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Little Book of Common Sense Investing

The Little Book of Common Sense Investing: Review

Who is this book for? 

Honestly anyone who is looking for a time-tested and simple way to build wealth over time. And really, who isn’t interested in that? 

If you arent convinced that index funds have a place in your financial planning by the end than we don’t know what will. 

This book also brings us one of my favoraite finance quotes of all time;

“Don’t look for the needle — buy the haystack” 

The Author: Jack Bogle

The man. The myth. The index fund legend. Jack Bogle is credited is the founder of Vanguard and is credited with popularizing the now well-known investment called an index fund. At this point you may be thinking, why should I let this guy sell me on his own ideas? We we’re skeptical too. 

By the end of the book any scepticism was cast away. As if he had predicted this doubt, the end of every chapter includes quotes from other industry titans: 

“It’s fun to play around … it’s human nature to try and select the right horse … [But] for the average person, I’m more of an indexer … The predictability is so high … For 10, 15, 20 years you’ll be in the 85th percentile of performance. Why would you screw it up?” – Charles Schwab 

A key thing to note here is that most, if not all, of the people quoted in this book, had nothing to gain from singing the praises of indexing. Some even had money to lose! 

GoodReads Info

Trying to beat the stock market is theoretically a zero-sum game (for every winner, there must be a loser), but after the substantial costs of investing are deducted, it becomes a loser’s game. Common sense tells us–and history confirms–that the simplest and most efficient investment strategy is to buy and hold all of the nation’s publicly held businesses at very low cost. The classic index fund that owns this market portfolio is the only investment that guarantees you with your fair share of stock market returns. To learn how to make index investing work for you, there’s no better mentor than legendary mutual fund industry veteran John C. Bogle.”

Summary of The Little Book of Common Sense Investing

Simplicity does not imply stupidity

As Bogle explains, more complexity in an investment does not equate to higher returns. This is a point that is driven home chapter after chapter and backed by several reputable studies. 

But what does Bogle mean by complex investment? 

The investing world fall into two general camps the active investors and the passive investors. 

Active Investing vs Passive Indexing – Investopedia.com

Active investing requires a hands-on approach, typically by a portfolio manager or other so-called active participant.
Passive investing involves less buying and selling and often results in investors buying index funds or other mutual funds.

In this book when Bogle refers to active investing he implies investments actively managed by people on behalf of someone(though diy investors could also be considered an active investors). This leads to one crucial things. Active management fees. 

Where there is active management there is a fee. Which leads to our next key point.

Ditch the Fees whenever and wherever possible

Throughout The Little Book of Common Sense Investinng, Bogle points out that past active fund performance cannot reliably predict future returns. 

But even with all that aside, there is one thing even worse than mediocre performance…. Fees! 

How can it be worse? Well, as performance ebs and flows, fees are forever. Managers will take fees in good year and more importantly in bad years. 

Bogles sums it up best with this line: “The more managers take the more investors make” 

Oh well, it’s only 1 percent right?

graphic credit of Investopedia.com

Jack Bogle’s ideal solution to the high fee problem? You guessed it. Index funds. But beware of investments parading as broad index funds. 

Not all Index Funds are created equal 

The book separates traditional index funds(TIFs) from Exchange Traded Funds (ETFs).

Exchange-Traded Funds

ETFs are groups of assets that are traded like securities. They can be bought and sold on an open exchange, much like regular stocks, unlike mutual funds.

Bogle defines a TIF a index fund that tracks the broader market and ‘virtually guarantee’ the investor their fair share of the market. Bogle argues that ETFs do no such thing. 

“For example, only 32 percent of ETF assets are invested in broadly diversified stock market funds… compared to 62 percent of TIF assets” -pg 184

The success of the index fund has brought many copy cats that do not share the same investor benefit. Moral of the story? Look closely at what you’re buying into. Not everything is as advertised!

The Bottom Line

This is THE book on index fund investing. If you need convincing, The Little Book of Common Sense Investing will do the trick. This is a great money book if you just want a better understanding of the different types of funds available. 

A must-read for the future index-fund investor! And yes, it does seem like a pretty common sense approach to investing.

Don’t just take our word for it: Reviews

“Rather than listen to the siren songs from investment managers, investors — large and small — should instead read Jack Bogles The Little Book of Common Sense Investing” – Warren Buffett

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