Jack Bogle spent his life serving the ordinary investor. In 1975, he created the Vanguard Group, which has allowed everyday investors to buy “low-cost index funds to build a diversified portfolio of stocks and bonds, and [then] stay the course.” A year later, Vanguard introduced the first index fund for individual investors and, with it, democratized access to low-cost, diversified investment opportunities.
Writing in the introduction to the 10th-anniversary edition of The Little Book of Common Sense Investing, Bogle summarized the gist of his investment philosophy.
Successful investing is all about common sense. As Warren Buffett, the Oracle of Omaha, has said, it is simple but it is not easy. Simple arithmetic suggests, and history confirms, that the winning strategy for investing in stocks is to own all of the nation’s publicly held businesses at very low cost.
The best way to implement this strategy is indeed simple: Buy a fund that holds this all-market portfolio, and hold it forever. Such a fund is called an index fund. The index fund is simply a basket (portfolio) that holds many, many eggs (stocks) designed to mimic the overall performance of the U.S. stock market (or any financial market or market sector). The traditional index fund (TIF), by definition, basically represents the entire stock market basket, not just a few scattered eggs. It eliminates the risk of picking individual stocks, the risk of emphasizing certain market sectors, and the risk of manager selection. Only stock market risk remains. (That risk is quite large enough, thank you!) Index funds make up for their lack of short-term excitement by their truly exciting long-term productivity. The TIF is designed to be held for a lifetime.
Above, Bogle again offers essential advice to the everyday investor. The key points include:
- It’s essential to invest in general, and particularly to make very diversified investments in stocks and bonds. For Bogle, you want to own index funds that include the entire stock and bond market.
- The amount that you decide to invest in stocks or bonds should partly depend on your age and risk tolerance.
- Buy low-cost funds (e.g., Vanguard funds) and don’t pay sales loads–that is, fees to brokers and agents who sell the funds. Needless fees can eat into your investment returns and significantly reduce the performance of your portfolio over time.
- Make sure the funds have low operating costs and zero management costs, for the same reason as above.
- Avoid funds that have high turnover. That is, don’t buy funds that frequently buy and sell assets and, in so doing, generate transaction fees and taxes that eat into the profits made by the fund.
- Don’t look regularly at how your diversified investments are performing. Let them perform for decades; let the miracle of compounding interest do its thing; and–if historical trends hold–investors will likely see their portfolio move higher. If you don’t look regularly at your investments, you will resist the temptation to sell when stocks fall, and buy when stocks move too high.
- Don’t try to time the market. He says: “I don’t know anyone who has ever been able to time the market successfully. And I don’t know anybody who knows anybody who has timed the market successfully. That is a lot of people!”
To learn more about Bogle’s investment philosophy, see his book: The Little Book of Common Sense Investing.
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