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Common Sense Investing With Index Funds: A Look at John Bogle's Book

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    Read Think And Invest
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Introduction

John Bogle, the founder of Vanguard and creator of the first index mutual fund, wrote "The Little Book of Common Sense Investing" to argue for a simple, low-cost investment strategy. [1] This blog post will explore the key takeaways from his book and discuss why index funds are the best way to invest for the majority of investors. It will also point readers to the corresponding podcast episode and YouTube video for those who want to learn more.

The Gotrocks Family

Bogle uses a parable about a family called the Gotrocks to illustrate how the costs of financial intermediation negatively impact investor returns. [2] The story shows that trying to beat the market is counterproductive, as most investors end up losing money in the process. [3]

Business Reality vs. Market Expectations

Bogle emphasizes that stock market returns are driven by the long-term growth of businesses, not short-term market swings. [4, 5] He explains how focusing on a company's dividend yields and earnings growth is a better indicator of investment value than trying to predict market psychology. [5]

Why Index Funds Win

Bogle provides compelling evidence that index funds outperform most actively managed funds over time. [6] He argues that this is largely due to the lower costs associated with index funds. [7, 8] Costs matter overpoweringly in the long run. [9] Index funds have low expense ratios, minimal turnover costs, and greater tax efficiency. [8-12]

The Dangers of Timing the Market and Picking Funds

Bogle advises against chasing past performance when selecting funds. [13, 14] He demonstrates how yesterday's winners often become tomorrow's losers. [15] He also cautions against relying on financial advisors to pick winning funds, as there is little evidence that they can consistently outperform the market. [16-18]

Funny Money vs. Serious Money

Bogle suggests that investors allocate their money into two accounts: Funny Money and Serious Money. [19] Funny Money is for experimenting with riskier investment strategies. [19] Serious Money is for investments meant for long-term goals, such as retirement. [19, 20] He strongly advocates for using index funds for the Serious Money account. [20, 21]

Conclusion

"The Little Book of Common Sense Investing" offers a compelling case for embracing simplicity and focusing on the long term. Bogle's arguments, supported by decades of data, demonstrate that index funds provide investors with the best chance of capturing their fair share of market returns. By staying the course with a low-cost, diversified index fund portfolio, investors can minimize costs, avoid emotional decision-making, and achieve long-term investment success. [22-28]

Want to learn more about John Bogle's common sense approach to investing?

  • Listen to our podcast episode: [Link to your podcast episode on Spotify]
  • Watch our YouTube video: [Link to your YouTube video]

Resources:

For a deeper exploration of the concepts discussed in Rich Dad Poor Dad, check out my podcast episode and YouTube video:

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