Bogle On Mutual Funds
Much of what you've heard about mutual funds is misleading at best, flat-out wrong at worst. When structured appropriately and approached with realistic expectations, the right mutual fund can be a valuable addition to any portfolio. Bogle On Mutual Funds shows you how to do it right, with the expert perspective of an industry leader. JOHN C. BOGLE is founder and former chairman of the Vanguard Group of mutual funds and President of its Bogle Financial Markets Research Center. After creating Vanguard in 1974, he served as chairman and chief executive officer until 1996 and senior chairman until 2000. Bogle is the author of ten books, including Enough.: True Measures of Money, Business, and Life, The Little Book of Common Sense Investing, and Clash of the Cultures: Investment vs. Speculation, all published by Wiley.
Bogle On Mutual Funds
The purpose of this book is to guide investors in developing and implementing an intelligent investment program through mutual funds. It does not attempt to tell you how to attain wealth without risk, nor does it attempt to tell you how to select the next "number one" equity fund. Both of these tasks are, in a word, impossible, and I fear this book would lack all credibility if I did not acknowledge that fact at the outset.
Rather, what I hope to provide is a sensible framework for establishing a long-term investment program that will meet your financial needs. Such a program must take into account: (1) your investment attitudes, whether conservative or venturesome; (2) your position in the life cycle of investing, as you move from the accumulation of assets during your earning years to the enjoyment of income during your retirement years; and (3) the behavior of the securities markets over the long run, from which much (but not too much) should be learned.
This book deals solely with mutual funds. It does not deal with the analysis and evaluation of individual stocks and bonds. In my view, attempting to build a lifetime investment program around the selection of a handful of individual securities is, for all but the most exceptional investors, a fool's errand. To be sure, by owning individual equities, some active investors will inevitably enjoy spectacular results. But others perforce will lose much of their capital. Earning extraordinary returns from the ownership of individual stocks is a high-risk, long-shot bet for most investors. Specific stock bets should be made, if at all, in small portions, and more for the excitement of the game than for the profit. Serious money belongs elsewhere; it belongs in a widely diversified investment program. For nearly all investors, mutual funds are the most efficient method of achieving this diversification.
This book covers not only equity funds but bond funds and money market funds as well. Together, these two new (post-1970) segments of the mutual fund industry are larger than the equity fund base that had dominated the industry since the inception of the first U.S. mutual fund back in 1924. Of the industry's current total assets of $1.6 trillion, equity-oriented (common stock and balanced) funds comprise $517 billion, bond funds $510 billion, and money market funds $555 billion. Diversification in bonds and in short-term instruments is every bit as important as in equities: a portfolio comprising, say, 100 fixed-income obligations vastly reduces the risk of any single default, without any reduction whatsoever in return.
While mutual funds are an ideal vehicle to mitigate substantially the risk of holding specific stocks and bonds, market risk still remains. The central task of a lifetime investment strategy is to allocate financial resources so as to balance the different market risks among the three basic classes of liquid assets: (1) common stocks, which carry the greatest short-term price volatility and uncertainty, but-based on the underlying fundamentals of corporate earnings, dividends, and dividend growth-promise the highest expected returns over the long term; (2) bonds, which normally provide lower returns than stocks and, depending on the length of maturity, carry significant risk of principal fluctuation but remarkable stability of income; and (3) money market reserves, which usually engender minimal risk to capital and thus the lowest rewards but, given their short-term nature, create an inevitable risk of income volatility. An intelligent approach to allocating your assets among these three investment classes is a key theme of this book.
Risk and return are normally considered the central elements of asset allocation, and this book will not abandon the careful evaluation of these two fundamentals. However, I will add a third critical element, cost. The cost of an investment program is the third leg