Time and again, it has been proven that simple rules can help you build the most sensible of an investment portfolio and relieve your mind of the load arising from unnecessary complexity. Here are some rules that are offered by none other than John C Bogle, one of the most important persons worldwide in the financial services industry.
Who is John Bogle?
Back in 1975, the world’s first index mutual fund was started with the guiding principle of “trusteeship”. It sought to put the investor first and tilt the scales of investment rewards towards the investor. Not just that, this organisation has established the norms of running a trusteeship driven organisation.
The fund house, as would be a familiar name to you, is known as Vanguard. As of today, Vanguard is the largest no-load mutual fund in the world managing trillions of dollars for its unit holders.
I want to bring your focus on this man who built Vanguard, its founder John C. Bogle.
John Bogle has studied mutual funds in-depth since 1949, when he began his senior thesis at Princeton University before joining the industry in 1951. He was named as one of America’s four financial “giants of the twentieth century” by Fortune magazine.
He is a prolific author and has penned his wisdom on investing in books such as Common Sense on Mutual Funds – New Imperatives for the Intelligent Investor.
Mr Bogle is a hard-core believer in indexing or buying index funds. In his findings (supported by data), a broad market index fund will almost always beat an actively managed fund. This will primarily be a function of the costs that are loaded onto actively managed funds. He outlines his approach very logically in his book Common Sense on Mutual Funds.
However, for those who would still go the other way and choose actively managed funds, he has shared 8 rules to build a mutual fund portfolio. These rules are based on the same strategies that help index funds to succeed.
While the rules have been explained in great detail in his book Common Sense on Mutual Funds, in this post I bring to you the essence of these 8 rules.
While the context of these rules is in the US, I believe they would apply to any sensible investor building a portfolio to meet long-term financial goals.
All the 8 rules are listed below. To read a detailed explanation as also the India mutual fund context, you may want to download the full guide.
Here we go.
John Bogle’s 8 Rules to build a Mutual Fund Portfolio
Rule 1: Select Low Cost Funds
When it comes to costs, Mr Bogle is considered a “fringe fanatic”. He simply says “Costs matter”. So much so, that out of this 8 rules he has made this Rule No. 1.
Rule 2: Consider Carefully the Added Costs of Advice
What Mr Bogle points out that you have to carefully consider the cost of the advice that you are taking. After all that is a cost that can impact your returns too.
Rule 3: Do not overrate past fund performance
“…the first element that catches the eye of most investors, whether experienced or novice: the funds’s past track record.” Mr Bogle nails it with this one statement.
Past performance does indeed catch the fancy of every single investor including you and me. This famous line from an auto company advertisement sums it all “kitna degi“.
Rule 4: Use past performance to determine consistency and risk
Now, not all is that bad about past performance. “The intelligent investor“can use the past performance to determine consistency of performance and to know the risk that the fund took to achieve that performance.
Mr Bogle says “look for consistency – it is a virtue of a mutual fund.”
Rule 5: Beware of Stars
Here Mr Bogle refers to the “star fund managers”.
The problem, as pointed out by Mr Bogle, with Star Managers is two-fold. One, no one can tell in advance who the star is going to be. Two, Star Managers never stay in the same organisation, except a few.
Rule 6: Beware of Asset Size
Mr Bogle has 2 very simple things to say on this. “Avoid large fund organisations that:
- have no history of closing funds-that is, terminating the offering of their shares-to new investors, or
- seem willing to let their funds grow, irrespective of their investment goals, to seemingly infinite size, beyond their power to differentiate their investment results from the crowd.”
Unfortunately, in India, such instances where funds have closed new subscriptions or returned investor money are rare.
Rule 7: Don’t own too many funds
“I truly believe that it is generally unnecessary to go much beyond four or five equity funds” is the sage advice from Mr Bogle. I am sure you have heard that before too.
Rule 8: Buy your fund portfolio – and hold it
Let’s understand one thing – mutual funds are not stocks.
Mr Bogle’s advice is, “When you have identified your long-term objectives, defined your tolerance for risk, and carefully selected….funds that meet your goals, stay the course. Hold tight.”
You should not miss out reading the detailed notes on these 8 points, specially with reference to the Indian context, in the eBook “John Bogle on How to build a winning mutual fund portfolio.”