Common Sense on Mutual Funds Fully Updated 10th Anniversary Edition-John C

659 Pages·2011·6.45 MB·English

by  Bogle, John C.

—continued from front flap—
PRAISE FOR THE ORIGINAL 1998 EDITION
B F O R E W O R D B Y D A V I D S W E N S E N
long-term investing and asset allocation, Bogle “Cogent, honest, and hard-hitting—a must read-for every investor.” O $29.95 USA / $35.95 CAN
Chief Investment Officer, Yale University
WARREN E. BUFFETT
off ers sensible solutions to the fund selection process
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and reveals what it will take to make it in today’s ohn Bogle—founder of the Vanguard
COMMON SENSE MUTUAL FUNDS
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chaotic market. Updated charts, which also show Mutual Fund Group and creator of the
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fully updated th anniversary edition
original data, as well as new commentary and analysis fi rst index mutual fund—is an industry
provide timely guidance in light of recent changes in
“The only thing better than Bogle’s original book is its improved revision. Bon appetit!” pioneer. Over the years, he has single-
investment vehicles and market performance.
—PAUL A. SAMUELSON, Nobel Laureate, Economics handedly transformed the mutual fund
Securing your fi nancial future has never seemed more “W ere I allowed to recommend only one investment volume to friends and SC business, and today, his vision continues to
diffi cult, but after reading this revised and updated family, the updated edition of Common Sense on Mutual Funds would be it— EO inspire investors.
edition of Common Sense on Mutual Funds, you will it is even better than the fi rst edition was ten years ago.” M
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become a better investor. From stock and bond funds —WILLIAM J. BERNSTEIN, author of The Investor’s Manifesto, A Splendid Exchange, M It has been over a decade since the original edition of
to global investing and index funds, this book will The Birth of Plenty, and The Four Pillars of Investing S Common Sense on Mutual Funds was fi rst published.
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help you regain your fi nancial footing and make more E While much has changed during this time, the
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informed investment decisions. “H ow do you improve upon perfection? Well, with this tenth anniversary importance of investing and the issues addressed
edition of Common Sense on Mutual Funds, the best mutual fund primer just o in the original edition of this book have not. Now,
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—DON PHILLIPS, Managing Director, Morningstar FM Common Sense on Mutual Funds, Bogle returns to
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rgen of the Vanguard Mutual Fund “ In this timely update of Common Sense on Mutual Funds, John Bogle improves NT business of investing—helping you navigate through
Fran Group and President of its Bogle on what was the fi nest book on mutual funds ever written.” U the staggering array of investment options found in
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/Corb Financial Markets Research —JANE BRYANT QUINN, fi nancial columnist and author of Smart and Simple Financial DA today’s evolving investment landscape.
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chief executive offi cer until 1996 and senior chairman “J ack Bogle cares passionately about everyday Americans—and that passion is jjjjjj the fundamentals of mutual fund investing in
until 2000. In 1999, Fortune magazine named Mr. palpable in these pages. Th is new edition of Common Sense on Mutual Funds
turbulent market environments and off ers valuable
Bogle as one of the four “Investment Giants” of the will send you marching into the fi nancial markets with a sense of mission.” Fully Updated
guidance for building an investment portfolio. Along

