I've been a financial blogger for over eight years now. There are only so many blog posts that one can write that teach people the basics of investing before you cannot think of a new way to phrase it. Sometimes I make the incorrect assumption that my readers already know “Bogleism” and that we're working with a common background knowledge. While I have written dozens of articles extolling the virtues of these principles of investing, the truth is that due to the growth rate of this blog, the vast majority of its regular readers have been here for two years or less. So if I go a year or two without writing about this subject, there might be thousands of docs out there who don't know the information, or worse, think it isn't important. Besides, there is so much marketing out there (including by me on this site) about other investing methods, that it is easy to assume that they are all equal, which is most certainly not the case. As Rick Ferri has repeatedly said,
The truth about index funds must be repeated over and over because lies are constantly being told. Index funds are not evil, they are not destroying the markets, and will not blow-up your portfolio. To the contrary, they have outperformed most active investment strategies and continue to save investors billions of dollars per year in fees.
So today, I thought I'd take a step back and help people to understand the basic principles of investing as taught by the late Jack Bogle, the man who Warren Buffett said: “did more for American investors as a whole than any individual I've known.”
Bogle's 10 Principles of Investing
In his book, “Clash of the Cultures: Investment vs Speculation“, Jack Bogle lists out these ten principles of investing:
- Remember reversion to the mean. Chasing performance is a terrible strategy and results in buying high and selling low.
- Time is your friend, impulse is your enemy. Your emotions are not your friend when it comes to investing. Time in the market matters far more than timing the market.
- Buy right and hold tight. Get a reasonable investing plan put down on paper. Then follow it.
- Have realistic expectations. Rather than aiming for 12% returns, figure out a way to save twice as much money so you don't need to take inappropriate risks. Anyone expecting more than 7.5% out of stocks and 3.5% out of bonds (and those are nominal, not real [i.e. inflation-adjusted] returns) is probably going to be disappointed.
- Forget the needle, buy the haystack. Don't pick individual stocks, it's a losing strategy that introduces uncompensated risk.
- Minimize the “croupier's” take. Fees matter and they matter a lot. Minimize the number of trips into the “casino” of Wall Street. Be an investor, not a gambler by essentially only buying investments you're willing to hold even if the markets closed for the next five years. Know what you're paying in fees and taxes and ruthlessly minimize them.
- There's no escaping risk. Risk of loss must constantly be weighed against the risk of not reaching your goals, especially when taking inflation into account. Anyone who promises all (or most) of the upside while eliminating the downside is trying to earn a big commission.
- Beware of fighting the last war. Just another way to phrase number one.
- Hedgehog beats the fox. To Jack, the fox represents financial institutions trying their wily tricks and the hedgehog is the individual investor who rolls into a spiny ball in times of trouble, staying the course with low-cost index funds.
- Stay the course. Just another way to phrase number three, but it's so important it deserves to be repeated.
For all of his wisdom, Jack Bogle was never a particularly entertaining author. If you can read one of his books, you can certainly manage your own investments. What he excelled at was persistently holding the feet of the mutual fund/investing/brokerage industry's feet to the fire for decades on end.
There are other Bogleisms you should be aware of. Let me list a few:
You can have constant principal or constant interest, but not both. This is the difference between bonds and cash. Cash provides a constant principal value, but the amount of interest you get each month varies. Bonds provide a constant coupon, but the value of the principal varies.
“If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks.” You should expect to lose 10% of your stock portfolio EVERY YEAR. You should lose expect to lose 20%+ of your stocks EVERY THREE YEARS. Bear markets should not be a surprise to you. They are an expected event. You should plan to pass through approximately 20 of them during your investing career.
There’s risk in being too conservative or too aggressive. Your asset allocation—the mix of stocks and bonds you hold—will probably have a greater impact on your portfolio’s long-term performance than any other single factor. A very general rule of thumb is that your bond allocation should equal your age minus 10 (i.e., a 40-year old investor would own approximately 30% bonds, 70% stocks).
