Common Sense on Mutual Funds Updated---A Gem

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Common Sense on Mutual Funds Updated---A Gem

Postby Taylor Larimore » Fri Nov 20, 2009 11:56 pm

Hi Bogleheads:

Our mentor, Jack Bogle, has "updated" his original Common Sense on Mutual Funds written 10 years ago. This is really two books in one: The original book and the updated version with add-on's to his many charts, plus Jack's numerous and often lengthy analysis about his earlier advice; how it has, or has not, held up; and the valuable lessons we can learn.

You can read excerpts from his first bookHERE. The excerpts below, are all new:

"Today, it's hard to imagine the incredible ebullience in the stock market in 1999 when the first edition was published. Dow 36,000 was published a few months after my own book."

"After two crashes--in 2000-2002 and again in 2007-2009--the stock market returned to the level it reached way back in 1996 (excluding dividends)."

"Far too many professional managers of our mutual funds have failed to act as vigilant stewards of the assets that we entrusted to them."

"Stock valuations (now) appear realistic, and, quite likely, attractive for the long term."

"Beware of extrapolating returns in the stock market and of relying on projections of past returns to tell us what the future holds."

"The stock market is not, and never has been, an actuarial table."

"Stocks have always been volatile. There seems little reason to expect that such volatility will soon abate."

"Mutual fund investors continued their consistently counterproductive investment patterns (buying high/selling low) during the 1998-2009 period.--Will investors never learn?"

"Active trading in fund shares is an industry scandal"

"Annual portfolio turnover has risen to the 100 percent range during the past quarter-century."

"Nothing that has happened in the last decade persuades me to change a single one of those six rules of intelligent investing: Invest you must; time is your friend; impulse is your enemy; basic arithmetic works (low costs); stick to simplicity; stay the course."

"The data confirm unmistakably that historic patterns repeat themselves over time; however, knowing in advance when these peaks and valleys will occur is not within our competence."

"The more things change, the more they remain the same."

"The 2-year cumulative return on stocks through September 2009 totaled -25%, while the value of a 60/40 stock/bond portfolio would have declined by just -11%."

"Despite the serious bear markets of 2000-2002 and 2007-2009, the annualized returns on stocks since 1971 remained strong (9.6% per year)."

"It is unusual--but hardly unprecedented--for bond returns to be competitive with stock returns."

"As we age, we usually have (1) more wealth to protect, (2) less time to recoup severe losses, (3) greater need for investment income, and (4) perhaps an increased nerviousness as markets jump around. All four of these factors clearly suggest more bonds as we age."

"Even after having my principles tested in the crucible of a rotten decade for stocks, there's hardly an idea--or even a word--that I would change in my recommendations in establishing an appropriate allocation of assets in investor portfolios."

"The remarkable complexity of the insanely risky financial instruments that brought our financial system and our economy to their knees--only confirms the need for the kind of clarity, transparency, and simplicity that I recommended to investors then, and continue to recommend now."

"Even when the data are examined over shorter periods, and even when the data turn negative, low costs continue to be key to superior returns."

"Don't forget that taxes are costs, too."

"The powerful pattern of reversion to the mean cited 10 years ago continued over the past decade."

"There remains no evidence--none--that superior past performance is predictive of future success."

"As I wrote in 1999, hot performance by tiny funds should be 'a warning flag to intelligent investors.'"

"I'm increasingly convinced that all--or virtually all--portfolios should carry a substantial commitment to broad market index funds."

"My message, with just a few tiny modifications, remains intact--a clear understanding of the value of 'the gift to be simple,' and its commonsense implementation."

"When we incorporate the results of the Vanguard 500 Index Fund since 1998 with its previous record over 15 years, we find that the fund outpaced about 68% of all general equity funds on a pre-tax basis but nearly 90% on an after-tax basis."

"In the past five years, index fund risk as measured by Morningstar was more than 30% below the risks assumed by actively managed funds."

"The events of the past decade have combined to make indexing the standard to which actively managed funds must hold themselves."

"My hope that 'the raw power of indexing' could force major changes in the way fund complexes operate' died aborning."

"In the more volatile recent markets--the risks assumed by large-cap funds remained well below the risks assumed in the other categories."

"As I noted then (a decade ago) 'Once the equity market environment turns more sober, future bond fund returns may well prove to be more competitive with stock fund returns.' Both predictions, as it turned out, were remarkable understatements."

"Managed bond fund carrying sales loads have earned far less than no-load bond funds in each category, and roughly one-half of the returns of a comparable bond index."

"Municipal bond funds are fine choices for investors in high tax brackets, and inflation-protected bond funds are a sound option for investors who expect much higher living costs."

"Weights in the world's stock market: China, 1.7%; India, 0.7%; Brazil, 1.2%; and Russia, 0.6%."

"In 2008 alone, fully 399 funds were either liquidated or merged into another fund (usually in the same fund family, and usually one with a better record)."

"If you like the target-date idea, carefully consider the records of the underlying funds, the asset allocations to equities and bonds, and the all-in costs."

