The Little Book of Common Sense Investing – Book Review
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Since I started to pay closer attention to my finance, I have read a few books about investing and finance. I will review them on this blog. I explain what the book is about and also what I liked about the book. And of course, what I did not like about it.
The first book I have read is “The little book of Common Sense Investing”, by John C. Bogle. It is coming from the founder and former CEO of the Vanguard Mutual Fund Group. John Bogle is a great man and the creator of the first index fund. A lot of people in the Bogleheads community are recommending this book, so I decided to give it a try.
The Little Book of Common Sense Investing
The idea of The Little Book of Common Sense Investing is simple: You should only invest in low-cost, no-load, mutual funds that replicate the entire market (index funds) and you should buy-and-hold these funds for as long as you do not need the underlying money (no market timing).
Most of the chapters are showing, using strong facts, that most active funds cannot beat the market. Therefore, index funds are better for indexing. In the long-term, your returns will be the same as those of the market.
Moreover, the costs of passive index funds are generally significantly lower than active funds. The costs of the funds are one of the few things you have control over. Therefore you should always reduce them. Investing fees have a significant effect on your returns in the long term.
The author advises mutual funds over Exchange Traded Funds (ETFs). However, the author states that ETFs are an excellent alternative as long-term as long as you do not trade them but buy them and hold them.
What I liked
The Little Book of Common Sense Investing is a good book, with a sound basis. Everything is well supported by evidence with graphs and plots. Moreover, this book is quite well written. The style is simple and easy to read. The organization of the book is also quite good.
Plus, I agree with the message of the book. Index investing is key. And this is well supported over the entire book. Since we cannot beat the market, we should prefer funds with low-cost. Using low-cost funds also makes a lot of sense.
And diversification is essential. You do not want to have all your eggs in the same basket. If you are invested in the global market, you will not be impacted too much if one market crashes. Diversification is excellent protection against local events.
What I did not like
As with almost everything, this book is not perfect.
The main flaw of this book for me is that it insists upon itself. Nearly every chapter is merely showing that index investing beats active investing. If the first two chapters convinced you, the next seven or eight chapters will be pretty boring. Yes, the message is great. But this could have been much shorter.
Another thing that is lacking in this book is the lack of real practical advice. For instance, it should go into much more details on how much bonds you should have. Or how much you should allocate to international stocks. Of course, there is no one size fits all solution to investing. But some practical advice would have been great.
Finally, it is very focused on the United States. Several things would not be applicable to foreigners. Retirement accounts are very different from country to country. Also, bonds are of varying quality from country to country. Currently, United States bonds are quite good. But Swiss Bonds have negative returns.
Summary
Let’s review the main points of The Little Book of Common Sense Investing:
- Prefer passive index funds rather than active funds
- Use index funds that replicate the entire stock market or the entire bond portfolio
- Choose the funds with the lowest costs (no-load, low TER)
- Buy and hold for long-term
- Do not time the market
- You can use ETFs but not trade them (buy-and-hold)
- Minimize taxes
Conclusion
Overall, The Little Book of Common Sense Investing is good. If you already think that passive index funds are better than active funds or stock selection, then you probably will not learn anything new in this book. If you prefer active funds or prefer to hold individual stocks, you should probably read this book to get a different point of view.
On the other hand, it lacks practical advice on exactly how to perform this strategy. By the end of the book, you will know that you should use index investing. However, you will not know how to invest in practice. But there are other books that are more practical.
If you are interested, you can buy the book on Amazon: The Little Book of Common Sense Investing. If you want to read more about investing, you can take a look at the best personal finance books I have read.
I have written an entire article about John Bogle if you want to know more about this great man.
If you have already read The Little Book of Common Sense Investing, I would be glad to hear your point of view. Also, if you have more recommendations for books!
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