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Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition

Book Description

John C. Bogle shares his extensive insights on investing in mutual funds

Since the first edition of Common Sense on Mutual Funds was published in 1999, much has changed, and no one is more aware of this than mutual fund pioneer John Bogle. Now, in this completely updated Second Edition, Bogle returns to take another critical look at the mutual fund industry and help investors navigate their way through the staggering array of investment alternatives that are available to them.

Written in a straightforward and accessible style, this reliable resource examines the fundamentals of mutual fund investing in today's turbulent market environment and offers timeless advice in building an investment portfolio. Along the way, Bogle shows you how simplicity and common sense invariably trump costly complexity, and how a low cost, broadly diversified portfolio is virtually assured of outperforming the vast majority of Wall Street professionals over the long-term.

  • Written by respected mutual fund industry legend John C. Bogle

  • Discusses the timeless fundamentals of investing that apply in any type of market

  • Reflects on the structural and regulatory changes in the mutual fund industry

  • Other titles by Bogle: The Little Book of Common Sense Investing and Enough.

Securing your financial future has never seemed more difficult, but you'll be a better investor for having read the Second Edition of Common Sense on Mutual Funds.

Table of Contents

  1. Copyright
  2. Foreword for the 10th Anniversary Edition
  3. Foreword for the Original Edition
  4. Preface to the 10th Anniversary Edition
  5. Preface to the Original Edition
    1. "Common Sense" Defined
    2. A Five-Part Approach
    3. Common Sense Redux
    4. Principles and Practices
  6. Acknowledgments for the 10th Anniversary Edition
  7. Acknowledgments for the Original Edition
  8. About the Author
  9. I. ON INVESTMENT STRATEGY
    1. 1. On Long-Term Investing: Chance and the Garden
      1. 1.1. Chance, the Garden, and Long-Term Investing
      2. 1.2. How Has Our Garden Grown?
      3. 1.3. Stock Market Returns
        1. 1.3.1. Stock Market Risk
      4. 1.4. Bond Market Returns
        1. 1.4.1. Bond Market Risk
      5. 1.5. Planting Seeds for Growth
      6. 1.6. The Financial Markets Are Not for Sale
        1. 1.6.1. The Pie Theory
      7. 1.7. Practice Departs from Principle
        1. 1.7.1. Market Timing in the Press—"The Death of Equities"
        2. 1.7.2. Market Timing by Mutual Fund Investors
        3. 1.7.3. Fund Shareholders Become Short-Term Investors . . .
        4. 1.7.4. . . . Following the Example of Fund Managers
        5. 1.7.5. Understanding the Economics of Investing
      8. 1.8. Simple Principles for Long-Term Success
    2. 2. On the Nature of Returns: Occam's Razor
      1. 2.1. Occam's Razor and the Stock Market
        1. 2.1.1. Enter Occam's Razor
        2. 2.1.2. Investment and Speculation
        3. 2.1.3. The Fruits of Knowledge
        4. 2.1.4. From the Past to the Future
        5. 2.1.5. Honing the Razor
        6. 2.1.6. Occam in Action
        7. 2.1.7. The Envelope, Please
        8. 2.1.8. What Happened after 1994?
      2. 2.2. Occam's Razor and the Bond Market
      3. 2.3. Precision and Perversity
        1. 2.3.1. Stock Returns in the Coming Decade
