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The Little Book of Common Sense Investing by John C. Bogle is a book about investing that emphasizes the importance of passive investing through index funds. The book is aimed at individual investors, and its key message is that investors should focus on low-cost, low-risk investments that provide long-term value.
Key Takeaways
Indexing beats active management: The author argues that most individual investors should avoid actively managed mutual funds and instead invest in index funds, which provide broad exposure to the market as a whole. According to Bogle, actively managed funds rarely beat their benchmark indexes over the long term and tend to be more expensive.
Avoid high fees: Bogle stresses the importance of keeping investment costs low, especially when it comes to fees. He says that the typical mutual fund charges a management fee of around 1%, which can significantly eat into returns over time. He recommends looking for funds with expense ratios of 0.5% or lower.
Stay the course: Bogle cautions investors to avoid getting caught up in market hype and to stick to their investment plans. He says that market fluctuations are normal and that investors who try to time the market usually end up losing out in the long run. Bogle recommends investing in low-cost index funds and holding them for the long term, regardless of short-term market fluctuations.
Diversify: Bogle emphasizes the importance of diversification in investing. He recommends building a portfolio of low-cost index funds that provide exposure to different sectors of the market, rather than putting all of one's eggs in a single basket. Bogle also recommends periodically rebalancing one's portfolio to maintain the desired asset allocation.
Use benchmarks to evaluate performance: Bogle says that individual investors should use benchmarks to evaluate the performance of their investments. He recommends comparing the performance of an investment to a relevant benchmark index, such as the S&P 500, to determine whether it is worth holding on to.
Avoid timing the market: Bogle warns investors against trying to time the market, which he says is almost impossible to do consistently. He argues that most active investors end up underperforming the market, and that the best strategy is to invest in low-cost index funds and hold them for the long term.
Buy and hold: Bogle emphasizes the importance of having a long-term perspective when it comes to investing. He says that investors who buy and hold low-cost index funds tend to outperform those who buy and sell frequently. Bogle recommends avoiding the temptation to trade frequently and instead putting one's money in a diversified portfolio of index funds.
Invest with a purpose: Finally, Bogle suggests that investors should have a clear purpose for their investments, such as saving for retirement or a child's education. He says that having a clear goal and time frame in mind can help investors stay focused and avoid making impulsive decisions.
Conclusion
The Little Book of Common Sense Investing is a useful guide for individual investors who are looking to build a low-cost, diversified portfolio of index funds that provides long-term value. The book emphasizes the importance of avoiding high-cost, actively managed funds, staying the course during market fluctuations, and diversifying one's portfolio to reduce risk. By following these key principles, investors can increase their chances of earning a fair share of market returns over the long term.
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