Jack Bogle’s 11 Principles for Smart Investing

John Clifton “Jack” Bogle was founding CEO of the Vanguard Group, the biggest investment management fund with $5 trillion in assets-under-management. Bogle has penned 12 books, with his best-selling Bogle on Mutual Funds praised by Warren Buffet as the “definitive book on mutual funds.” The father of modern-day index funds, Bogle’s company and philosophy has put billions of dollars back into investors’ pockets. Bogle was named one of Fortune’s “Giants of the 20th Century” in 1999, Time’s “World’s Most Powerful and Influential People” in 2004, and given the Institutional Investors’ “Lifetime Achievement Award.”

As part of the research for our book, The Ten Commandments of Investing, we profiled Bogle and shared his 11 principles for smart investing. What is the case for being a passive investor? 

Here Are Bogle’s 11 Rules For Smart Investing:

1. Stay in the market: Keep yourself in the market. Even if there are short term turbulences, the equity markets will still likely produce the greatest returns out of all asset classes in the long run. Plenty of evidence suggests passive investing can match, or even out-perform, returns of active investing.
2. Saving is half of the equation: Passive funds have been able to keep up with the returns of active investing, and the reason is because active investing has management, legal, and transaction costs, while passive investing cuts these costs out. Invest in a diverse portfolio of companies (maybe with passive index funds), and let the market work its magic.
3. Simplicity is key: Many investment books will note that if you invest in the stock market, the compounding effects of time and the growing of the economy will generate great returns for you. If the broader market will generate returns, and it takes a lot of time and risks to find good stocks, passive investing may be a more effective and efficient path.
4. Don’t listen to experts: Not a lot of experts saw the coming of the 2008 financial recession. Even if some make right predictions, it’s very difficult to tell these experts apart and listen to the right ones. Find an investment philosophy that works for you, keep on improving it until you find a working formula for investing.
5. Impulse is your enemy: The worst things you can do in investing are buying high, selling low, or holding onto stock when you should be cutting losses. However, emotions and impulses will often force you to make errors. Never make trade decisions in the moment. Make clear what your principles are, program trades/stop losses ahead of time so that you know your investments are made not out of impulse but with preparation.
6. 60/40 diversify: Put 60% in US stock index funds and 40% in US bond index funds. As Bogle grew older, he put more of his portfolio into the bond index funds, making it more of a 50/50 distribution. The mix depends on your risk appetite, but always spread your risk out to get exposure to different parts of the economy.
7. Three fund portfolio: Building upon 60/40, Bogle believes in picking three funds, covering different asset classes, to build wealth. One in the US stock market, the other in bonds, and the third one in international markets. Each of these funds should cover the entire market (large/mid/small cap stocks). This gives more diversity to the 60/40 rule.
8. Invest in innovative markets: The markets that produce new ideas and new products will do well in the future, those who don’t will be eliminated by competition. While it may be difficult to choose companies, it’s easier to see which economies in the world are producing new businesses that will dominate in the future, like the U.S. and China where there is an abundance of talent. Choose the right economy, and you increase your chances of finding returns.
9. Invest, don’t speculate: Speculation treats the stock market like a casino, a place where you let luck create lots of wealth in a short period of time. That is the opposite of how the market should work. Invest in the broader economy for a longer period of time, do your due diligence regardless of whether you’re an active or passive investor and you’ll find a way to generate returns.
10. Be patient: The importance of the time value of money cannot be stated enough. Investments cannot be looked at short term, because the emotions of greed and fear drive most market fluctuations. Fundamentals of the economy, the creation of valued services and products, however, drive the long-term returns. Invest for the long run.
11. Don’t overrate past performance: Having a good year of performance doesn’t guarantee good returns next year. Having 5 years of good performance can only show some consistency, or perhaps 5 bull years. Funds also inherently have survivorship biases, where only the ones that are lucky enough to last through downturns survive. Rate investment funds based on investment methodology, not on past performances.

Conclusion: 

It can be easy to view passive investing as the strategy of the disinterested or unknowledgeable investor. People are drawn to the lure and action of more active, short-term investing. Succumbing to this thinking is a mistake. Bogle emphasizes that the passive, long-term approach is the smart approach. Passivity doesn’t relate to investor disinterest or ignorance, but rather, investor restraint and logic.  

In the short-term, most market shifts are driven by human emotions: Greed and fear. One of the greatest pitfalls for an investor is allowing his or herself to be influenced by the emotion-driven actions of others. It takes practiced discipline to adhere to Commandment #6 of investing and to reject the herd mentality of others. Doing so, however, will allow for calculated decisions based on due diligence and research, and not on the whims of others. 

In the long term, fundamental economics, innovation, and products/services drive the market. These are factors that can be researched and to which logical, data-driven conclusions can be reached. This is not the work of disinterested or ignorant investors, but rather intelligent ones. 

There is a final critical point to make here: beating the performance of the S&P500 over the long-term is an incredibly difficult feat to accomplish. How hard? Here’s a fact that may give you some pause: between 2010 and 2019 nearly 65% of large active funds underperformed against the S&P500. Adjust that period to 15 years and statistically over 90% of large active funds are outperformed by the S&P500. This is a triumph for passive managers in a longstanding battle over investor strategy. Moreover, it’s a triumph for index funds designed to mirror the performance of the S&P500. 

What’s the lesson here? Be a passive investor. Put your money in the best index fund(s) you can find and stay in it for the long haul. Doing so will help you to avoid costly management fees and also the pitfall of succumbing to the emotions of other investors.

Which index funds are in your portfolio? Please let us know, comment below.