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Booknotes: Common Sense on Mutual Funds

January 17th, 2007 at 05:22 pm

Common Sense on Mutual Funds by John C. Bogle

This was a very good book on mutual funds, very thoroughly researched, lots of historical information. Gotta warn you, though, it's long and the analysis gets very dense, not for the math-phobic by any stretch.

Here are the points I remember from the book (I don't have it in front of me).

* Although some mutual funds beat the index in any given year, there's no way you can know in advance which ones they will be.

* Over a longer period of time, all funds tend to return to the average performance of their class -- funds that perform higher than average early on tend to do less well, funds that are lower than average tend to improve -- so that over a 10 or 25 year horizon they pretty much mirror the performance of the index. This is known as "reverting to the mean".

* Once you take all fees into account, you're better off just buying a low-cost index fund in the first place.

On this last point, although supported by huge amounts of convincing analysis in the text, it should be noted that the author is very famous for having invented the very first index mutual fund! This may explain why a lot of the getting-started type books like The Complete Idiot's Guide to Getting Rich recommend that you purchase a single no-load index fund -- I think the authors have all read Bogle!

When I asked my dad about index funds a few years ago, he said that because everyone was jumping on the index fund bandwagon, they were becoming overvalued. How ironic if all the advice out there to buy index funds was actually creating a bubble in the stocks that are members of the indexes!

I think I do believe there is value in having fund managers who do research on the companies they are investing in. Warren Buffet made his wealth that way.

4 Responses to “Booknotes: Common Sense on Mutual Funds”

  1. Broken Arrow Says:

    I absolutely agree with the points you have highlighted!

    I wish everyone would consider these deceptively simple points more seriously.

  2. baselle Says:

    Love John Bogle. Most passive index funds will out perform an actively managed fund 75% of the time, and are usually more tax efficient to boot.

  3. fern Says:

    index funds are a very affordable way to go.

  4. jIM_Ohio Says:

    I am not an indexer. Bogle made money from people buying his book which also bought shares of Vanguard funds.

    You need to take this with a grain of salt.

    The index is quite volatile and has risk to it. Downward risk in particular. A managed fund does not need to beat index every year (to beat the index long term). If a managed fund can "play defense" when market is down or sideways, it can still lag the index on the way up, equal the indexes long term return and take on much less risk.

    That's the part of the book which was never published.

    I have no problem with people touting index funds as a good way to get average returns, or to keep decision making simple.


    Most people do not invest to minimize cost. I invest to get a certain return for taking on a certain amount of risk. If you invested at a low cost and lost money, would you still invest?

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