In 1976, one man quietly started a revolution.
That man was John C. Bogle.
He launched the Vanguard 500 Index Fund, the first index fund available to individuals, and transformed the investment landscape forever.
In 2012, Vanguard Group founder Bogle released a book. The Clash of the Cultures.
In it, he urges a return to the common-sense principles of long-term investing.
A common-sense strategy that “may not be the best strategy ever devised. But the number of strategies that are worse is infinite.”
With 60-plus years in the investment field, these lessons are immeasurably valuable:
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 noise of the market.
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.
6. Keep costs low.
Beating the stock market and high charges are both zero-sum games. You get what you don’t pay for. Click here to learn 5 Things Your Adviser May Not Be Telling You.
7. There’s no escaping risk.
Investors often think of cash as a safe haven in volatile times, or even as a source of income. But the ongoing era of ultra-low interest rates has depressed the return available on cash to near zero, leaving cash savings vulnerable to erosion by inflation over time.
Cash underperforms over the long term. Cash left on the sidelines earns very little over the long run. Investors who have parked their cash in the bank have missed out on the impressive performance that would have come with staying invested over the long term.
8. Volatility is normal, don’t panic.
Every year has its rough patches. The red dots on the chart below represent the maximum intra-year equity decline in every calendar year, or the difference between the highest and lowest point reached by the market in those 12 months. It is hard to predict these pullbacks, but double-digit declines in markets are a fact of life in most years; investors should expect them.
Volatility in financial markets is normal and investors should be prepared upfront for the ups and downs of investing, rather than reacting emotionally when the going gets tough. The grey bars represent the calendar-year market price returns. They show that, despite the pullbacks every year, the equity market has recovered to deliver positive returns in most calendar years.
The lesson is, don’t panic: more often than not a stock market pullback is an opportunity, not a reason to sell.
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. Don’t put your emotions in charge of your investments
The secret to investing is there is no secret. When you own the entire market through a well diversified, professionally managed portfolio, you have the optimal investment strategy. Discipline is best summed up by staying the course.
The key to successful investing isn’t predicting the future. It’s learning from the past and understanding the present. We believe that these ten time-tested investing principles can help you increase your odds of reaching your financial goals.
To learn more and see how Intelligent Investments can help you achieve your goals, visit www.intelligentinvestments.biz and speak to the team today.