The U.S. stock market has been cuckoo for cocoa puffs this past year! Particularly this past week with Game Stop GME, Robinhood App and Wallstreetbets on Reddit dominating the news. If you are looking for a "signal in all the noise," I highly recommend you read The Little Book of Common Sense Investing by Vanguard founder John "Jack" Bogle. This book lays out such a simple investment strategy for all of us common people, which can help you "Guarantee Your Fair Share of Stock Market Returns," as the subtitle of the book reads. If you only read one investment book in your life, I strongly believe this is the one book to read. Below are my 9 takeaways from this wonderful book. (Please note that I am not giving you investment advice. I'm reviewing the book.)
1. "Don't try to find a needle in a haystack. Buy the haystack." Jack Bogle advocates that investors should simply invest in low cost index funds and not try to pick individual stocks nor invest in high cost mutual funds. He details in this book how challenging it is for even the smartest investment advisors and stock pickers to beat the S&P 500 market returns over a long period of tine. When you put your money with investment advisors who are promising to invest in the "needle in they haystack" you might pay fees of 1% or more that will eat into your investment returns. Instead, you can buy all-market or S&P 500 equity index funds with low .05% fees. He advocates for all-market equity and bond index funds to create an asset allocation strategy, which I'll discuss more below in point #7.
2."The Relentless Rules of Humble Arithmetic." Bogle makes a compelling case in this book about how low cost index funds returns for individual investors will beat out mutual funds and investment advisors stock picks over a long period of time. This book is a simple read for anyone, even in you don't currently understand equity markets. You'll quickly learn Bogle's points on how even "hot" investment advisors or mutual funds (or GameStop) will eventually cool off while the humble index fund keeps chugging along. Like the old tortoise and hare fable, the tortoise (index funds) will eventually win. Bogle shares in the book that the S&P 500 average annual return between 1926 - 2016 is 10.0%.
3. "Reversion to the Mean." Bogle does such a great job describing how the equity markets can have bubbles (maybe now) or big corrections (in 2020) and yet over time the markets return to their average, or the mean. The ups and downs will average out while the equity markets continue to go up over time because they are backed by companies with actual cash flows, earnings and dividends. (unlike, say, Bitcoin or other commodities.)
4. "Cash is an opportunity cost." Bogle shares that cash or money market funds are good for savings, such as an emergency fund, but that cash is not a good investment strategy. Cash becomes an "opportunity cost" over time when you could have been investing in equity or bond index funds, which should at least beat out inflation.
5. "Invest now and invest often." Bogle stresses how important it is to start investing for your retirement as soon as you enter the workforce and to continue investing regularly until you retire. When I started in my career at Deloitte, a wiser older CPA told me to "invest 15% of your salary now and you won't miss it." It was such great advice that I followed for a while, but then stopped following over time. I am now again investing 15% of my salary in index funds for retirement. At the very least, make sure you are maximizing your company's match on your retirement savings, if your company offers a match. If 15% sounds like a lot of your salary to save for retirement, then what about 10%? Or 5%? And then perhaps start building up your percentage of savings over time, such as increasing your savings 1% a year.
6. "Set it and forget it." Bogle does such a great job explaining why investing in index funds can save you so much time, costs and even stress by simply "setting it and forgetting it." Sure, it is probably more exciting to invest in individual stocks like GameStop and use apps like Robinhood and maybe even dabble in some crypto currency like Bitcoin. However, over time the humble index fund investment strategy will statistically beat other strategies. Bogle does allow for 5% of your investment portfolio to be what he calls "funny money," where you can invest it however you'd like. However, he says to track your returns over time in this funny money category compared to a core index fund investment strategy. Hint: the "boring" long-term index fund strategy will probably win.
7. "Asset allocation is key." At the end of the book Bogle does a nice job of explaining how a mix of an asset allocation of equity index funds and bond index funds can maximize your retirement savings while minimizing costs and risks. Bogle actually advocates that the percentage of your bond allocation should correlate to your age. Meaning, at age 20 he says you should have 20% in bonds and 80% in equities/stocks, at age 50 you'll have 50% in bonds and 50% in stocks and at age 70 you'll have 70% in bonds and 30% in stocks. He confesses this is a conservative strategy. He does like target-dated retirement funds that adjust your asset allocation automatically, as along as they are in low-cost index funds.
8. "Stay the course." I've read this book twice in my life and it has benefited me greatly in saving for retirement. Though I will caution you that when I first read this book many years ago, the market dipped and I lost a decent percentage of my retirement savings. Well, thanks to the "reversion to the mean" I recovered those losses and over time have had gains that correlated with the overall market. Just FYI that following this book's investment advice could cause short-term losses. Bogle does a nice job in this book reminding us all to "stay the course" on his humble index fund investing strategy because equities will eventually "revert to the mean."
9. "No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other. You cannot serve both God and money." Matthew 6:24. These words of Jesus are not in Bogle's book, but are words I think apply to this investment conversation to close out this blog post. Why should we care about investing for retirement? I believe it is so we don't become dependent on others and so that we can bless others. What I like about Bogle's simple "set it and forget it" index funds investment strategy is that I don't have to obsess daily about the stock markets ups and downs. I can spend my time, energy and attention on serving my family and my community now, rather than watching and stressing over the stock market. I want to serve God with my life and not serve money with my life.
There is so much more I could write about Bogle's book - I love it! I hope this blog post encourages you to read the book and then make decisions for yourself on how you might want to best save for retirement. If you have other helpful resources related to investing, please do share them in the comments below.
p.s. The purpose of this blog is to encourage you to live a more disciplined life by God's Grace. I'd be honored if you'd subscribe to my blog's emails to alert you of new blog posts at: www.mikepritchard.com/subscribe.html