When John Bogle died last year, at the age of 89, the investing world lost a hero. Most investors may not know his name, but he's the founder of Vanguard, one of the most respected financial services companies, known in part for low fees. That's not even his most important accomplishment; he's also known as the father of index funds, and advocated for them for many decades.
Here's a look at nine smart things Mr. Bogle said, along with a little commentary about each.
Image source: Getty Images.
No. 1. If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks.
The recent stock market crash has made this abundantly clear. It's important, if you're going to invest in stocks, to understand that the market drops by about 20% or more every few years -- and that after each such drop, it has always recovered and gone on to new highs -- eventually. That sometimes happens within a matter of months, but it might also take years. That's why you only want to invest in stocks with money you won't need for at least five (or more) years.
No. 2: Owning thestock market over the long term is a winner's game, but attempting to beat the market is a loser's game.
Consider this: As ofthe middle of 2019, the S&P 500 index of 500 of America's biggest companies outperformed fully 90% of large-cap stock mutual funds over the previous 15 years, according to the folks at Standard & Poor's. In other words, only about 10% of mutual funds run by financial professionals who carefully decide what to buy and sell and when and who focus on large companies are able to deliver above-average results. This is largely due to the fees that they charge. It's common for actively managed stock mutual funds to charge around 1% or more annually, while many index funds that track the S&P 500 charge 0.20%, 0.10%, or even less.
No. 3: The trueinvestor . . . will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.
In other words, be a long-term adherent of fundamental investing, where you focus on the companies in which you're a part-owner through your shares, keeping up with their progress and assessing factors such as their market share, profit margins, track record of growth, prospects for further growth, sustainable competitive advantages, debt and cash levels, and so on.
The opposite of this would be jumping in and out of stocks without ever having a solid understanding of the underlying companies, and checking how the stock market and your holdings are doing every day or even every few hours. (I'll concede that when the market has been as volatile as it has been recently, it can be more understandable to take a look more often.)
No. 4: Buying funds based purely on their past performance is one of the stupidest things an investor can do.
This is a common mistake that mutual fund investors make, and stock investors make it, too. If you see a mutual fund that soared more than, say, 50% last year, you might jump in, wanting to collect a 50% return yourself. (I made precisely this error once -- and, fortunately, only once.) Well, that's not how it works. Any fund or stock can have an amazing year -- perhaps partly due to investor euphoria and optimism or due to a truly impressive performance. But it doesn't happen every year. And when stocks and funds get ahead of themselves, they're very capable of falling back to more reasonable levels.
Focus on long-term results -- and put more weight on what you expect the company or fund to do in the future than on what it has done in the past.
No. 5: Lower costs are the handmaiden of higher returns.
It's underappreciated how important it is to favor mutual funds and other investments with low fees. Here's an example. Imagine three stock mutual funds. One is an index fund charging an annual fee of 0.10%, while the other two charge 1% and 1.5%. If the stock market averages 10% growth over a given period, you'll end up with average annual gains of 9.9%, 9%, and 8.5%, respectively, with those funds. Here's how $10,000 annual investments would grow over time at those rates:
Investing Period | Balance Assuming 8.5% Growth | Balance Assuming 9% Growth | Balance Assuming 9.9% Growth |
|---|---|---|---|
10 years | $160,961 | $165,603 | $174,315 |
20 years | $524,891 | $557,645 | $622,348 |
30 years | $1.35 million | $1.49 million | $1.78 million |
Source: Calculations by author.
No. 6: The two greatest enemies of the equity fund investor are expenses and emotions.
The cost of expenses is clear in the table above -- and remember that some funds or investments charge significantly more than 1.5% annually, too. Emotion, though, is another challenge for investors to overcome. Think about the recent big market drops. They tend to lead many people to panic and sell their stocks (which causes the stock prices to fall further). Market drops are actually great buying opportunities for long-term investors.
As Warren Buffett has explained about his own (wildly successful) investing style: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
No. 7: When there are multiple solutions to a problem, choose the simplest one.
Simplicity is often best. Many people think about investing and assume they need to learn all about commodities and futures and options and that they have to become experts at reading financial statements in order to study many companies. Instead, think back to Bogle's simple index funds. You can just park money in one or more index funds regularly for many years and do very well -- without becoming a stock market expert.
No. 8: Don't look for the needle in the haystack. Just buy the haystack!
When you invest in a broad-market index fund, such as one that tracks the whole U.S. stock market, as the ultra-low-fee Vanguard Total Stock Market ETF(VTI)does, it lets you skip looking for the most promising stocks among thousands -- because you just buy into all the thousands.
No. 9: 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.
Finally, if you become an index investor, you just have to stick to the plan. Keep investing in it for many years, without panicking and selling.
There's a lot more we can learn from John Bogle -- and we have a lot to be grateful to him for, as well.
Selena Maranjian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
