The Little Book of Common Sense Investing does what it says: lays out great -and easy-to-follow- investment principles in a short amount of time.
And that’s pretty great.
Contents
Bullet Summary
- Avoid middlemen: skip the advisers
- Avoid high-priced funds
- Pick index funds (ETFs) covering big indexes and sit back
Full Summary
The author, John Bogle, is the founder of Vanguard Investment and he often quotes Benjamin Graham, author of The Intelligent Investor.
Cut Middlemen
People who promise to manage your money to make money for you are actually taking money for you. Ask yourself: does that make sense? The author says that, often, it doesn’t.
This means you should look for ways to invest with the fewest middlemen possible.
Minimize Fees
The author indeed says that the average investor should, first of all, focus on minimizing fees. Taxes are fees too, and from a US-tax perspective the less transaction a fund does, the more it will maximize taxes’ payments.
Another reason why index funds are better.
Stocks Match Businesses
Bogle says that stocks’ returns, in the long run, closely match the performance of the business you are buying. The short term is different as it can be governed by emotions but, long run, stocks do seem to move rationally.
Managed Fund: The Short-Term Gains
The authors concede that some funds are better positioned to provide outsized returns in the short term in certain niches and in certain market conditions.
During the dot-come bubble for example many funds managed to beat the market and provide huge returns. But while the overall market survived and recovered from the bust, many of those funds collapsed.
So again, long-term managed funds perform poorly.
Investment Advisers? No Thanks
Investment advisers do far worse than the market once you weigh in their fees.
Index Funds
The Little Book of Common Sense Investing builds up toward one simple truth: you should invest in index funds yourself.
How do you do that?
Picking the Best Index Funds
- First, eliminate all the high-cost funds
- Pick funds with the widest coverage (funds covering big markets)
Don’t look too much based on past results. They’re not an indicator of future results and in the long run, the performances average out.
Play Money
The author advises you to keep the lion’s share of your portfolio on broad index funds tracking the biggest indexes. But keep a small portion with which you can play around and speculate a bit.
Your portfolio will be safe and you also get to enjoy some playtime.
Real-Life Applications
Play Money
The idea of leaving only a small portion of your portfolio as “play money” is simple, yet genius. You can use this small portion of the portfolio to let your irrational instincts take over and realize that no, you likely won’t beat the market through speculation.
I wish I had stumbled upon this idea years ago :).
Review
The Little Book of Common Sense Investing is a perfect introduction to investment.
And most of all, it lays out how normal people can get great results -or better: match market results- without wasting money on advisers or wasting time following financial news.
