Book SummaryThe Little Book of Common Sense Investing, by John C. Bogle

1-Page Summary1-Page Book Summary of The Little Book of Common Sense Investing

Investing can feel overwhelming. There are various companies vying to manage investors’ money while platforms like Robinhood that encourage expedient day-trading entice investors with the possibility of quick profits and beating the market. Amidst this chaos, John C. Bogle argues that the winning strategy for novice investors is simple: Invest in traditional index funds and hold them indefinitely. (Shortform note: While Bogle frames this as a book for new investors, his arguments and explanations may be advanced for anyone with little or no prior knowledge of the stock market.)

In his 2017 book, The Little Book of Common Sense Investing, Bogle outlines the reasons why investors typically make more money with index funds than the primary alternative—actively...

The Little Book of Common Sense Investing Summary Introduction to Equity Investing

To begin, we’ll discuss equity more generally—what it is, its role in the US stock market, and how to own it via equity index funds and actively managed mutual funds.

Equity and the US Stock Market

Broadly speaking, equity is the part of a company that belongs to its owners. When companies are publicly traded, investors can acquire partial equity in them by purchasing shares of their stock. (Shortform note: Stock is another term for equity, and shares are units of stock.) For example, you could acquire equity in Apple by purchasing shares of Apple stock.

(Shortform note: In addition to publicly traded stocks, some investment funds purchase private equity—in other words, companies that aren’t publicly traded—with the aim of eventually selling them for a profit. Because private equity funds last a finite amount of time, private equity firms typically have concrete plans to improve the companies they acquire, ensuring that they profit when the investment term ends.)

In the US, investors can purchase stocks traded on the US stock market—basically, the...

The Little Book of Common Sense Investing Summary Why Mutual Funds Cost Investors More Than Index Funds

Since index funds are typically held indefinitely, while mutual funds are actively managed, Bogle claims that index funds are much more cost-effective for investors. In this section, we’ll examine three areas where mutual funds cost more than index funds: expense ratios, sales charges, and portfolio turnover.

Cost 1: Expense Ratios

Mutual funds and index funds alike have expense ratios—the percentage of the fund’s assets that goes to operating expenses, like marketing, administration, and portfolio management. Because they require active intervention, Bogle claims that mutual funds’ expense ratios are substantially higher than those of index funds.

(Shortform note: While mutual funds are actively managed, some exchange-traded funds—pre-packaged pools of stocks that can be traded daily—are managed by “robo-advisors.” Basically, these robo-advisors are algorithms that automatically manage your portfolio for you. Because robo-advisers replace human managers, their funds typically charge lower expense ratios than the average mutual fund.)

In...

The Little Book of Common Sense Investing Summary How Index Funds Statistically Outperform Mutual Funds

Despite their higher costs, mutual funds could nonetheless be superior to index funds if they generated proportionately higher returns. In this section, however, we’ll examine Bogle’s arguments to the contrary: Mutual funds generate significantly lower returns for investors than index funds.

Historical Data

First, Bogle examines historical data to see whether mutual funds have outperformed index funds in the past. In this regard, the data are clear: Low-cost index funds have consistently outperformed the vast majority of mutual funds since 1970.

(Shortform note: Although advocates of actively managed funds grant that index funds have outperformed most mutual funds, some argue that doesn’t mean index funds are always a better option. In particular, they claim these historical data only show index funds are better than the average mutual fund. Consequently, these advocates recommend finding mutual funds with gifted managers who are able to outperform the market over the long term.)

To show as much, Bogle turns to the records of the 355 mutual...

The Little Book of Common Sense Investing Summary Bonds and Asset Allocation

While Bogle primarily discusses equity investments, he also discusses bonds—loans that investors pay to governments or corporations in exchange for interest over time. For example, if you purchase a $1,000 10-year Treasury bond at 3% interest, the Treasury agrees to pay you $30 annually the next 10 years, and also repay the $1,000 principal in 10 years.

Because their returns are less volatile than returns on equity, Bogle argues that bonds belong in your investment portfolio. In this section, we’ll discuss Bogle’s reasons for investing in bonds, why he favors bond index funds to bond mutual funds, and his suggested investment ratio of equity to bonds.

Bonds vs. Equity

To begin, Bogle concedes that equity investments, or stocks, have historically generated greater returns than bonds: Annual returns on bonds have been 5.3% since 1900, while annual returns on stocks have been 9.5%. Nonetheless, he claims you should invest in bonds for three reasons: Bonds can beat stocks over short stretches; bonds provide protection during market drops; and bond yields are still greater than current dividend yields.

(Shortform note: Bonds have existed far longer than stocks...

Shortform Exercise: Determine Your Ideal Asset Allocation

Bogle argues that your ideal asset allocation between stocks and bonds depends on two factors: your financial position and your degree of risk aversion. In this exercise, evaluate these two factors to determine your ideal portfolio.

Which financial liabilities do you have looming in the future (for example, mortgages or retirement costs)? Write down these liabilities and their specific costs.