twentieth century; in 2004, Time named him one —JONATHAN CLEMENTS, author of The Little Book of Main Street Money
A F the way, Bogle shows you that simplicity and common
of the world’s 100 most powerful and infl uential n u 10
people; and Institutional Investor presented him with “W hen the history of modern investment management is written, John Bogle ni lly th sceonsts,e bsrtoialld ltyr udmivpe rcsiofis etldy pcoormtfpolleiox ictoy,n tainndu etsh taot bae ltohwe
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its Lifetime Achievement Award. Bogle is also the will stand out as one of its towering fi gures.” e U Anniversary Edition
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author of Enough. and Th e Little Book of Common Sense —BYRON R. WIEN, Vice Chairman, Blackstone Advisory Services sa d and will almost always outperform more expensive,
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Investing, both published by Wiley. y t actively managed mutual funds.
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“A powerful no-nonsense prescription for how individual investors should E d
Jacket Design: Paul McCarthy d 1
Jacket Image: © Getty Images structure their portfolios in the current market environment.” it 0t Th roughout these pages, Bogle skillfully presents a
—MARTIN LEIBOWITZ, Managing Director, Morgan Stanley io h JOHN C BOG LE platform for intelligent investing as he analyzes costs,
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exposes tax ineffi ciencies, and warns of the mutual
fund industry’s confl icting interests. Emphasizing
N a t i o n a l B e s t s e l l i n g A u t h o r
—continued on back flap—
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Praise for the original edition of
Common Sense on Mutual Funds
“Cogent, honest, and hard-hitting—a must-read for every investor. Bogle does the
American investor a real service by carrying on his crusade. Absolutely terrifi c,
particularly Part IV, ‘On Fund Management.’ I hope some journalists and the SEC
get energized after reading it.”
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—Warren E. Buffett
Praise for the tenth anniversary edition of
Common Sense on Mutual Funds
“Jack Bogle gave the public two magnifi cent gifts—Vanguard . . . and Common
Sense on Mutual Funds, a readily accessible guide on how to manage personal
investment portfolios. Take advantage of Jack Bogle’s gifts and pass them on to
someone you love.”
—David F. Swensen, Chief Investment Offi cer, Yale University
“We don’t know who fi rst invented the wheel. But the one and only inventor
of the fi rst index mutual fund—broadly diversifi ed and investor-friendly—was
John Bogle. If you will read only one book on canny personal investing, don’t
pick Warren Buffett’s valuable offering. Buffett cannot make you or me a Warren
Buffett. By contrast, John Bogle can help make any of us a canny investor who
minimizes wasteful turnover and unuseful selling loads. The only thing better than
Bogle’s original book is its improved revision. Bon appetit!”
— Paul A. Samuelson, Nobel Laureate, Economics;
Massachusetts Institute of Technology Professor, Emeritus;
Professor of Economics, Emeritus; Gordon Y. Billard Fellow
“Were I allowed to recommend only one investment volume to friends and fam-
ily, the updated edition of Common Sense on Mutual Funds would be it; in no other
single place can you so easily, and enjoyably, acquire the expertise and perspective
necessary to harness the vast power of the fi nancial markets. This is the book that
the investment industry doesn’t want you to read, and is even better than the fi rst
edition was 10 years ago. Read it, and your heirs will thank you.”
— William J. Bernstein, author of The Investor’s Manifesto, A Splendid
Exchange, The Birth of Plenty, and The Four Pillars of Investing
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“How do you improve upon perfection? Well, with this tenth anniversary edition
of Common Sense, the best mutual fund primer just got better. Jack Bogle’s work
clearly stands the test of time. Bogle’s refl ections and additions further underscore
his timeless insights. This book remains required reading for everyone interested
in funds.”
—Don Phillips, Managing Director, Morningstar
“In this timely update of Common Sense, John Bogle improves on what was
the fi nest book on mutual funds ever written. This new edition addresses post-
meltdown investing and helps you make your way through the zoo of fi nancial
products offered today. Bogle is one of the few to stick up for the average investor
all the time. His watchwords—‘simple’ and ‘low-cost’—are the most sophisticated
approach to investing you’ll ever fi nd.”
— Jane Bryant Quinn, fi nancial columnist and author of
Smart and Simple Financial Strategies for Busy People
“Jack Bogle cares passionately about everyday Americans—and that passion
is p alpable in these pages. This new edition of Common Sense won’t just arm
you with the investment knowledge you need. It will also inspire you to be a
better investor and send you marching into the fi nancial markets with a sense of
mission.”
—Jonathan Clements, author, The Little Book of Main Street Money
“In this latest update of his Common Sense classic, Bogle gives us a mother lode of
new research and novel insights, which he then combines with wisdom from an
amazing array of sources—including the late, great Peter L. Bernstein, the medi-
eval scholar William of Occam, the ancient Hebrew Talmud, and others—to forge
a powerful no-nonsense prescription for how individual investors should structure
their portfolios in the current market environment.”
—Martin Leibowitz, Managing Director, Morgan Stanley

