The "Go-To" Book for Investors

If you're a physician-investor looking for a book that will dramatically improve your chances of making money in the stock market, John Bogle's Little Book of Common Sense Investing is it, according to reviewer Burton Malkiel, who is himself the author of a classic guide to investing, A Random Walk Down Wall Street.

“Learn every day, but especially from the experiences of others—it's cheaper.”—John Bogle

If you’re a physician-investor looking for a book that will dramatically improve your chances of making money in the stock market, John Bogle’s Little Book of Common Sense Investing is it, according to reviewer Burton Malkiel, who is himself the author of a classic guide to investing, A Random Walk Down Wall Street.

Bogle, the founder and retired CEO of the Vanguard Group and creator of the first index mutual fund back in 1976, has long been known as the patron saint of the small investor and a consistent critic of complicated and costly investment strategies. He advocates a simple approach to stock market investment, one that takes the hard work out of making money.

The key, according to Bogle, is to invest in a low-cost, low-turnover index fund that buys and holds virtually every stock that trades in the market. How can this approach beat the average investor? It works because the average investor is dazzled by the dream of fast, easy money. He/she buys into the market at peaks, when everyone is optimistic, and sells off at market lows, when pessimism reigns.

The same psychology leads investors to place their bets on hot sectors, often with disastrous results, as the dot.com crash demonstrated so spectacularly. Add in the higher fees charged by actively managed funds, the cost of trading by fund managers, and the earnings drag due to income taxes if the funds are held in a taxable account, and you have a almost perfect recipe for underperforming the market. As it turns out, that’s exactly what usually happens—the average stock market investor generally falls short of market returns, often by quite a wide margin.

An index fund avoids many of these pitfalls. By buying and holding stocks, trading costs are kept at a minimum, which results in a far lower expense ratio. A skinflint index fund may charge as little as 0.18% to handle your money, compared to the 1.25% that the average actively traded fund charges. In other words, for every $1,000 you have invested, an actively managed fund is skimming $12.50 from your return, while the index fund is getting by on 18¢. Over time, that difference can add up to significantly more cash in your fund account if you choose the low-cost fund. And since an index fund sells stocks less often, realized profits are kept low, which translates into a lower tax burden.

Bogle also has little love for Exchange Traded Funds (ETFs), which buy and sell like stocks. Unlike mutual funds, which are sold only after the end of the trading day, ETFs can be bought or sold at any time. To Bogle, this means that they are designed for trading, not investing. Also, some ETFs zero in on certain sectors—in contrast to the broad-based, total-market concept that Bogle champions.

Malkiel disagrees with Bogle on this point, contending that ETFs have a place in the average investor’s portfolio, when approached cautiously and intelligently. Among their advantages, claims Malkiel, ETFs can be more tax-efficient than mutual funds, which is especially important for those in higher tax brackets.

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