"Investors seem hell-bent on carrying out the search for winning funds of the future, no matter how futile the search has proven to be."

"There can be little doubt that mutual fund champions come down to earth with remarkable consistency."

"The average annual returns of the two categories (growth funds vs. value funds) during the 72-year period (1937-2008) were actually identical--9.7%."

"The past decade has also reflected--in spades!--RTM between U.S. and international stocks. Over the full half century, (1959-2008) the annual returns are virtually identical: U.S. 9.1%; international 9.0%."

"RTM in investing is everywhere--in equity mutual funds, in market sectors, across the globe, in real stock market returns... Ignore these clear lessons of history at your peril."

"Winning strategies becoming the mode of the day, attracting many dollars and then no longer working, is hardly without parallel in the long history of the financial markets."

"In the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw therefrom."

"Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience."

"Institutions control some 75% of the stock of all U.S. corporations."

"Since 1998, equity mutual funds have distributed nearly $1.5 trillion of realized capital gains to their investors."

"Taxable investors owe it to themselves to emphasize passive index funds, or well-managed low-turnover, actively managed mutual funds, or funds with substantial unrealized losses on their books."

"As time marches on, the variability of the average historical rates of return converge dramatically. But please don't make the error of equating that narrower range of returns with lower long-term risk."

"With the passage of time the magic of compounding returns is inevitably overwhelmed by the tyranny of compounding costs. (Do the math!)"

"Casino capitalism has come to sit in the driver's seat, and trusteeship, professional competence and discipline, and focus on the long term were lost in the shuffle."

"Among the 200 largest mutual funds during the decade ended as 2000 began, the 6.5% annual return earned by fund investors was 3.3% behind the 9.8% annual return reported by the funds themselves."

"The absurdity of the 12b-1 fee remains,"

"I continue my campaign to treat the human beings who invest in mutual funds as owners, not as mere customers."

"By my reckoning, nearly all firms in the (investment) field are essentially marketers."

"During the past decade, the fund industry has moved in precisely the opposite direction from the direction I urged."

"Stocks listed on the NY Stock Exchange averaged an annualized turnover rate of 155% during the first half of 2009, ETF turnover averages a truly incredible 3,000%. I'm crestfallen. Trading in funds has now overwhelmed trading in stocks."

"My earlier concerns about derivative instruments have been borne out."

"With the nice market recovery since March 2009, the worst now seems to be over. I hope so, but I would still keep some powder dry--just in case."

"Morningstar data clearly confirm that traders in indexed ETFs have earned returns that fall far below the returns earned by the respective indexes that the ETFs track."

"Total equity fund costs, are estimated at some $43 billion in 2008. That is a lot of money to pay to managements that, as a group, have consistently failed to outpace th stock market as a whole."

"Not a single firm has joined Vanguard in operating with a truly mutual structure."

"A recent study by Cogent Research concluded that 'Vanguard Group generates substantially more loyalty than any other fund company.'"

"The Bogleheads have come to passionately believe in Vanguard's mission of investment simplicity--economy, efficiency, asset allocation, widely diversified portfolios of high quality and low cost, and, above all, a commonsense focus on the wisdom of long-term investing and the folly of short-term speculation."

"Taylor and I struck up a friendship that, a decade later, is stronger than ever."

Even at age 80, I continue to press on in my crusade to build a better financial world for investors."


Thank you, Jack

More Investment Gems
"Simplicity is the master key to financial success." -- Jack Bogle
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Postby kenner » Sat Nov 21, 2009 5:27 am

Taylor,

Thank you very much for this post. It's great to read about Mr. Bogle's current thinking on the investment world. Seems like every time I start to re-think my investing strategy, I read a post here that keeps me grounded.

I was particularly struck by these gems:

"The average annual returns of the two categories (growth funds vs. value funds) during the 72-year period (1937-2008) were actually identical--9.7%."

"The past decade has also reflected--in spades!--RTM between U.S. and international stocks. Over the full half century, (1959-2008) the annual returns are virtually identical: U.S. 9.1%; international 9.0%."

"RTM in investing is everywhere--in equity mutual funds, in market sectors, across the globe, in real stock market returns... Ignore these clear lessons of history at your peril."

"Winning strategies becoming the mode of the day, attracting many dollars and then no longer working, is hardly without parallel in the long history of the financial markets."

"In the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw therefrom."

"Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience."


My take is that - assuming the accuracy of 72 years of data regarding the value vs. growth debate and 50 years of data in the case of International vs. U. S. investing - total market investing still makes the most sense and there is little or no factual basis to support the mathematical theories that overweighting value or specific geographical regions is justified. I'm comfortable with that.

All the best,
Ken
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Postby TJAJ9 » Sat Nov 21, 2009 5:52 am

Great gems, Taylor. Thanks for posting them.
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Postby Blue » Sat Nov 21, 2009 9:50 am

Really looking forward to the book --- thank you for the preview!
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