“For more than half a century Jack Bogle has provided investment insights and
pioneering products that have helped both small and large investors. When the
history of modern investment management is written, he will stand out as one of
its towering fi gures.”
—Byron R. Wien, Vice Chairman, Blackstone Advisory Services
“Once again, Jack Bogle has delivered straight talk to investors, just when they
need it most. This updated edition—complete with confessional mea culpas when
called for—shows why Bogle is not only the conscience of the mutual fund busi-
ness, but its poet and prophet.”
—Tyler Mathisen, Managing Editor, CNBC Business News
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C O M M O N
S E N S E

ON
M U T U A L
F U N D S
j
Fully Updated 10th Anniversary Edition
John C. Bogle

John Wiley & Sons, Inc.
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Copyright © 2010 by John C. Bogle. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted
in any form or by any means, electronic, mechanical, photocopying, recording, scanning,
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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their
best efforts in preparing this book, they make no representations or warranties with respect
to the accuracy or completeness of the contents of this book and specifi cally disclaim any
implied warranties of merchantability or fi tness for a particular purpose. No warranty
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and strategies contained herein may not be suitable for your situation. You should consult
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Library of Congress Cataloging-in-Publication Data:
Bogle, John C.
Common sense on mutual funds / John C. Bogle.—Fully updated 10th anniversary ed.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-470-13813-7 (cloth)
1. Mutual funds. 2. Investments. I. Title.
HG4530.B633 2010
332.63'27—dc22 2009037064
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
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Dedicated to Walter L. Morgan
1898–1998
Founder of Wellington Fund, dean of the mutual fund industry,
fellow Princetonian, mentor, friend.
He gave me my fi rst break.
He remained loyal through thick and thin.
He gives me strength to carry on.

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Contents
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Foreword for the 10th Anniversary Edition ix
Foreword for the Original Edition xiii
Preface to the 10th Anniversary Edition xv
Preface to the Original Edition xix
Acknowledgments for the 10th Anniversary Edition xxvii
Acknowledgments for the Original Edition xxix
About the Author xxxi
PART I: On Investment Strategy 1
Chapter 1 On Long-Term Investing 3
Chance and the Garden
Chapter 2 On the Nature of Returns 45
Occam’s Razor
Chapter 3 On Asset Allocation 77
The Riddle of Performance Attribution
Chapter 4 On Simplicity 109
How to Come Down to Where You Ought to Be
PART II: On Investment Choices 143
Chapter 5 On Indexing 145
The Triumph of Experience over Hope
Chapter 6 On Equity Styles 191
Tick-Tack-Toe
v
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vi CONTENTS
Chapter 7 On Bonds 217
Treadmill to Oblivion?
Chapter 8 On Global Investing 251
Acres of Diamonds
Chapter 9 On Selecting Superior Funds 277
The Search for the Holy Grail
PART III: ON INVESTMENT PERFORMANCE 303
Chapter 10 On Reversion to the Mean 305
Sir Isaac Newton’s Revenge on Wall Street
Chapter 11 On Investment Relativism 329
Happiness or Misery?
Chapter 12 On Asset Size 347
Nothing Fails Like Success
Chapter 13 On Taxes 373
The Message of the Parallax
Chapter 14 On Time 401
The Fourth Dimension—Magic or Tyranny?
PART IV: ON FUND MANAGEMENT 423
Chapter 15 On Principles 425
Important Principles Must Be Infl exible

Chapter 16 On Marketing 445
The Message Is the Medium
Chapter 17 On Technology 465
To What Avail?
Chapter 18 On Directors 483
Serving Two Masters
Chapter 19 On Structure 503
The Strategic Imperative
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