Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor by John C. Bogle

Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor by John C. Bogle

Part I
ON INVESTMENT STRATEGY
Investment strategy is the first issue that investors should consider. At the
outset, investing is an act of faith, a willingness to postpone present
consumption and save for the future. Investing for the long term is central
to the achievement of optimal returns by investors. Unfortunately, the
principle of investing for the long term—eschewing funds with high-

turnover portfolios and holding shares in soundly managed funds as
investments for a lifetime—is honored more in the breach than in the
observance by most mutual fund managers and shareholders.
To bring the advantages of long-term investing into focus, I examine here
the historical returns, and risks, that have characterized the U.S. stock and
bond markets, as well as the sources of those returns: (1) fundamentals
represented by earnings and dividends, and (2) speculation, represented by
wide swings in the market’s valuation of these fundamentals. The first
factor tends to be reliable and sustainable over the long pull; the second is
both episodic and spasmodic. These lessons of history are central to the
understanding of investing.
This discussion of returns and risks serves as a background for a
discussion of asset allocation, now conceded by virtually all thoughtful
observers to be by far the most important single decision in shaping the
long-term returns earned by investors. Finally, I deal with the paradox that,
more than ever in these days of complexity, simplicity underlies the best
investment strategies.

Chapter 1
On Long-Term Investing
Chance and the Garden
Investing is an act of faith. We entrust our capital to corporate stewards in
the faith—at least with the hope—that their efforts will generate high rates
of return on our investments. When we purchase corporate America’s
stocks and bonds, we are professing our faith that the long-term success of
the U.S. economy and the nation’s financial markets will continue in the
future.
When we invest in a mutual fund, we are expressing our faith that the
professional managers of the fund will be vigilant stewards of the assets we
entrust to them. We are also recognizing the value of diversification by
spreading our investments over a large number of stocks and bonds. A
diversified portfolio minimizes the risk inherent in owning any individual
security by shifting that risk to the level of the stock and bond markets.
Americans’ faith in investing has waxed and waned, kindled by bull
markets and chilled by bear markets, but it has remained intact. It has
survived the Great Depression, two world wars, the rise and fall of
communism, and a barrage of unnerving changes: booms and bankruptcies,
inflation and deflation, shocks in commodity prices, the revolution in
information technology, and the globalization of financial markets. In recent
years, our faith has been enhanced—perhaps excessively so—by the bull
market in stocks that began in 1982 and has accelerated, without significant
interruption, toward the century’s end. As we approach the millennium,
confidence in equities is at an all-time high.
TEN YEARS LATER
The Paradox of Investing

Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor by John C. Bogle