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:

  1. Remember reversion to the mean. Chasing performance is a terrible strategy and results in buying high and selling low.
  2. 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.
  3. Buy right and hold tight. Get a reasonable investing plan put down on paper. Then follow it.
  4. 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.
  5. Forget the needle, buy the haystack. Don’t pick individual stocks, it’s a losing strategy that introduces uncompensated risk.
  6. 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.
  7. 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.
  8. Beware of fighting the last war. Just another way to phrase number one.
  9. 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.
  10. 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.”

jack bogle

# 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!