        2. 2.3.2. Bond Returns in the Coming Decade
        3. 2.3.3. Back to the Future
      4. 2.4. How Important Is It to Forecast Future Returns?
    3. 3. On Asset Allocation: The Riddle of Performance Attribution
      1. 3.1. From the Talmud to Modern Portfolio Theory
      2. 3.2. Risk to the Fore
        1. 3.2.1. Risk through the Seasons
      3. 3.3. Benefiting from Balance
        1. 3.3.1. Striking Your Own Balance
        2. 3.3.2. Fine-Tuning Your Balance
      4. 3.4. A Third Dimension
        1. 3.4.1. Financial Scripture
        2. 3.4.2. How Costs Change the Perspective
        3. 3.4.3. Low Costs Magnify Fund Returns
      5. 3.5. Three Perspectives on the Impact of Cost
        1. 3.5.1. And a Fourth Perspective
        2. 3.5.2. Asset Allocation and Cost
      6. 3.6. Is It Cost or Asset Allocation?
    4. 4. On Simplicity: How to Come Down to Where You Ought to Be
      1. 4.1. When All Else Fails, Fall Back on Simplicity
      2. 4.2. Simplicity in Your Stock Portfolio
        1. 4.2.1. If You Decide Not to Index . . .
      3. 4.3. Rule 1: Select Low-Cost Funds
      4. 4.4. Rule 2: Consider Carefully the Added Costs of Advice
      5. 4.5. Rule 3: Do Not Overrate Past Fund Performance
      6. 4.6. Rule 4: Use Past Performance to Determine Consistency and Risk
      7. 4.7. Rule 5: Beware of Stars
      8. 4.8. Rule 6: Beware of Asset Size
      9. 4.9. Rule 7: Don't Own Too Many Funds
      10. 4.10. Rule 8: Buy Your Fund Portfolio—and Hold It
      11. 4.11. The Paradigm of Simplicity
  10. II. ON INVESTMENT CHOICES
    1. 5. On Indexing: The Triumph of Experience over Hope
      1. 5.1. Indexing Is a Long-Term Strategy
      2. 5.2. The S&P 500 Index Is Not the Market
      3. 5.3. Indexing Wins Largely Because of Cost
      4. 5.4. The Index Fund Is Much Better Than It Appears
        1. 5.4.1. Sales Charges
        2. 5.4.2. Survivor Bias
        3. 5.4.3. Tax Efficiency
      5. 5.5. The Thorny Issue of Risk
      6. 5.6. All Index Funds Are Not Created Equal
      7. 5.7. Indexing Works in All Markets
      8. 5.8. The Triumph of Indexing
    2. 6. On Equity Styles: Tick-Tack-Toe
      1. 6.1. Enter Tick-Tack-Toe
      2. 6.2. Comparing Apples to Apples
      3. 6.3. Equity Funds—Risks, Returns, and Costs
        1. 6.3.1. Index Funds—Risks, Returns, and Costs
      4. 6.4. God, Pascal, and War Games
    3. 7. On Bonds: Treadmill to Oblivion?
      1. 7.1. Misery Loves Company
      2. 7.2. A Flagrant Example
      3. 7.3. How Much Does Cost Matter?
        1. 7.3.1. Long-Term Municipal Bonds
        2. 7.3.2. Short-Term U.S. Government Bond Funds
        3. 7.3.3. Intermediate-Term U.S. Government and GNMA Funds
        4. 7.3.4. Intermediate-Term Corporate Bond Funds
      4. 7.4. What about Management Skill?
      5. 7.5. Sales Charges Exacerbate the Cost Issue
        1. 7.5.1. Fee Dollars Are Real Money
      6. 7.6. How to Avoid Excessive Costs
    4. 8. On Global Investing: Acres of Diamonds
      1. 8.1. The Global Portfolio Extreme
      2. 8.2. Currency Risk—and Returns
      3. 8.3. The Global Efficient Frontier
      4. 8.4. International Economies and Financial Markets
      5. 8.5. The Record of Global Investors
      6. 8.6. Constructing Your Own Global Portfolio
      7. 8.7. Indexing in International Markets—A Better Way?
        1. 8.7.1. Yes, No, and Maybe
      8. 8.8. The Accidental Tourist
      9. 8.9. "Acres of Diamonds" Revisited
    5. 9. On Selecting Superior Funds: The Search for the Holy Grail