How to Invest According to Jack Bogle
In this section of the post, I'll simply summarize what I've learned from Jack Bogle about how you should invest, with “Seven Don'ts” that I hope you will find useful.
# 1 Don't buy individual stocks.
There's a reason all of his books are in the “mutual funds” section on Amazon. Bogle on Mutual Funds. Common Sense on Mutual Funds. He wrote his thesis at Princeton on this fancy new investment structure, the mutual fund. He started what is today the largest mutual fund company in the world. Mutual funds provide diversification, liquidity, economies of scale, and professional management. Picking stocks introduces uncompensated risk.
# 2 Don't use actively managed mutual funds.
As William Bernstein explained, “Consequences outweigh probabilities…if you believe [the stock market]is efficient (and you are right), the best strategy is to buy an index fund. If you believe it is efficient (and you are wrong), you will earn the market's return, but a few actively managed funds will beat you. But if you bet that the market is not efficient and you are wrong, the consequences of underperforming with an actively managed fund could be very painful. The risk, in short, is much greater if you bet on inefficiency rather than on efficiency.”
# 3 Don't try to time the market.
“The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently.” Yes, I know it seems like you can do it. But the truth is you can't, and neither can anyone else.
# 4 Don't change your plan based on market performance.
“I’ve said “Stay the course” a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you.”
# 5 Don't speculate.
“In recent years, annual trading in stocks — necessarily creating, by reason of the transaction costs involved, negative value for traders — averaged some $33 trillion. But capital formation — that is, directing fresh investment capital to its highest and best uses, such as new businesses, new technology, medical breakthroughs, and modern plant and equipment for existing business — averaged some $250 billion. Put another way, speculation represented about 99.2% of the activities of our equity market system, with capital formation accounting for 0.8%.”
# 6 Don't add unnecessary complexity.
“The beginning of simplicity is the index fund.” “I truly believe it is generally unnecessary to own more than four or five equity funds. Too large a number can easily result in over-diversification.” “Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes.”
# 7 Don't pay for unneeded advice.
“It is the essence of simplicity for self-reliant, intelligent, informed investors to purchase shares without resorting to an intermediaty salesperson or financial advisor.”
If you're following Jack's advice, your portfolio is likely composed entirely of stock and bond index funds that you have held for years. Your investments are so boring that watching paint dry is more interesting. So the next time you read about some fancy investment on this site or elsewhere, remember that 85%….6 out of every 7….dollars that I invest go into low-cost, broadly diversified stock and bond index funds. And primarily due to the work of Jack Bogle. Maybe you want a little more of your portfolio invested that way than I do, perhaps a little less. But if a significant portion of your portfolio is not invested in stock and bond index funds, it is highly likely that you are doing this whole investing thing all wrong. It's probable that you are spending more effort and taking more risk than you need to in order to reach reasonable financial goals. There's a reason that most investment comparisons are against the stock market. Yet there is nothing simpler in investing than ensuring you get the market return.
What do you think? What is your favorite Bogleism? What percentage of your portfolio is invested in index mutual funds? Comment below!
Great post. I owe debts of gratitude to Jack Bogle, William Bernstein, and The White Coat Investor for showing me the light in an otherwise dark industry when it comes to personal finance/investing.
You’re welcome and I’m honored to listed with such impressive company.
I myself have stopped tilting to dividends in favor of a boring, but thus far my favorite, portfolio of a global index find and ten percent in a tips fund.
It is an aggressive Boglehead and Buffett style portfolio.
