Common Sense on Mutual Funds, Updated 10th Anniversary Edition

by John C. Bogle

investment strategy, investment selection, and investment performance.

common sense and simplicity are the keys to financial success.

Investment Maxim.

Part III concludes with a study of the vital role played by time: It enhances returns, reduces risks, and magnifies the baneful impact of investment costs as well.

my goal has been to make each chapter a freestanding and independent essay on a particular issue.

Common Sense on Mutual Funds will demonstrate that the ills and injustices suffered by mutual fund investors are not dissimilar to those our forebears suffered under English tyranny.

Author compares that mutual fund investors suffer same as we suffered furing british rule.

But the trade-off between the profits that accrue to fund shareholders and the profits that accrue to the fund management companies seems subject to no effective independent watchdog or balance wheel, despite the fact that the shareholders actually own the mutual funds. As in every other corporation in America, they ought to control them, too.

Mutual fund companies are like britishiers ruling us They charge fees and unnecessary taxes at the expense of investors.

Mutual fund investors should return—and insist that the funds that they own return—to the sound investment principles and practices that are described in the first three parts of this book.

Thats the ultimate goal of this book. To ensure if your investments are in accordance with sound principles.

At the outset, investing is an act of faith, a willingness to postpone present consumption and save for the future.

Classic definition of Investing.

Investing is an act of faith. We entrust our capital to corporate stewards in the faith—at least with the hope—that their efforts will generate high rates of return on our investments.

Faith is everything in Investing. How do you develop faith ? by strong principles and reasoning.

we are professing our faith that the long-term success of the U.S. economy and the nation’s financial markets will continue in the future.

we are expressing our faith that the professional managers of the fund will be vigilant stewards of the assets we entrust to them.

value of diversification by

A diversified portfolio minimizes the risk inherent in owning any individual security by shifting that risk to the le...

As we approach the millennium, confidence in equities is at an all-time high.

The deepest recession of the post-1933 era has brought a stop to U.S. economic growth. After two crashes—in 2000-2002 and again in 2007-2009—the stock market returned to the level it reached way back in 1996 (excluding dividends): 13 years of net stagnation of investor wealth.

The record is rife with practices that serve fund managers at the expense of shareholders, from charging excessive fees, to “pay-to-play” (arrangements with brokers who sell fund shares), to a focus on short-term speculation rather than long-term investment.

nearly a score of major fund managers allowed select groups of preferred investors (often hedge funds) to engage in sophisticated short-term market-timing techniques, at the direct expense of the funds’ long-term individual shareholders.

But when confidence is high, so are market valuations. We can now hope—and, I think, expect—the other side of that coin. When confidence is low, market valuations are likely to be attractive. We might fairly call that parallelism “the paradox of investing.”

As long-term investors, however, we cannot afford to let the apocalyptic possibilities frighten us away from the markets.

For without risk there is no return.

“In a garden,” he said, “growth has its season. There are spring and summer, but there are also fall and winter. And then spring and summer again. As long as the roots are not severed, all is well and all will be well.”

Comparison of a stock market with a garden.

In the next five decades, our economy evolved from a capital-intensive industrial economy, keenly sensitive to the rhythms of the business cycle, to an enormous service economy, less susceptible to extremes of boom and bust.

To invest with success, you must be a long-term investor.

Wise advice.

The stock and bond markets are unpredictable on a short-term basis, but their long-term patterns of risk and return have proved durable enough to serve as the basis for a long-term strategy that leads to investment success.

study of the past, accompanied by a self-administered dose of common sense, is the intelligent investor’s best recourse.

Self administered Dose implying - Independent thinking.

We are not able to control our investment returns, but a long-term investment program, fortified by faith in the future, benefits from careful attention to those elements of investing that are within our power to control: risk, cost, and time.

We have no power to control our Investment returns . But we do have power to control -Risk -Cost -Time

term.The disdain of Chance the gardener for our foolish tendency to be upset by the inevitable seasons of economic growth provides a timely reminder that we must rely not on our emotions but on our reason to give us the perspective that we need to understand how our productive and innovative U.S. economy grows over the long term.

Do you have faith that Indian economy will boom ? What are the historic records ? Dont be emotional with these short term market dips. Eventually markets will bounce book.

stocks have provided the highest rate of return among the major categories of financial assets: stocks, bonds, U.S. Treasury bills, and gold.

An initial investment of $10,000 in stocks, from 1802 on, with all dividends reinvested (and ignoring taxes) would have resulted in a terminal value of $5.6 billion in real dollars (after adjustment for inflation).

The same initial investment in long-term U.S. government bonds, again reinvesting all interest income, would have yiel...

Stocks grew at a real rate of 7 percent annually; bonds, at a ...

Find out if we can have a similar graph for Indian businesses?

The first period was from 1802 to 1870 when, Siegel notes, “the U.S. made a transition from an agrarian to an industrialized economy.”3

In the second period, from 1871 to 1925, the United States became an important global economic and political power. And the third period, from 1926 to the present, is generally regarded as the history of the modern stock market.c

This contrast provides yet one more testament, if such be needed, to the importance of balancing an investment program between stocks and bonds.

Its Important to Balance your investmen program between stocks and Bonds.

Gold is often sought as a refuge during times of financial travail.

Because the goal of investing is to accumulate real wealth—an enhanced ability to pay for goods and services—the ultimate focus of the long-term investor must be on real, not nominal, returns.

Focus on real and not nominal returns.

In the modern era, the rate of inflation has accelerated dramatically, averaging 3.1 percent annually, and the gap between real and nominal returns has widened accordingly.

Since the Second World War, inflation has been especially high. From 1966 to 1981, for

The high rate of inflation in our modern era is in large part the result of our nation’s switch from a gold-based monetary system to a paper-based system.

Even as nominal returns have risen in line with inflation, the rate of real return has remained steady at about 7.0 percent, much as it did through the nineteenth century.

Plainly, the tidy patterns that are evident in a sweeping history of the stock market’s real returns tell little about the return an investor can expect to earn in any given year.

shows that the one-year standard deviation of 18.1 percent drops by more than half, to 7.5 percent, over just five years. It is cut nearly in half again, to 4.4 percent, over 10 years. Though most of the sting of volatility has been eliminated after a decade, it continues to decline as the period lengthens, until it reaches just 1.0 percent over an investment lifetime of 50 years, with an upper range of return of 7.7 percent and a lower range of 5.7 percent.

The longer the time horizon, the less the variability in average annual returns.

Investment maxim.

Investors should not underestimate their time horizons. An investor who begins contributing to a retirement plan at age 25, and then, in retirement, draws on the accumulated capital until age 75 and beyond...

Our colleges, universities, and many other durable institutions have essentially ...

Standard deviation is the accepted academic measure of variability; it expresses the range of an investment’s returns over a given time period.

The message is that stocks have always been volatile. There seems little reason to expect that such volatility will soon abate.

Stocks have always been and will be volatile.

The picture was then completely reversed from 1982 to 1997, when the bond market generated annual real returns of 9.6 percent, an exceptionally generous return,

“Variation stands as the fundamental reality and calculated averages become abstractions.”