John C. Bogle On The Twelve Pillars Of Wisdom

Summary

• Avoid major common pitfalls.
• Increase your return without increasing your risk.
• Develop a fully diversified and winning portfolio.
• Minimize Taxes.
• Protect yourself frominflation.

In 1994 John Bogle wrote the book “Bogle on Mutual Funds.”  While this book was written well before the breakout in ETFs that we have seen in the last 10 to 15 years, most of the book's advice is timeless. One such timeless piece of wisdom came not in the core of the book but in the epilogue, and that is his “Twelve Pillars of Wisdom,” which I will outline here.

Pillar 1. Investing is Not Nearly as Difficult as it Looks.

With a little common sense, the intelligent investor can perform with the pros. In a world of highly efficient markets, there is no reason that careful and disciplined investors cannot hold their own with the pros or even surpass the long-term returns earned by professional investors as a group Focus on an asset allocation that is consistent with your own risk tolerance. [Don’t jump in and out of the market]

Pillar 2. When All Else Fails, Fall Back on Simplicity.

Commit over a period of a few years, half your assets to a stock index fund and half to a bond index fund. Ignore temporary fluctuations in their price. Hold the positions for as long as you live, making only marginal adjustments if your circumstances change When there are multiple solutions to a problem, choose the simplest one. There is an infinite number of strategies that are worse than this one.

Pillar 3. Time Marches On.

Time dramatically enhances capital accumulation as the magic of compounding accelerates your portfolio total. At an annual rate of 10% a $10,000 investment will be $108,000 at the end of 25 years. If you add just $6000 a year ($500 a month) to the above, then the $108,000 becomes over $750,000.[As a testament to the last statement, when I set up a 50/50 portfolio of the Total Stock Market Fund (VTSMX) and the US Treasury Fund (WHOSX) I get a result of $697,000 with the worst year of the 25 being only down by -4.55%. What can be easier than that?]

Pillar 4. Nothing Ventured, Nothing Gained.

It pays to take reasonable interim risks in the search of higher long-term rates. The magic of compounding accelerates as your annual rate of return goes up. As pointed out above, a $10,000 investment earning 10% will return $108,000 after 25 years, but the same investment earning 12% will return $170,000.

Pillar 5. Diversify, Diversify, Diversify.

By owning a broadly diversified portfolio of stocks and bonds, specific security risk is eliminated. Only market risk remains. Market risk will reflect in the volatility of your portfolio but should take care of itself over time as returns are compounded [,dividends are reinvested and new money buys “stocks on sale.”] Besides individual stock risk, there is style risk.  In some years growth funds outperform and in other years value stocks will outperform. [Personally, I prefer to own a “blend” fund which is a little of each.] Finally, there can be manager risk. If you own an active fund where the manager is picking stocks how would you go about picking the manager who is going to have the better performance over the next 5 years. [I contend that isn't easy and why I recommend sticking with index funds.]

Pillar 6. The Eternal Triangle.

Never forget that risk, return, and cost are the three sides of the eternal triangle of investing. Remember that the cost penalty may sharply erode the risk premium to which an investor is entitled. Unless you are confident that the higher costs you incur are justified by higher expected returns, select your investments from among the lower-cost funds or ETFs.

Pillar 7. The Powerful Magnetism of the Mean.

In investing, the mean is a powerful magnet that pulls financial market returns toward it. This causes returns to deteriorate after they have exceeded historical norms by substantial margins and to improve after they fall short. Reversion to the mean is a manifestation of the immutable law of averages that prevails, sooner or later, in the financial jungle.

Pillar 8. Do Not Overestimate Your Ability to Pick Superior Equity Mutual Funds, nor Underestimate Your Ability to Pick Superior Bond and Money Market Funds.

In selecting equity funds, no analysis of the past, no matter how painstaking, assures future superiority. In general you should settle for a solid mainstream equity fund in which the action of the stock market itself explains 85% or more of the funds returns Also, a low-cost market index fund, which is 100% explained by the market, is a good choice. The selection of bond and money market funds can be done with less skepticism. Selecting the better funds in these categories on the basis of their comparative costs holds much more chance of success.

Pillar 9. You May Have a Stable Principal Value or Stable Income Stream, But You May Not Have Both.

Contrast two choices by comparing a Money Market Fund (very stable in principal) with a long-term government bond fund (very stable in income flow.) Intelligent investing involves choices, compromises, and trade-offs, and your own financial position should determine the most suitable combination for your portfolio.

Pillar 10. Beware of “Fighting the Last War”

Too many investors and money managers alike are constantly making decisions based on the lessons of recent or even longer term past. They look to equities if equities have done well recently or bonds if bonds have done well. They worry about inflation because of inflation trends of the past. You should not ignore the past, but neither should you assume that a particular cyclical trend will last forever. None does.

Pillar 11. You Rarely, If Ever, Know Something the Market Does Not.

Worries about bear markets, bull markets, the economy, or just general unrest or euphoria are in all probability already reflected in the market. The financial markets reflect the knowledge, hopes, fears, and greed of all investors everywhere. It is nearly always unwise to act on insights that you think are your own but are in fact shared by millions of others.

Pillar 12. Think Long-Term

Do not let transitory changes in stock prices alter your investment decisions. There is a lot of noise in the daily movements of the stock market. That volatility is all too often “a tale told by an idiot, full of sound and fury, signifying nothing.” (Macbeth would doubtless agree.) Stock may remain overvalued or undervalued for years Patience and consistency are valuable assets for the intelligent investor. The best rule: Stay the Course.

Finally, to the contrarians who think John Bogle sold out if his aggressive stock funds before his death, they obviously don’t know John Bogle.  In March of 1995 he made a friendly bet with a Professional fund manager of his that in the next 5 years his simple S&P 500 index fund would outperform the professional portfolio.  On March 31, 2000 he collected on his bet. You see, having an investment process, a plan and the discipline to stay with it beats having an outlook, a forecast, and a crystal ball most every time.

Full disclosure: I am a bit biased on this subject.  How could I not be when he sent me a free copy of one of his later book, “Don’t Count On It,” with a very nice personal inscription inside that says:

“… with Congratulations on winning the Boglehead Contest for picking the level of the S&P index at year-end 2014. Stay the Course! John C Bogle. January 2, 2015.”

That was the kind of man he was. May he rest in peace.