Thanks for the great post. At age 60, the investing light for me went off when I discovered WCI and Vanguard. I grew up believing that investing was just too complex to understand and that an advisor was an absolute necessity. After reading three of Bogle’s books, I “stopped” using a financial advisor and took the plunge on my own with Vanguard index funds. My regret is that I wish I had started earlier rather than relying on the use of an advisor. I realize now the fees and advice given to me were truly not for my benefit. Nobody looks after your money better than you. However, all is not lost because at any age it is possible to grow money. Just because you are retired doesn’t mean you throw in the investing towel or lose interest in what has been accumulated. Once an investor always an investor…
I have no doubt that WCI will ultimately save me $1M+ by retirement. Switched my money from an 1% AUM manager to a 3-fund portfolio.
My only issue is the comment regarding taxes…. is it actually best to “ruthlessly minimize them”? This ideal is repeated over and over again in the Boglehead universe. As the WCI has blogged a few times, sometimes bonds in taxable (So you have room for stocks in tax advantaged) might be preferable long term even if you pay more in taxes in the short term. Especially in times like these where bond yields are so low that you ultimately won’t be paying that much on them. Of course, you could avoid this problem by holding a muni bond fund in taxable.
Glad to be of service.
Contrarian active trader here with a wildly unpopular viewpoint. Bogle’s one size fits all “don’t do list” is a great practical starting point, albeit an inefficient one. I routinely break the first 6 of his 7 rules. I also maintain a portfolio with zero index funds. My style of investing is certainly not for the broadest of audiences. But I do believe that, especially for risk-tolerant investors on an accelerated retirement timeline (aka FIRE), there is at least some room in your portfolio for speculative instruments that attempt to thoughtfully time the market.
I do agree with #7 — I have never paid for unneeded advice. Now if I could figure out how to stop paying for unneeded knick-knacks from Amazon…
I hope that works out for you. Rapid FI is usually primarily a function of savings rate, not investing prowess.
except your personal experience is very “hare vs tortoise.” bogle’s way ALWAYS works; that’s why it’s one size fits all. your way MAY work depending on many variables, especially if the hare doesn’t stop to take a nap.
“For all of his wisdom, Jack Bogle was never a particularly entertaining author.” – – I thought ‘Enough.’ and ‘Little Book of Commonsense Investing’ were entertaining.
Glad you enjoyed them!
For your posts, it would be nice to have the author’s name listed in the byline underneath the title of the post. I know that you have multiple people on your website, so it’s sometimes not clear who wrote the article. Thank you.
If it doesn’t say in an editorial note at the beginning of the article, I wrote it. The basic formula is this;
Monday: My original post
Tuesday: A classic post I wrote years ago
Wednesday: A Guest post
Thursday: Podcast notes from the podcast written by my podcast manager
Friday: Another original post written by me
Saturday: A republished post that was originally published on Physician on FIRE, Passive Income MD, or The Physician Philosopher
Sunday: Take a day off!
Timeless advice. Bears repeating again and again. It’s crazy how easy it is for this simple message to get lost in the din of glitzier investment ideas.
-PFB
Thanks for the excellent info. I am a newbie here and extremely impressed with recommendations and information. I personally have no investing knowledge or experience. I will like to use vanguard products as recommended. Can i open an account and buy them myself or is it recommended to go through the vanguard advisor. Please let me know about your experience.
Thanks.
Yes, you can buy them yourself. However, you really need a written investing plan. This post describes 3 ways to get one, one of which is using a financial advisor:
https://www.whitecoatinvestor.com/investing/you-need-an-investing-plan/
It is quite amazing how simple investing is. This and handful of other posts are probably all that is required to have a successful saving/investment plan. Yet you , and a others, have captivated the world with content that keep us coming back for more. Well done! You are in the process of joining the ranks of Mr Bogle.
That’s very kind of you to say, but probably not deserved. If I could keep up this pace for another 30 years and after a heart transplant then perhaps…
Excellent article. Don’t know why I didn’t see it until now.
I have most of Bogle’s books but “The Clash of the Cultures” and “Don’t Count On it” have a special place on my bookshelf being personally signed by him. I only wish I had known of his investing philosophy 40 years ago and of course been able to follow it. RIP