The Little Book of Common Sense Investing Review
Welcome to my review of "The Little Book of Common Sense Investing." In this review, I'll explore the key ideas presented in the book, which offers valuable insights into how to make smart investment choices. Whether you're new to investing or looking to refine your investment strategy, this book provides practical advice in a straightforward manner. So, let's dive in and discover how common sense can help you make better decisions when it comes to managing your money.
Actively Managed Funds Are Inefficient
Actively managed funds are often expensive and tend to underperform the market. Many investors choose these funds to avoid directly investing in individual stocks. These funds pool money from multiple investors and are managed by experts who adjust the stock portfolio regularly. However, the high costs associated with actively managed funds, including brokerage commissions and fund manager fees, significantly eat into potential profits. Over the long term, actively managed funds typically yield less profit than passive, low-cost index funds that track the overall market.
This is due to the inability of active funds to consistently outperform the market and the added burden of fees. When comparing the returns of an active fund and an index fund, fees alone can lead to a substantial difference in profits. For example, by 2005, a $10,000 investment in an active fund in 1980 would result in 70 percent less return compared to an index fund.
Moreover, most funds fail to generate significant returns or go bankrupt over time. Despite the high fees investors pay, only a small fraction of mutual funds consistently outperform the market and remain in business. Even profitable funds can't guarantee future success:
The track record of a fund over the past few decades may not reflect its future performance, as factors contributing to its success may no longer be present.
Fund managers eventually retire, and their successors might not replicate their success.
Future investment opportunities will differ from those in the past, making it difficult to predict a fund's performance accurately.
Index Funds Are The Solution
The majority of your assets should be invested in safe, low-cost index funds. Index funds are a superior alternative to actively managed funds, mainly due to their cost-efficiency. Index funds hold diversified portfolios reflecting the financial market or specific market sectors. Unlike actively managed funds, they don't make short-term bets and minimize operating costs by holding portfolios indefinitely. Index funds, also known as passive funds, track the performance of all stocks in the index without betting on individual stocks. This approach eliminates fees for buying and selling shares, financial consultants, or fund management while delivering commercial net returns. Index funds tend to outperform actively managed funds in the long term by offering returns at the real value of stocks and eliminating active management costs.
Choosing The Cheapest Index Fund is Crucial.
Each index fund has an expense ratio representing management fees and operating expenses, typically less than one percent. Over longer investment periods, even small expense differences can add up significantly. For example, the Fidelity Spartan Index fund has a low annual expense ratio of 0.007 percent, while the J.P. Morgan Index fund's ratio is 0.53 percent. It's essential to select the fund with the lowest cost structure, as an expense ratio doesn't necessarily correlate with performance.
Caution When Considering New Investing Trends.
The competition among index funds has led to a continuous cycle of new trends and offerings. While index funds were introduced in 1975, there are now 578 competing index funds.
Established funds aim to attract investors by reducing costs, while new entrants promise larger rewards through novel stock-picking methods, often charging higher fees. Some new trends involve unconventional portfolio construction methods, such as using company earnings or dividends to determine stock proportions. Regardless of a fund's claims, it remains nearly impossible to reliably identify overvalued or undervalued stocks.
Therefore, it's advisable to stick with funds that maintain a standard portfolio.
As the success of new investment trends is unpredictable, prioritizing low costs remains a prudent strategy for investors.
The Little Book of Common Sense Investing Review Vote
I recently read "The Little Book of Common Sense Investing" again, and it's an excellent resource for new investors, especially those interested in Exchange-Traded Funds (ETFs).
The book's straightforward approach simplifies complex investment concepts, making it accessible to anyone. It emphasizes the value of low-cost index funds and highlights the drawbacks of actively managed ones. This advice is particularly valuable for new investors, steering them away from costly underperforming funds.
One standout piece of advice is choosing the cheapest index fund, which can significantly impact long-term returns. The book also cautions against following the latest investment trends, emphasizing the importance of time-tested strategies.
In short, this book is an essential guide for new ETF investors, offering practical, common-sense advice for making informed investment decisions. It has certainly empowered me to invest more wisely in ETFs.
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