John Bogle's Twelve Pillars of Wisdom (--> Wiki)

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John Bogle's Twelve Pillars of Wisdom (--> Wiki)

Postby Barry Barnitz » Sat Oct 06, 2007 2:16 am

This page has been incorporated into The Bogleheads Wiki.

Paul Crafter has provided us with a compilation of John Bogle's time tested Twelve Pillars of Wisdom. Links to Forum comments on each of the Pillars will be included.

For more about John Bogle, please refer to the topic About Vanguard and Its Founder.
Last edited by Barry Barnitz on Mon Jun 30, 2008 11:42 am, edited 1 time in total.
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JACH BOGLE'S 12 PILLARS OF WISDOM

Postby pkcrafter » Sat Oct 06, 2007 10:17 am

The 12 Pillars were originally published in 1994, but they were again provided by Mr. Bogle at The Arizona Republic Investment Strategies Forum in Phoenix, Arizona, April 27, 2001

When you read the 12 Pillars, remember the difference in the nature of the stock market at the time of the original post (1994) and the time of the Arizona Conference (2001). What is amazing is that the 12 Pillars were good advice in both situations,just as they are today.

When I posted the 12 Pillars many got no response as if they were either not important or were not relevant in today's market environment. I wondered about this and then I realized that at any given time some of the 12 Pillars will connect while others don't seem so relevant. At another time, others will stand out. But this does not change the fact that they are all relevant all the time.

The 12 Pillars of Wisdom.
Indeed, these twelve sensible guidelines to successful investing are lessons that investors should have learned before the bear market arrived, but that many are only learning now. Bull markets come and bull markets go, inevitably followed by bear markets, which too come and go. But these pillars of wisdom are timeless, and should serve us well in all seasons.
John Bogle

Pillar 1. Investing Is Not Nearly as Difficult as It Looks.
The intelligent investor in mutual funds, using common sense and without extraordinary financial acumen, can perform with the pros. In a world where financial markets are highly efficient, there is absolutely no reason that careful and disciplined novices—those who know the rudiments but lack the experience—cannot hold their own or even surpass the long-term returns earned by professional investors as a group. Successful investing involves doing just a few things right and avoiding serious mistakes.

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Bogleheads Forum Comments

Pillar 2. When All Else Fails, Fall Back on Simplicity.
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.

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Pillar 3. Time Marches On.
Time dramatically enhances capital accumulation as the magic of compounding accelerates. At an annual return of +10%, the total value of the initial $10,000 investment is $108,000, at the end of 25 years, nearly a tenfold increase in value. Give yourself the benefit of all the time you can possibly afford.

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Pillar 4. Nothing Ventured, Nothing Gained.
It pays to take reasonable interim risks in the search for higher long-term rates of return. The magic of compounding accelerates sharply with even modest increases in annual rate of return. While an investment of $10,000 earning an annual return of +10% grows to a value of $108,000 over 25 years, at +12% the final value is $170,000. The difference of $62,000 is more than six times the initial investment itself.

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Pillar 5. Diversify, Diversify, Diversify.
By owning a broadly diversified portfolio of stocks and bonds, specific security risk is eliminated. Only market risk remains. This risk is reflected in the volatility of your portfolio and should take care of itself over time as returns are compounded.

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Pillar 6. The Eternal Triangle.
Never forget that risk, return, and cost are the three sides of the eternal triangle of investing. Remember also that the cost penalty may sharply erode the risk premium to which an investor is entitled. You should understand unequivocally that investing in a fund with a relatively high expense ratio—more than 0.50% per year for a money market fund, 0.75% for a bond fund, 1.00% for a regular equity fund—bears careful examination. Unless you are confident that the higher costs you incur are justified by higher expected returns, select your investments from among the lower-cost no-load funds.

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Pillar 7. The Powerful Magnetism of the Mean
In the world of investing, the mean is a powerful magnet that pulls financial market returns toward it, causing returns to deteriorate after they exceed historical norms by substantial margins and to improve after they fall short. Reversion to the mean is a manifestation of the immutable law of averages that prevails, sooner or later, in the financial jungle.

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Pillar 8. Do Not Overestimate Your Ability to Pick Superior Equity Mutual Funds, nor Underestimate Your Ability to Pick Superior Bond and Money Market Funds.
In selecting equity funds, no analysis of the past, no matter how painstaking, assures future superiority. In general, you should settle for a solid mainstream equity fund in which the action of the stock market itself explains about 85% or more of the fund’s return, or an low-cost index fund (100% explained by the market). But do not approach the selection of bond and money market funds with the same skepticism. Selecting the better funds in these categories on the basis of their comparative costs holds remarkably favorable prospects for success.

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Pillar 9. You May Have a Stable Principal Value or a Stable Income Stream, But You May Not Have Both.
Contrast a money market fund—with its volatile income stream and fixed value—and a long-term government bond fund—with its relatively fixed income stream and extraordinarily volatile market value. Intelligent investing involves choices, compromises, and trade-offs, and your own financial position should determine the most suitable combination for your portfolio.

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Pillar 10. Beware of "Fighting the Last War."
Too many investors—individuals and institutions alike—are constantly making investment decisions based on the lessons of the recent, or even the extended, past. They seek stocks after stocks have emerged victorious from the last war, bonds after bonds have won. They worry about the impact of inflation after inflation, having turned high real returns into so-so nominal returns, has become the accepted bogeyman. You should not ignore the past, but neither should you assume that a particular cyclical trend will last forever. None does.

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Pillar 11. You Rarely, If Ever, Know Something The Market Does Not.
If you are worried about the coming bear market, excited about the coming bull market, fearful about the prospect of war, or concerned about the economy, the election, or indeed the state of mankind, in all probability your opinions are already reflected in the market. The financial markets reflect the knowledge, the hopes, the fears, even the greed, of all investors everywhere. It is nearly always unwise to act on insights that you think are your own but are in fact shared by millions of others.

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Pillar 12. Think Long-Term.
Do not let transitory changes in stock prices alter your investment program. There is a lot of noise in the daily volatility of the stock market, which too often is "a tale told by an idiot, full of sound and fury, signifying nothing." Stocks may remain overvalued, or undervalued, for years. Patience and consistency are valuable assets for the intelligent investor. The best rule: Stay the Course.

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for those who may be interested, here is a link to the 12 Pillars plus additional remarks by John Bogle from the Bogle Financial Markets Research Center.

The Twelve Pillars of Wisdom:Lessons We Should Have Learned before the Bear Market Arrived, but are Only Learning Now


Paul

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When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.


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