes from many other famous investors that back his claim that investing in a broad market, low-cost, index fund is the smartest strategy for most investors.
Fun Fact: When establishing a trust for his wife’s estate, Warren Buffet directed that 90 percent of its assets be invested in a low-cost S&P 500 Index fund.
Asset Allocation
Bogle spends the last few chapters covering asset allocation. He explains the different amounts of certain assets, such as bonds vs stocks, that someone should be invested in at different age points in their life. Here’s a simple heuristic from Bogle:
“A simple and seemingly rigid asset allocation: your bond position should equal your age, with the remainder in stocks. That asset allocation strategy can serve the needs of many, if not most, investors quite well… It is based on the idea that when we are younger, have limited assets to invest, don’t need investment income, have a higher tolerance for risk, and believe that equities will provide higher returns than bonds over the long term, we should own more stocks than bonds.”
“But when we grow older and ultimately retire, most of us will have accumulated a significant investment portfolio. Then, we are apt to be more risk averse, more willing to sacrifice maximum capital appreciation and to rely more heavily on the higher income yields that bonds have provided over the past 60 years. Under these circumstances, we should own more bonds than stocks.”~ John Bogle, The Little Book of Common Sense Investing
Costs of Equity Fund Ownership
Bogle makes the argument that as investors we earn precisely the average market return. But this is before the costs involved with actively managed mutual funds such as management fees, portfolio turnover, brokerage commissions, sales loads, operating costs, and legal fees. He goes into detail the costs of expense ratios combined with these fees and operating costs. Although these fees seem small, over time, they take up a major portion of potential income.
“What you see in this example – and please don’t ever forget it! – is that over the long term, the miracle of compounding returns has been overwhelmed by the tyranny of compounding costs. Simply put, our fund managers, sitting at the top of the investment food chain, have confiscated an excessive share of the returns delivered by our financial markets. Fund investors, inevitably at the bottom of the food chain, have been left with a shockingly small share. Investors need not have incurred that loss, for they could have easily invested in a simple, very low-cost index fund tracking the S&P 500.”~ John Bogle, The Little Book of Common Sense Investing
Conclusion
A little summary for a little book. But this is a good read for any investors, since this is information that will stick with you for life. It has had an impact on my personal portfolio and has convinced me to check out a few other books in this series.
If you made it this far, I recommend checking out my review on The Most Important Thing by Howard Marks. This is one of my all time favorite investing books!
