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The Little Book of Common Sense Investing

Investing, especially for beginners, can be a tad bit overwhelming. Even with a financial advisor, which is probably the best way to ensure your asset allocation meets your investment objectives, you need to understand the basics. 

 

And that’s why John C. Bogle, the founder of The Vanguard Group, an investment management company insists:

 

“Don’t look for the needle in the haystack. Just buy the haystack!”

― John C. Bogle, The Little Book of Common Sense Investing

 

Rather than falling for the “high return” fund that promises to beat the market index, invest in a broad market fund with all of the market’s portfolio. 

 

However, the goal is to hold those stocks forever, regardless of the market performance. Yes, the market experiences downturns, but they recover in the end. 

 

“Owning the stock market over the long term is a winner’s game, but attempting to beat the market is a loser’s game.”

― John C. Bogle, The Little Book of Common Sense Investing 

 

While index funds lack the excitement of actively managed funds, they tend to pay for that in the long run. Due to the passive management strategy, index mutual funds have no advisory fees, lower expense ratios, little portfolio turnover, and are tax-efficient. When you take all these factors into account with an actively managed fund, your net investment profit will be lower than the market return. 

 

He also points out that not all index funds are created equally. Every investment firm with an index mutual fund has its expense ratios. And the higher that ratio, the lower your overall return. An intelligent investor will undoubtedly go for a mutual index fund with a lower cost and from a well-known organization. 

 

While the Author tends to beat his own drum for the better part of the book, which is probably warranted, he does support his arguments with graphical evidence. At the end of each chapter, he also quotes proponents of indexing, like Warren Buffet, with the “Don’t Take My Word For It” take. 

 

This is meant to be a little book, and it could have been shorter. But for the better half of the book, Bogle talks only about indexing. Yes, I get that he is trying to support his arguments and hammer into your head that indexing is the only way you are guaranteed a fair share in the stock market, and it works. 

 

But, he also ignores the fact that one needs a diversified portfolio… well, until the last 2 or 3 chapters of the book. An index fund does provide diversification. But stocks are a risky investment compared to bonds. It is not until these last chapters that he points out having indexed bonds in your portfolio will help you diversify it further. For a reader who is not patient enough to withstand all the redundancy of the previous chapters (which has sadly earned the book 1-stars), you might miss that point. 

 

Second, the book mainly focuses on the US market, from the index fund examples to retirement planning options. Still, there are several lessons we investors from other countries can learn. 

 

All in all, this is a book worth reading. And worth probably implementing in your investment strategy. Don’t buy single stocks, invest in mutual index funds, and don’t try to beat the market. Instead, hold your investments for the long haul. An active mutual fund will only eat your returns with the high costs and taxes. Plus, numerous studies support Bogle’s theory. 

 

“The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course.”

― John C. Bogle, The Little Book of Common Sense Investing

 

Indexing requires little research from you since there is little to no trading of the equities. In addition, market indexes rarely change their components, so you can expect to hold the stocks for long before you have to make any changes. 

 

But if you are still interested in active management, ensure you get a fund with lower costs. However, don’t allocate a large portion of your investment in actively managed funds. Plus, in a country like ours, where there are no index mutual funds, we are probably only left with ETFs (Exchange Traded Funds). These track an index but, unlike mutual funds, you can buy or sell an ETF through the stock exchange like a regular stock (in this case, the NSE).  

 

My ★ Rating 4.5

Goodreads ★ Rating 4.18 (as of July 2021)

 

DISCLOSURE: THE INFORMATION PROVIDED TO MY READERS IS GENUINE AND PRECISE TO THE BEST OF MY KNOWLEDGE. THE LINKS PROVIDED IN THIS ARTICLE DO NOT BELONG TO ANY AFFILIATE PARTNERS AND I AM NOT PAID FOR THEM.

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