John Bogle's 10 rules of investing

Wiley/CBS

(MoneyWatch) "The Clash of the Cultures: Investment vs. Speculation" is investing pioneer John C. Bogle's tenth and last book. It is an enjoyable read that ends with 10 lessons for investors that, while simple, are deeply valuable to the general public. I even developed my own scorecard to keep track of how the clash that Bogle, founder of mutual fund giant The Vanguard Group, alludes to is developing over time.

Clash of the Cultures is a great summary of the breadth of Bogle's 60-plus years in the investment field. He offers observations on the shocking change in the culture of finance that he has witnessed first-hand. Among the most important of the shifts is that short-term speculation has crowded out long-term investment. Though this has been great for the financial sector, it has come at the expense of the public.

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Bogle also offer prescriptions for how to address such opposing forces. The bad news -- don't hold your breath waiting for the financial system to get fixed. The good news is that you can immediately begin following his lessons to at least lessen the chances of losing your hard-money amid this surge in speculation:

1. Remember reversion to the mean. What's hot today isn't likely to be hot tomorrow. The stock market reverts to fundamental returns over the long run. Don't follow the herd.

2. Time is your friend, impulse is your enemy. Take advantage of compound interest and don't be captivated by the siren song of the market. That only seduces you into buying after stocks have soared and selling after they plunge.

3. Buy right and hold tight. Once you set your asset allocation, stick to it no matter how greedy or scared you become.

4. Have realistic expectations. You are unlikely to get rich quickly. Bogle thinks a 7.5 percent annual return for stocks and a 3.5 percent annual return for bonds is reasonable in the long-run.

5. Forget the needle, buy the haystack. Buy the whole market and you can eliminate stock risk, style risk, and manager risk. Your odds of finding the next Apple (AAPL) are low.

6. Minimize the "croupier's" take. Beating the stock market and the casino are both zero-sum games, before costs. You get what you don't pay for.

7. There's no escaping risk. I've long searched for high returns without risk; despite the many claims that such investments exist, however, I haven't found it. And a money market may be the ultimate risk because it will likely lag inflation.

8. Beware of fighting the last war. What worked in the recent past is not likely to work going forward. Investments that worked well in the first market plunge of the century failed miserably in the second plunge.

9. Hedgehog beats the fox. Foxes represent the financial institutions that charge far too much for their artful, complicated advice. The hedgehog, which when threatened simply curls up into an impregnable spiny ball, represents the index fund with its "price-less" concept.

10. 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. Discipline is best summed up by staying the course.

Bogle's book raised some concerns for me over the future of this great clash of the cultures, yet it also left me with hope. One reason is he notes that index funds represented only 3 percent of equity assets 20 years ago compared with 28 percent today. And though Jack Bogle will never be able to convince most financial professionals of their disservice to clients, he appears to be having success persuading an increasing number of investors to keep away from the fox.

[Creation1962]

Hi all,

the title of this book says most of what it does, The market is a long term investment proposition and as a rule it doesn't pay to play it as if it were a casino. Bottom line, what John Bogle says works in the way he describes it and that's it - he walks the walk in this regard. You can however do better than just accepting the randomnnes of the market and managing it - see for example "Ten simple rules that beat the stock market: November 2012 edition" (which I wrote so I may be biased).

Many happy abnormal returns.

MR

[db1953]

Regarding some of Mr. Bogle's rules:

Rule 1 suggests that one should be a contrarian investor, i.e. buy when cold sell when hot. However, I've never heard Mr. Bogle suggest this type of investing elsewhere. Thoughts?

Rule 3 says to stick to your allocation no matter what. This, IMO, is very foolish. If a person gets to a point where they literally can't afford to lose another time, then they must make a change. Additionally, I've heard Mr. Bogle make statements in the past indicating that stocks either look attractive or unattractive - what's the point of making these valuation judgments if you can't make changes based on them?

[Allan_Roth]

db1953,

Regarding rule 1, Mr. Bogle is saying don't performance chase. It's related to rule 3 which is don't panic and sell. IMO, it's foolish to have set an allocation one can't stick with. When valuations get high, sticking to an allocation would have you sell. When valuations look attractive, rebalancing would have you buy. Rebalancing is contrarian.

My own rule on asset allocation goes like this - "if you can't be right, at least be consistent." Humans, including advisors, have a long history of buying high and selling low.

[ricosu]

I have no argument when you write of a man I revere. He is the epimtome of not letting your emotions be your investing guide. Although I think many who think they can do better on their own timing trades as opposed to Bogle's advice are engaged in a kind of self deception. For example everyone thinks they just know this market is headed down here and has known that since 2009. And it's always possible they're correct-have to be at some point. Problem is how many times will they fool Mr. Market. If it were that easy everyone would be rich. They're not. Mr. Bogle is.

[Allan_Roth]

ricousu,

I agree with you 100%. I'm brilliant at predicting the past but am smart enough to know I don't know the near-term future. Harry Dent is one of the smartest people I have interviewed. Yet he has consistently called the market wrong and his second investment vehicle has been terminated (DENT ETF).

Still, It's the market timers that keep markets efficient so they have my gratitude.

[theakeman]

Some More Good Advice on investing: http://modeltstocktrends.blogspot.com/2012/03/dont-let-curtis-mismanage-your-money.html

[Allan_Roth]

theakeman,

I took a look. For example, the site you recommended said "Increased the number of stocks from 20 to 27." This is off by a factor of at least 100 and is tyring to pick needles in a haystack. A couple of index funds can own the equity world.

[dajhilton]

This is nothing more than a sales pitch for buying stock index mutual funds (plus bond index funds).
That is no investment strategy at all. Someone following this advice over the past 4 years would have missed entirely the chance to quadruple their money which would have resulted from them simply investing in the world's largest,must successful, and most visible company (Apple). And that strategy would have cost them nothing more than the broker's fee to purchase the share. Unlike this author's so-called strategy, which relies on stupid investor's paying the managers of their index funds an annual fee in perpetuity for doing nothing productive at all. Does no one realize that buying the whole market, as this expert, recommends, means buying every worthless share? every soon-to-be bankrupt firm? every troubled asset class? Why buy blackberry (RIM) when you can buy Samsung and Apple? It does not take a genius to see that for at least a decade the first firm will be a loser (if it even continues to exist) and the latter two will be winners. In short, this 'strategy' is lazy and lame. Avoid.

[Allan_Roth]

dajhilton,

I think I hear you say you know how to find that needle in a haystack and put everything you had in Apple. I gather you are a billionaire? Thanks for taking the time to respond on this blog.

I suspect you are actually very poor and are merely predicting the past. I also think you missed the point - buying the low cost index fund means you pay managers very little and you do own the next Apple.

[Michael__T]

I wish you luck separating the Apple's of the world from the RIM's of the world. Plus knowing when to buy them and when to sell them before they turn into losers. (Remember, RIM was a high flyer at one point.)

For me, I'll stick to a well-diversified portfolio of low-cost stock and bond index funds that's consistent with my risk tolerance and investing timeline. I'll wait up for you at the finish line.

[Allan_Roth]

Thanks Jerry. It is a very good book.

[JerryNA100]

Hi Allan,
Great advice from Bogle (and you), as always. I noticed that rebalancing is implicit in points 1 and 2 -just mentioning it for new readers.