Jack Bogle, the founder of Vanguard, was a pioneer of mutual funds. His advice inspired a large community of investors. In his book, The Little Book of Common Sense Investing, he shows the path to making sound investments in the stock market.
Stock market investment returns are based on three categories:
- Dividends
- Earnings growth
- Differences in price-earnings ratios
Mutual funds that track an index like the S&P 500 (five hundred large companies on the stock exchanges in the U.S.) provide broad exposure to the stock market. Certain sectors may provide better performance in a given time period based on consumer behavior and other factors that can be difficult to predict. Lucky fund managers will most likely revert to the mean. “Past performance is not a guarantee of future results” is not just a disclaimer in small text - it’s the truth!
The long-term investor does not take unnecessary risks in speculation. Studies show that it is extremely difficult to beat the market. Low-cost index funds provide the best option for minimizing costs and assuring that you receive a fair return. I prefer Vanguard. The $VFIAX mutual fund has a 0.04% expense ratio and a turnover of 4%. This compares favorably to other funds that are more actively managed such as $PREIX from T. Rowe Price which has a 0.21% expense ratio (over 5x Vanguard’s!) and turnover of 7%.
“Don’t look for the needle in the haystack. Just buy the haystack!”
— John C. Bogle
Another way to mitigate risk when investing in the stock market is to not try to time the market. This can be accomplished with dollar cost averaging - periodic investments of a fixed dollar amount. Stay the course. The noise from the speculators can be deafening during a volatile market but the long-term investor is disciplined.