When markets look complex and uncertain and your investment journey hazardous, turn to the man who always said ‘keeping things simple is the best way to make money in the markets.”
Legendary American investor John Bogle is widely known as the crusader who revolutionised the investing experience for the common man. Bogle, who died on January 16, 2019, left behind a legacy that is hard to ignore.
Bogle, a very popular name in the mutual fund industry, introduced index funds which made stocks enter every American home and changed the perception that stock markets were just for the rich.
An index fund is a mutual fund that invests in a market index, Nifty50 or the Sensex for instance, and seeks to imitate its performance. It doesn’t involve a great level of active fund management and, hence, its expense ratio tends to be very low.
How Vanguard shot to fame under Bogle
Bogle was a big critic of the mutual fund industry due to the high expenses charged by most firms from investors. He was of the view that lower costs were critical to the returns that investors made and felt that it was impossible for most fund managers to sustainably beat the market indices.
So he built his investment company Vanguard on the premise that low-cost index funds could provide superior returns to long-term investors. Bogle put index funds on the map and made it available to the general public, aiming to track the broader market performance.
He was also responsible for starting the trend of lowering fees, which benefited many investors immensely.
While sustaining some of the lowest fees in the business, Vanguard grew its assets from $1.8 billion at its start in 1974 to over $5.3 trillion by 2018 and hence has become one of the great success stories in the mutual fund industry.
Common sense can help achieve financial success
In a career spanning 50 years, Bogle always worked for investors’ well-being and brought interests of asset managers in line with those of their investing clients.
He passed on most of his savings to Vanguard investors, bringing fees for his funds to the minimum levels, which in turn forced the rest of the fund market to follow suit. This helped all investors get superior returns on their retirement savings, which helped reduce underperformance caused by soaring management fees.
“My ideas are very simple. In investing, you get what you don’t pay for,” he once told investors in a summit.
Unlike many Wall Street billionaires, Bogle was known for his relatively modest lifestyle. He always believed that successful investing didn’t require sophistication and complexity, all that was necessary was a healthy dose of common sense.
“Unfortunately, you’re unlikely to hear this truism from Wall Street’s financial service firms, at least publicly. Instead, you’ll hear how complicated investing is, and how their advice, their managers, their research and their expertise are necessary to help you reach your savings goals. In reality, investing need not be complicated at all. Your own common sense can set you on the road to financial success,” he once told investors.
Bogle often shared his investment lessons that he learnt throughout his lifetime with investors, which helped them improve returns and made them wiser.
Here is a list of the investment tips he often shared:-
1. Hold on to quality stocks: Bogle was of the view that the biggest risk investors face is not short-term volatility, but the risk of not earning sufficient return on their capital as it accumulates.
“While there will always be periods of volatility, holding on to quality and reinvesting dividends when prices drop is one of the best ways to build wealth over a lifetime. Just be honest with yourself about how much risk you can realistically tolerate,” he used to say.
2. Believe in the power of compounding: Bogle always encouraged investors to start investing as early in their life as possible to make an investment successful. Time always plays a major role in investing.
“Enjoy the magic of compounding returns. Even modest investments made in one’s early 20s are likely to grow into staggering amounts over the course of an investment lifetime. One of the most important factors in investing success is to avoid trying to time the market. Time in the market is what’s critical to long-term success,” he said.
Bogle also advised investors to have rational returns expectations from investments and would always say that investors should avoid chasing big numbers, as there is always a risk of change in the market cycle.
3. Avoid impulsive decisions: Bogle felt worst things any investor could do is take an impulsive decision based on reports and analysis that appear in financial media. He advised investors to choose a diverse range of stocks and bonds, trust in the maths behind and stay committed to them. “While investing, eliminate emotions from your system,” he said.
4. Stick to your investment plan: Bogle felt the most important advice investors needed to follow was “Stay the course”. “Regardless of what happens in the market, stick to your investment program. Changing your strategy at the wrong time can be the single most devastating mistake you can make as an investor. Have rational expectations for future returns, and avoid changing those expectations in response to the ephemeral noise coming from markets,” he advised.
5. Diversify your investments: Bogle said it is necessary to keep a careful balance of risk, return and cost while investing, as absolutely no one knows what the stock market is going to do tomorrow, let alone next year. So investors should stick to a sensible and diverse allocation among stocks, bonds and cash reserves and should preferably mirror the performance of a market yardstick.
“Given this absolute uncertainty, the most logical strategy is to invest as broadly as possible and allocate prudently. Your asset allocation will probably have a greater impact on your portfolio’s long-term performance than any other single factor. There’s risk in being too conservative or too aggressive. A very general rule of thumb is that your bond allocation should equal your age minus 10 (i.e., a 40-year old investor would own approximately 30% bonds, 70% stocks),” he said.
6. Be cautious while following experts: Bogle was of the view that highly skilled analysts and experts can’t be trusted entirely and felt that investors probably didn’t need a financial adviser at all. “Money managers missed all the warning signs before the 2008 Global Financial Crisis. Also, how could so many highly skilled, highly paid securities analysts and researchers fail to question the toxic-filled, leveraged balance sheets of leading banks and investment banks?” he asked.
7. Keep investment expenses to a bare minimum: Bogle always felt keeping investment expenses to the bare minimum is the best route to stellar performance over time. So, he advised investors to avoid funds with sales loads and seek funds with low operating expenses.
“One way to increase investment returns is to minimise the costs associated with managing those investments. Vanguard’s low-cost index funds were revolutionary when they were first introduced because they rejected the high fees typically associated with actively managed mutual funds,” he said.
Without Bogle’s valuable contribution to the mutual fund business, it is doubtful whether index funds, variable annuities and long-term investing ideas would be as popular. Seldom has someone made such an impact on investing like Bogle and his investment lessons would surely live through his company, the index funds he created, and the books he wrote.
Source: ET Markets