Introduction to the 10th Anniversary Edition xvChapter OneA Parable 1Chapter TwoRational Exuberance 9Chapter ThreeCast Your Lot with Business 25Chapter FourHow Most Investors Turn a Winner’s Gameinto a Loser’s Game 39 XII C O NTENT SChapter FiveFocus on the Lowest-Cost Funds 53Chapter SixDividends Are the Investor’s (Best?) Friend 65Chapter SevenThe Grand Illusion 73Chapter EightTaxes Are Costs, Too 85Chapter NineWhen the Good Times No Longer Roll 93Chapter TenSelecting Long-Term Winners 111Chapter Eleven“Reversion to the Mean” 127Chapter TwelveSeeking Advice to Select Funds? 139C O NTENTS XIIIChapter ThirteenProfit from the Majesty of Simplicity andParsimony 153Chapter FourteenBond Funds 167Chapter FifteenThe Exchange-Traded Fund (ETF) 179Chapter SixteenIndex Funds That Promise to Beat the Market 195Chapter SeventeenWhat Would Benjamin Graham HaveThought about Indexing? 209Chapter EighteenAsset Allocation I: Stocks and Bonds 223Chapter NineteenAsset Allocation II 237 XIV C ONTENT SChapter TwentyInvestment Advice That Meets theTest of Time
The haystack, of course, is the entire stock market portfolio, readily available through a low-cost index fund. The return of a low-cost index fund would have roughly matched or exceeded the returns of 345 of the 355 funds that began the 46-year competition described earlier in this chapter64 of the 74 funds that survived the long period, plus the 281 funds that failed. I see no reason that such a broad market fund tracking the Standard & Poors 500 Index cannot achieve a roughly commensurate achievement in the years to comenot through any legerdemain, but merely through the relentless rules of arithmetic that you now must know so well. Indexing for a lifetime. Two major options: Investing in 30 or 40 active funds and managers, or in one index fund with one non-manager. Look at it this way: If youre investing for a lifetime, you have two basic options. You can select (as is typical) S E L E C T I N G L O N G T E R M W I N N E R S
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Result: Youll own maybe 30 or 40 funds over your lifetime, each carrying that burden of fees and turnover costs. Or (no surprise here) you can invest in a low-fee, minimal-transaction-cost, broad-market index fund, with the certainty that the same non-manager will still closely track its index for the rest of your life. There is really no practicable way that a portfolio of actively managed funds will serve you more effectively and consistently than the index fund. Simplicity, cost efficiency, and staying the course should win the race. If you decide against indexing . . .
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We know that the index fund will deliver substantially all of the stock markets return. As to the actively managed fund, we know that fund manager changes will inevitably be forthcoming. We know that many of the funds (and, alas, many of their managers) will die. We know that successful funds will draw capital in amounts that are likely 1 2 3 1 2 4 T H E L I T T L E B O O K O F C O M M O N S E N S E I N V E S T I N G to jeopardize their future success. And we accept our inability to be certain how much of a funds performance is based on luck and how much on skill. In fund performance, the past is rarely prologue. There is simply no systematic way to assure success by picking the funds that will beat the market, even by looking (perhaps especially by looking) to their past performance over the long term. It is like, yes, looking for a needle in a haystack, and with no better odds for finding one.
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Dont Take My Word for It Consider the words of Warren Buffett in his 2013 letter to Berkshire Hathaway shareholders as he describes the instructions in his will for managing his wifes trust. Rather than selecting an actively managed mutual fund with a superior record, he directed the trustees to invest 90 percent of the assets in the trust in a very low-cost S&P 500 index fund. (I suggest Vanguards.) It is reasonable to assume that Mr. Buffett considered looking for the needle. But he finally decided to buy the haystack.
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