John Bogle is the former CEO, now retiree, of the Vanguard Group, an investment management company of nearly $3 trillion in capital.
He is well-respected in the investment management world, with his book “Common Sense on Mutual Funds” having been a classic bestseller.
Everyone knows that growing money in your retirement fund doesn’t happen without effort.
Keeping it sitting in a bank with low interest returns will keep it safe, but you won’t profit much from it.
If you invest in risky pursuits like micro-cap stocks, it may grow your funds quickly, but you also run the risk of losing a lot of money that way.
According to Bogle, investment in stable stocks is the key way to grow your retirement savings without a high risk of loss.
No Matter What, there is Always a Cost of Investment
All growth-oriented investment requires a cost.
Whether it is making small investments over time or putting a large chunk of money into one project, there is always the potential for loss when saving.
Compounding interest is an important aspect of why many people save, but Bogle emphasizes another concept known as the compounding cost of investment.
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Compounding Cost Can Lead to Huge Losses
Although the return on your investment may increase over time through compounding interest, it is worth considering whether the compounding costs will outweigh potential profit.
If the stock market’s overall return percentage overtakes your personal savings return, that constitutes a compounding cost and an overall loss even though you have gained something on returns.
It is not the total return that you could potentially have achieved.
What Types of Stocks You Choose Matters
In a sea of potential investment choices, deciding what type of stocks you will invest in with your retirement funds can be overwhelming.
In order to make your profits worth the risk of compounding cost, Bogle says overall owning a broad range of investment options, including bonds, stocks, and others, will generally give a good payout.
Owning a large variety cheaply is the best route for overall savings.
Owning Index Funds Is Bogle’s Most Valued Investment Strategy
If Bogle is famous for anything, it is his emphasis on index funds.
Index funds are a category of mutual fund where the investor’s portfolio generally follows or matches the market index.
A portfolio which matches something such as the S&P 500 gives wide exposure to the market as a whole, essentially guaranteeing some level of overall gain.
Why are Index Funds so Essential for Bogle?
In an Interview, Bogle once famously said that since it is so difficult and complex to “beat” the market, investors may as well try to “be” the market instead, or at least reflect its patterns well.
This is the whole idea behind index funds – trying to get a portfolio that mirrors broad market trends.
Reasons Indexing Works Better Than Many Other Strategies
Here are a few reasons indexing is a great strategy for increasing retirement returns:
- You are letting the pros work for you
- It is simple from the standpoint of the investor
- It is less time-consuming and requires less research
- You have long-term compounding of returns
- You avoid compounding costs in the long-term
The Professionals Do the Work for You in Indexing
If you’re trying to increase your retirement returns, indexing is a great strategy according to Bogle, partly because in indexing, professionals are determining the investments.
Indexing funds are run by investors who have spent decades working with the stock money.
They have had the time and resources to research patterns in stock trends and are likely going to make better decisions than the average individual investor.
While many investors consider index funds a lazy strategy, it should be seen more as a straightforward, dependable pathway to increasing returns.
Bogle Puts More Faith In Passively-Managed Funds
Bogle believes that passively-managed funds are the most reliable way to increase returns.
There is actually data to back this up.
Passive funds such as indexing and others usually perform better by 0.5-1% every year.
This is usually because actively-managed funds are more likely to take a risk, and so have a higher average investment cost.
Avoid Overseas Investment in your Retirement Portfolio
Another thing Bogle is famous for is keeping his portfolio entirely in the United States.
Unlike most investors, he doesn’t directly invest in foreign companies, and many people cite this as a major factor in his success.
He believes investors should stick with what they know, and that the United States has the best legal protections for investors in the world.
Additionally, most domestic companies get over 50% of their gains from international profit.
This means that even when you keep your investments in the U.S., you still get a wide exposure to the benefits of the international market.
If you invest specifically in a foreign market, this wide exposure doesn’t always happen.
We can sum up Bogle’s advice by saying that simple is better when it comes to your retirement portfolio.
Using passively-managed funds decreases risk and effort and increases profitability.