Name: The Little Book of Common Sense Investing
Rating: 4.3 (348 reviews)
Author: John C. Bogle

What’s in it for me? Learn why index funds are the best investment you can make.

Mutual funds are like chocolate bars: there are so many different kinds, and new versions are always popping up. How are you supposed to decide where to invest?

One way is security. Pool your investment along with other people’s in a low-risk fund that’s highly diversified and avoids turbulent markets. Or you could include high-risk and high-reward funds, or funds that play in particular statistics.

The options can get confusing and the last thing you want is to make poor decisions with your hard-earned money!

This pack will hedge the odds in your favor, laying out a straightforward case for one kind of mutual fund: The index fund. These blinks explain why all mutual funds are not created equal, and why index funds are the only way to not get robbed by fees and expenses.

In these blinks, you’ll find out

the difference between a passive fund and an actively managed fund;
why you should always choose the fund with the lowest fees; and
how you can avoid market bubbles.

Actively managed funds are expensive and consequently often underperform the market.

Have you ever invested in the stock market? If so, you might have realized that evaluating the attractiveness of a stock is tricky business.

That’s why many investors choose not to invest directly into stocks, but instead put their money in an actively managed fund. Here money is pooled from several investors and then invested into stocks by a specialized fund manager, who regularly evaluates and revises the stock portfolio according to the current situation.

Unfortunately, that kind of investment is risky.

Why?

Because the costs of investing in such a fund are very high. As an investor, you’d pay the brokerage commissions, the fund manager’s fees and so forth. All those fees add up to a hefty chunk of your expected profits.

If the funds perform extremely well, you might not mind those costs, but in the long run, actively managed funds are likely to yield you less profit than the overall stock market.

How can that be?

For one, speculating on stock prices is simply not a sustainable strategy. You might think that a fund can generate huge profits by, for example, buying stocks when they are undervalued and selling them later when they reach their true higher value, but in the long run this strategy can’t produce more earnings than what the underlying companies are earning, which is reflected in the overall development of the stock market.

Add that pitfall to the high costs of the funds, and the result is that an actively managed fund will generate significantly less profit for you than a passive, low-cost index fund that merely mimics the performance of the overall market. In fact, if you had invested $10,000 in 1980, by 2005 you would walk away with 70 percent less if you invested in an active fund rather than an index fund, due to fees alone!

Few funds perform well, and there’s no guarantee even those few will continue to do so.

Despite what you’ve just discovered about the costliness of funds, you might still be thinking of investing in an actively managed fund. Before you do, though, consider if those funds perform well compared to the overall stock market.

Unfortunately, they probably don’t. Most funds go bankrupt or fail to generate significant returns.

Choose the cheapest index fund.

Each index fund comprises an expense ratio that represents management fees and operating expenses. These expenses, though typically totalling less than one percent, can add up in a long-term investment.

For instance, the Fidelity Spartan Index fund has an annual expense ratio of 0.007 percent, while the J.P. Morgan Index fund’s is 0.53 percent. Both funds have expenses below 1 percent, but over longer investment periods like a decade, those tenths of a penny add up.

Be wary of new investing trends.

Whenever you’re considering where to invest your hard-earned money, be skeptical when it comes to the latest investment fads.

The fierce competition between index funds causes a continuous cycle of new trends. Index funds were invented in 1975, and today there are already 578 index funds competing with each other! Long-standing funds compete by trying to lower their costs as much as possible and thus lure in discerning investors. Meanwhile, new funds entering the market attempt to gain clients by promising larger rewards through new stock-picking procedures. Consequently, they also charge more.

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Worum geht es in The Little Book of Common Sense Investing?

The Little Book of Common Sense Investing provides a detailed overview of two different investment options: actively managed funds and index funds. These blinks explain why it's better to your money in a low-cost index fund instead of making risky, high-cost investments in wheeling-and-dealing mutual funds.

Über den Autor

John C. Bogle is the founder and now-retired CEO of the Vanguard Mutual Fund Group, an American investment management company. His other books include the bestselling classic Common Sense on Mutual Funds.

© [John C. Bogle: The Little Book of Common Sense Investing] copyright [2007], John Wiley & Sons [Inc. or Ltd. as applicable] Used by permission of John Wiley & Sons [Inc. or Ltd. as applicable] and shall not be made available to any unauthorized third parties.