Jack Bogle’s Vanguard Icon’s 4 Simple Rules of Investing
You don’t have to make investing difficult to generate long-term returns. Vanguard founder Jack Bogle advocated keeping investing simple with cheap funds.
People in their fifties – who are often close to retirement – may be afraid of making mistakes that put their savings at risk. Following Bogle’s investment advice helps reduce risk and cost while still seeing growth in your portfolio. Here are his rules you can use to continue building your nest egg.
1. Own the haystack, not the needle
Searching for individual stocks can be like finding a needle in a haystack. You can dig a lot and not end up finding stocks that will go up after investing. Haystack management has very little risk and still leads to strong long-term returns.
Think of a haystack as a collection of various stocks, such as the S&P 500. A broad market index that gives investors exposure to the 500 largest US companies. The S&P 500 has produced an annualized return of approximately 10% historically. That’s enough to beat inflation, and build wealth to support your retirement.
It is possible to get high returns by picking individual stocks. However, it is very difficult to bypass the market – and you risk having all your eggs in a few baskets.
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2. Keep costs down
Bogle emphasized the importance of lower cost ratios and transaction costs because payments can quietly decrease your net worth. A 1% expense ratio may sound small, but that’s an extra $10,000 that someone would have to pay each year on $1 million in their portfolio. A 0.10% expense ratio results in only $1,000 in annual payments for the same net amount.
Index funds are generally cheaper than actively managed funds, and over time, many index funds outperform their actively managed counterparts.
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3. Stay on course with market noise
Not surprisingly, the creator of index funds was strongly against trying to time the market and chasing strong stocks. When investors chase rising stocks, they risk buying high to avoid missing out and selling short when the rally is over. Investors who only buy a stock because it is rallying may fail to understand the fundamentals, which can lead to high trading costs and significant losses.
Reacting to the headlines and having more risk in the portfolio can be more dangerous for someone over the age of 50, as their portfolio has less time to recover from market losses than a younger investor. Many index investors add a small amount of money to their positions each month through automatic transfers to take the emotion out of investing.
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4. Match risk with age and horizon
Most investors take on more risk as they get older. Stocks are still important for growth, but switching to bonds can reduce volatility and provide stable cash flow. Bogle recommended an age-based bond/stock ratio. There are several rule of thumb ways to use this, including subtracting your age from 120 to determine your stock allocation.
Remember that the rules of thumb are just general guidelines that may require some adjustments, depending on your circumstances. However, they provide a good starting point for determining your optimal allocation, especially since it is important to adjust your portfolio as you age to match your changing time horizon, goals and risk tolerance.
