Investing icon Jack Bogle has many written works on the art and science of Wall Street. His latest book is not just a continuation of his common-sense narrative on mutual funds and capital markets, but also a checklist for investors of all stripes.
Bogle was the founder and CEO of the Vanguard Group, and pioneered the idea of low-cost index funds. His strategy of low risk and low cost was first broadcast to the masses in Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor and most recently in his 10th and final text, The Clash of the Cultures: Investment vs. Speculation.
In Clash of the Cultures, Bogle closes with this simple list of 10 things that individual investors need to learn in order to balance the quest for instant profit (speculation) with the need for stability and long-term performance (investment).
- Remember reversion to the mean. What goes up must come down, so be careful of fad sectors and crowded trades.
- Time is your friend, impulse is your enemy. As Einstein said, “compound interest is the most powerful force in the universe.”
- Buy right and hold tight. Short-term volatility scares many folks out of good trades. Don’t fall victim to the headline-watching that results in a rash investment decision.
- Have realistic expectations. Bogle thinks a 7.5% annual return for stocks is reasonable. So if you’re looking for 15% a year … be realistic. Your greed might drive you to take bigger risks.
- Forget the needle, buy the haystack. This is my favorite. In short, buying the market eliminates a lot of risk — something Bogle has long preached. Rather than try to find a 100% gain in the next Apple (NASDAQ:AAPL) or risk a 50% loss in a small-cap dud, simply content yourself with the higher lows and lower highs of a broad-based strategy.
- Minimize the “croupier’s” take. That’s the dealer in Vegas, for those unfamiliar with the term. There always is a way for the casino (or Wall Street) to get paid, so make sure someone else is subsidizing the game and not you.
- There’s no escaping risk. Simple but true. There are no such things as “no-risk” investments. Just minimize it where you can.
- Beware of fighting the last war. Investments that worked well in the past might fail miserably in the future. Sticking to your guns means never gaining ground.
- Hedgehog beats the fox. Be defensive first. A predator is fine if it’s at the top of the food chain, but rather than strive for that status, investors should simply do their best not to get eaten.
- Stay the course. The secret to investing is there is no secret. Don’t flail around looking for answers when there is no foolproof strategy.
Allan S. Roth, the founder of Wealth Logic, recently recapped these rules in a column on CBS MoneyWatch and capped his list with this note:
“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.”
If you’re a retail investor looking for ways to beat the house, Jack Bogle should be one of your role models. This list is a great reference for stock market junkies and novice investors alike.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.