Monday, November 17, 2014

Employing the KISS Method of Saving and Investing ... Sage Advice from Legendary Index Fund Proponent and Vanguard Founder Jack Bogle

For the majority of individuals, investing for the long haul should be inexpensive, boring and simple. And for those individual savers and investors who set aside money consistently to invest in their long term financial security, low cost passively 'managed' index funds definitely provide the best and easiest route to long term financial independence and security. Besides, why make something hard that could be easy?

{NOTE: Although I'm no longer an index investor myself, I invested in the S&P 500 index for many years. I now am a DIY investor and own a diversified portfolio of individual blue chip stocks. And if you're interested in what my crystal ball is saying, things continue to look good for stocks into next year and well beyond that. At least that's the way I see it. But since all predictions are dangerous, and especially those about the stock market's future, let's now return to the 'down to earth' and more mundane and relevant topic of stock market investing by individuals. In other words, that's enough of my 'dangerous' predictions for now.}

Sticking to what I do know instead of what I am predicting, here's the deal. I firmly believe that a low cost passive simple indexing approach works best for the vast majority of individual investors. So unless you have the time or expertise to engage in DIY investing, stick with the low cost index funds for the long haul. You'll outperform a high percentage of the so-called professionals, and you won't have to pay high fees and expenses along the way to long term success.

Jack Bogle's advice to worried investors: Shut your eyes and let the indexes work offers straightforward advice which if followed will perform wonders for the average investor's long term financial health and well being:

"Jack Bogle has some advice on how to tackle what’s about to happen next: Close your eyes.

Bogle, the founder of the Vanguard Group, the world’s largest investment company, and patron saint of low-cost, long-term index investing, has not changed his tune in the 40-plus years since he started the company. . . .

{In a recent interview about smart individual investing here's a sampling of Bogle's solid thinking.}

On markets:

“What’s going on in the market is domination of short-term speculation over long-term investment,” he said. “Long-term investors simply are not affected by the comings and goings of the market ....

“As I have said before, the daily machinations of the stock market are like a tale told by an idiot, full of sound and fury, signifying nothing,” Bogle added. “One of my favorite rules is ‘Don’t peek.’

Don’t let all the noise drown out your common sense and your wisdom. Just try not to pay that much attention, because it will have no effect whatsoever, categorically, on your lifetime investment returns.”

On why investors should ignore the noise and just aim for the index return over a lifetime:

“Returns are created not by the stock market, they are created by U.S. business, our corporations,” he explained. “The formula I use for that is today’s dividend yield, which is around 2%, and the subsequent earnings growth which could be around 5% — we’re not sure but that’s probably not a bad guess — and that’s a 7% nominal rate of return on stock in terms of fundamentals.

“If you go back and look at the history of American business over the last century, you will find the [price/earnings] effect of stocks is zero. All of the returns are created as investment returns, dividend yields and earnings growth, and p/e effect — the speculative return — goes up and goes down and goes up and down for 100 years and ends up just where it started.

“So try to ignore these machinations and stick with getting the underlying returns that provide stocks as good investments,” Bogle said.

On how many experts have declared indexing the winner over active management: . . .

Over the long run [indexing] should beat the competition by 150 to 200 [1.5% to 2.0%],” Bogle said."

{NOTE: Although 2% may not seem like much, please remember the rule of 72 which holds that a 2% annual rate of return difference over 36 years will result in the average indexer having roughly twice as much as the owner of an actively managed account.}

Summing Up

Individual investing isn't a game for 'cowboys.'

It's a serious endeavor for those interested in long term financial security.

Consistently saving and investing those savings in a basket of blue chip dividend growing stocks or in a low cost S&P 500 index fund are great ways to build a nest egg and achieve financial independence over time.

Let's not make investing for the long haul complicated. Invest with patience in good companies for the long haul, and don't pay the so-called 'experts' much to try to match the market. Besides, most of them can't do it.

That's my take.

Thanks. Bob.

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