Table of Contents
Introduction:
Jack Bogle, the legendary founder of Vanguard Group, believed successful long-term investing rests on following a set of simple, commonsense rules. Over his long career, Bogle distilled his investing philosophy into 10 straightforward principles that every investor should live by.
These rules withstand the test of time and changing market cycles. By ignoring fads and shortcuts, adhering to Bogle’s approach can potentially give your portfolio a performance edge.
1. Remember Reversion to the Mean
According to this principle, investment returns that substantially outperform their long-term historical average tend to revert back toward that mean over time. Simply put, outlier performance rarely sustains forever. Gravity eventually kicks in.
Bogle illustrated this concept using data on several top mutual funds of the modern era. He showed how their stellar short-term results inevitably faded as reversion to the mean occurred.
Investors frequently chase eye-popping returns from hot funds or asset classes. However, these highfliers cool off as market conditions change. The outsized performance proves unsustainable.
Avoid the common mistake of projecting recent superior results far into the future. Past returns contain little insight into what happens next. Also, recognize mean reversion applies on the flip side too. Lagging investments tend to improve over time as well.
2. Time is Your Friend, Impulses Are Your Enemy
Allowing enough time for the power of compounding to work its magic is one of the big advantages investors have. But our emotions often sabotage this edge.
When markets decline sharply, we irrationally want to sell. When they rally strongly, we’re tempted to chase returns. However, the exact opposite behavior typically produces better results. Patience and discipline are key.
As Bogle colorfully put it, “When you feel sad, it’s good to buy stocks. When you feel happy, it’s a good time to sell.” Fight your impulses and stay invested for the long haul. Don’t let transitory price changes alter your course. Markets fluctuate, but your investment principles should remain steady.
3. Buy Right and Hold Tight
Buying right means building a diversified portfolio matched to your risk appetite and goals. Broad stock and bond index funds covering the total market are generally the smart choice for most investors. Limit costs by using passively managed funds when possible. Rebalancing periodically maintains your desired asset allocation.
Once the portfolio is right for you, your job is simply to hold tight. Don’t panic during periods of market volatility. Trust that your diversified mix of equities and fixed income is designed to weather short-term fluctuations. Trying to time markets rarely succeeds and often backfires badly. Stay the course.
4. Have Realistic Expectations
Setting realistic return assumptions helps avoid disastrous financial moves driven by emotion and unrealistic hopes. Chasing unsustainable yields often ends badly.
Market history provides a solid statistical guide to what future returns could reasonably be, given current valuations and interest rates. Annuities also offer guaranteed payouts for those seeking income stability.
People projecting the stellar stock returns of the 1980s and 1990s far into the future are engaging in wishful thinking. Bond yields were much higher then too. Adjust expectations to fit the current investing landscape. Middling returns may frustrate but shouldn’t cause you to attempt low-probability strategies with unattractive risk/reward payoffs.
5. Forget the Needle, Buy the Haystack
Rather than hunting fruitlessly for elusive market-beating investments, buy the whole haystack. Broad stock and bond index mutual funds capture the market’s overall returns at very low cost.
They eliminate the need for investors to pick needles in a haystack or time markets successfully. As Bogle noted, abandoning this hopeless quest is a major advantage individual investors have.
Owning the entire market with low-cost index funds also harnesses the wisdom of crowds. You profit from the collective judgments of millions of buyers and sellers setting security prices. Attempting to outsmart the market is difficult for even professionals to achieve over the long run.
6. Minimize Costs
Investment costs are relentless performance drags that compound over long periods. They represent a tyranny of compounding returns in reverse. As Bogle stated, high aggregate costs can absolutely devastate compounded returns over investing lifetimes. Every basis point matters when multiplied over decades.
Minimizing taxes, operating expenses, transaction fees, and adviser charges leaves more capital working for you. Vanguard pioneered low-cost index funds under Bogle’s leadership for this very reason. The company recognized costs as the most proven predictor of a fund’s returns relative to peers. Don’t underestimate the power of penny-saved investing.
7. There’s No Escaping Risk
Even holding cash or bonds carries risks like inflation and interest rate fluctuations. The only true risk-free asset is a U.S. Treasury Inflation-Protected Security (TIPS) guaranteed to match CPI. Stocks clearly involve volatility risk but also have positive expected returns over time.
Rather than futilely attempting to avoid risk altogether, the wise approach is balancing both kinds of risk. For example, temper stock market swings with some bond holdings. Or hedge inflation risk via TIPS. Intelligently managed risk-taking is generally rewarded over the long run.
8. Beware of Fighting the Last War
The future often looks nothing like the past. Don’t blindly extrapolate historical returns forever. Carefully examine whether critical conditions have changed materially. What worked previously may fail miserably later.
For example, bond returns were excellent in past decades when yields were much higher. Lower yields today mathematically mean lower future bond returns. Similarly, lofty stock valuations suggest muted returns versus historical averages. Fighting the last war can lead to disastrous portfolio decisions when the investing landscape shifts fundamentally.
9. Hedgehog Beats the Fox
This metaphor conveys that the hedgehog’s simple one big idea – broad indexing – consistently defeats the fox’s complex strategies and tactics. When it comes to investing, simplicity wins over sophistication. As Bogle noted, passive investors prosper precisely by abandoning the fruitless quest for mispriced securities.
Attempting to pick winners or time markets takes immense expertise. Stock-picking requires identifying information not yet reflected in security prices. But the collective wisdom of the entire market is tough to beat consistently, even for expert professional money managers. Indexing succeeds by not playing a game you’re almost certain to lose.
10. Stay the Course
Having an intelligent investment plan you can stick with for the long haul is critical. But emotions and distractions often cause investors to tinker and stray from their strategy. Fight the urge to chase recent returns or flee temporary setbacks.
Rebalance on schedule as needed to maintain target allocations. But avoid constant portfolio tinkering. Allow your diversified mix of low-cost funds to capture market returns over your timeframe. Remember, patience and discipline are the cornerstones of successful investing.
Timeless Wisdom
The beauty of Bogle’s 10 investing rules is their resiliency across changing market environments. They represent universal principles grounded in cold, hard facts – not opinions or forecasts. While investing fads come and go, Bogle’s commonsense philosophy remains as relevant today as ever.
By ignoring complexity and shortcuts in favor of simplicity and discipline, Bogle boiled down the essence of successful investing. Focus on what you can control: costs, taxes, diversification, asset allocation, patience. Tune out unhelpful noise.
Sticking to these principles requires wisdom and mental toughness. But doing so tilts the odds in your favor over the long run. For individual investors, that incremental performance edge over decades adds up to greater prosperity. Those willing to embrace Bogle’s distilled wisdom have a bright financial future.
