The Bogle Behind My Long-Term Investment Strategy

In these trying times, I feel compelled to revisit the rules I follow in my never-ending pursuit of a better investment plan and the man behind several of those rules: the late John "Jack" Bogle. He revolutionized the mutual fund world by creating index investing and was devoted to making investing easier for the average investor. Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Bogle Bio

Bogle was born a twin in 1929 - just three months before America plunged into the Great Depression. He showed a particular aptitude for mathematics, and studied economics and investment at Princeton University. After graduating in the early 1950s he was hired by the Wellington Fund, where he rose through ranks and eventually became chairman.

In 1974, Bogle founded The Vanguard Group and served as Chairman and Chief Executive Officer until 1996 and Senior Chairman until 2000. Fortune Magazine named Bogle one of the four investment giants of the 20th Century.

In 1976, Bogle created the First Index Investment Trust (a precursor to the Vanguard 500 Index Fund) as the first index mutual fund available to the general public. His goal was to mimic the index performance over the long run and achieve higher returns with lower costs than those associated with actively managed funds. It was not immediately accepted by individuals or the investment industry, but is now a market staple. Among his biggest fans (other than myself) is businessman and billionaire, Warren Buffett, otherwise known as the "Omaha Oracle." Buffett was often quoted as saying that Bogle did more for American investors as a whole than any individual he'd ever known.

Bogle died at the age of 89 in on January 16, 2019.

Bogle-isms

Bogle could grab your attention with some of his startling “isms.” For example, “If you have trouble imagining a 20% loss in the stock market, perhaps you shouldn't be in stocks.” Statistics support this Bogle-ism: An investor could lose 10% of his or her stock portfolio every year…or lose 20%-plus of his or her stock portfolio every three years.

In one of his informative books on investing, “Clash of the Cultures: Investment vs Speculation,” Bogle cited several of his important principles of investing (Bogle-isms), including:

Remember reversion to the mean. What's hot today isn't likely to be hot tomorrow. Don't follow the thundering herd.
Time is your friend, impulse is your enemy. Take advantage of the power of compound interest. Don't buy stocks after they soar and sell after they plunge.
Buy right and hold tight. Once you set your asset allocation, stick to it.
Have realistic expectations. You are unlikely to get rich quickly. Bogle estimated a 7.5% annual return for stocks and a 3.5% annual return for bonds in the long run.
Forget the needle, buy the haystack. Buy the whole market and you can eliminate stock risk, style risk, and manager risk.
Minimize the "croupier's" take. Beating the stock market and the casino are both zero-sum games. You get what you don't pay for.
There's no escaping risk. There are no high returns without risk.
Beware of fighting the last war. What worked in the recent past is not likely to work going forward.
Hedgehog beats the fox. Foxes represent the financial institutions that charge far too much for their advice. The hedgehog represents the index fund.
Stay the course. The secret to investing is there is no secret. When you own the entire stock market through a broad stock index fund with an appropriate allocation to an all bond market index fund, you have the optimal investment strategy.

Dare To Be Average

The Bogle principle I find most beneficial is to have realistic expectations about marketplace yields, which I call Dare To Be Average. Back in the 1980s, it helped me accept the much debated virtues of a controversial new investment vehicle - the index fund. Rather than pursue some outlandish get-rich-quick scheme, I realized that that it made sense to aspire to a more attainable yield - the market rate of return.

Since those early days of heated index fund debates, unmanaged funds have repeatedly outperformed those of managed funds, primarily by doing what Bogle called “minimizing the croupier’s take.” Fees matter…a lot. Investors should know what they’re paying in fees and taxes – and be hardnosed about minimizing them.

According to Forbes Advisor:

When you buy a total stock market index fund, it’s like owning the entire U.S. equity market in a single fund. Investing in a total stock market index fund provides you with a simple, inexpensive way to diversify your U.S. equity exposure. The funds charge ultra-low expense ratios, in most cases. But not every option is the same—each relies on different underlying indexes and methodologies to mirror the U.S. stock market.

The Simple Approach

Based on my own experience, investing is not as difficult as it might appear to a beginning investor. It simply involves doing a few things right and doing proper homework when buying products you wish own. And what better, simpler way to optimize diversification than through mutual funds. “Forget the needle” (an individual stock), "buy the haystack” (an index fund), Bogle said. In short, don’t buy individual stocks and suffer their built-in lack of diversification risk. By definition, it’s a losing strategy.

Most informed investors who practice simplicity in their approach to investing are able to develop profitable portfolios without resorting to a salesperson or financial advisor (I call ‘em Wazoos). Do your homework and keep it simple. This approach will allow you to keep more of your own money…always a winning proposition.

Dangerous Times

Bogle's tenets are even more important during chaotic times. The changing nature of things…like in today’s unstable market…always includes a warning about “reversion to the mean.” It's a red flag warning to investors to not to chase performance. We’re seemingly wired to invest in assets that have been doing well recently – a human tendency that assumes recent trends will continue. Don’t count on it.

And don't be surprised by bear markets. Rather, savvy investors should expect them, perhaps as many as 20 or more over an investment career. They often represent opportunities to make money.

In Sum

There are no perfect investment strategies. But some are better than others. I happen to believe the stock market is efficient. I also believe the best strategy is to buy an index fund. Even if I’m wrong, I will earn the market's rate of return (a result few actively managed funds achieve). In short, the risk is much greater for those who bet on inefficiency (managed funds) rather than on efficiency (index funds).