But don't pay attention to that
last bit and go right ahead and splurge on his
latest book. It's less than $20 and well worth
In it he presents so many compelling arguments
that you will likely be converted to his way of
thinking. So-called "Bogleheads," who
refer to their leader as "St. Jack,"
already know his mission: Abandon the search for
the needle in the haystack -- the next best-performing
fund -- and instead buy the haystack, or the entire
market itself. Buy it as cheaply as possible through
low-cost index funds.
A compelling example
Bogle looks at the 25-year period from 1980 to 2005, when the Standard & Poor's 500 Index gained 12.5 percent on average per year. The average mutual fund gained 10 percent -- a 2.5 percent difference in performance attributable mainly to expenses. "Never forget: Market return, minus cost, equals investor return," Bogle says.
A $10,000 initial investment over that time frame in an index fund with expenses of 0.2 percent would have grown to $170,800. The average equity fund's value at the end of the period was $98,200.
Which pile of money would you rather have?
"What you see here -- and please don't ever forget it! -- is that over the long term, the miracle of compounding returns is overwhelmed by the tyranny of compounding costs," Bogle says of actively managed equity funds.
Bogle figures investors actually didn't earn 10 percent during that time frame but rather 7.3 percent (and index investors only earned 10.8 percent) because of their tendency to trade in and out of funds. They often sabotage themselves by getting into a hot fund at precisely the wrong time -- just before it freefalls.
The beauty of the indexing strategy, says Bogle, is that after
the initial setup no further action is required.
In fact, too much investment activity results
in transaction costs that further erode returns.
In Chapter 10, Bogle cites several
studies (including the one mentioned above) that
show that advisers aren't particularly adept at
selecting funds which beat the market. He says
he has a hard time imagining they add much value
-- unless they select low-cost funds with low
turnover (which have lower transaction costs and
are more tax-efficient). "If they put those
two strategies together and emphasize low-cost
index funds -- as so many advisers do -- so much
the better for their clients," says Bogle.
But most advisers are reluctant to follow an indexing strategy because -- hey -- where's the added value there? Why should individuals hire an adviser to buy cheap index funds (and then pay the adviser a percentage point a year from portfolio assets for the privilege) if they can do this for themselves?