      1. 9.1. The Equity Fund Record
      2. 9.2. Enter the Index Fund
      3. 9.3. The Index Fund Elicits a New Industry Mantra
      4. 9.4. Selecting Winning Funds—An Academic Activity
        1. 9.4.1. The Sharpe Study
        2. 9.4.2. The Carhart Study
        3. 9.4.3. The Goetzmann-Ibbotson Study
      5. 9.5. Funds That Have Beaten the Market—The Disappointing Reality
      6. 9.6. The Investment Advisers Who Select Funds—Another Disappointment
      7. 9.7. Returns of Funds of Funds—Yet Another Disappointment
        1. 9.7.1. A Caveat
      8. 9.8. No Holy Grail Here—Academic or Pragmatic
  11. III. ON INVESTMENT PERFORMANCE
    1. 10. On Reversion to the Mean: Sir Isaac Newton's Revenge on Wall Street
      1. 10.1. Mutual Fund Champions Come Down to Earth
      2. 10.2. Gravity and Stock Market Sectors
        1. 10.2.1. Growth Stocks versus Value Stocks
        2. 10.2.2. High-Grade Stocks versus Low-Priced Stocks
        3. 10.2.3. Large-Cap Stocks versus Small-Cap Stocks
        4. 10.2.4. U.S. Stocks versus International Stocks
        5. 10.2.5. Back to Sir Isaac Newton
      3. 10.3. Common Stocks Return to Earth, Too
        1. 10.3.1. Lord Keynes Redux
        2. 10.3.2. A New, Higher Mean?
      4. 10.4. Investing to Cope with the Force of Gravity
      5. 10.5. The Crown Jewels
    2. 11. On Investment Relativism: Happiness or Misery?
      1. 11.1. A Powerful Bogey
      2. 11.2. The Rise of Closet Indexing
      3. 11.3. The Index Fund: Villain of the Piece?
      4. 11.4. We're All Quants Now
      5. 11.5. Measuring Managers—Where Does Your Manager Stand?
      6. 11.6. "If You Can't Beat 'Em, Join 'Em"
        1. 11.6.1. Dickens Returns
    3. 12. On Asset Size: Nothing Fails Like Success
      1. 12.1. Isn't Bigger Better?
      2. 12.2. Size and Fund Investment Returns
      3. 12.3. Real Size, Real Problems
        1. 12.3.1. Measuring a Fund's Real Size
      4. 12.4. What's Size Got to Do with It?
        1. 12.4.1. A Shrinking Universe
        2. 12.4.2. Higher Transaction Costs
        3. 12.4.3. The Triumph of Process over Judgment
      5. 12.5. Nothing Does Succeed Like Success—for Fund Managers
      6. 12.6. To Dream the Impossible Dream
      7. 12.7. You Can Make the Dream a Reality
    4. 13. On Taxes: The Message of the Parallax
      1. 13.1. Taxes—The Industry's Black Sheep
        1. 13.1.1. The Remarkable Value of Tax Deferral
      2. 13.2. Alpha Takes Another Hit ... from Taxes
      3. 13.3. Fund Portfolio Turnover Soars
      4. 13.4. Fund Manager Turnover Doesn't Help
      5. 13.5. A Good Solution: The Index Fund
        1. 13.5.1. Results Confirmed
      6. 13.6. A Better Solution: The Tax-Managed Fund
      7. 13.7. A New Idea, Sixty Years Old
        1. 13.7.1. Nothing New under the Sun
      8. 13.8. Tax Strategies
      9. 13.9. The Parallax View
    5. 14. On Time: The Fourth Dimension—Magic or Tyranny?
      1. 14.1. Reward—The First Dimension
      2. 14.2. Risk—The Second Dimension
      3. 14.3. Cost—The Third Dimension
      4. 14.4. Time—The Fourth Dimension
        1. 14.4.1. Time and Reward—The Magic of Compounding
        2. 14.4.2. Time and Risk—The Moderation of Compounding
        3. 14.4.3. Time and Cost—The Tyranny of Compounding
      5. 14.5. The Dimensional Imperative
  12. IV. ON FUND MANAGEMENT
    1. 15. On Principles: Important Principles Must Be Inflexible
      1. 15.1. Distribution Drives the Industry
      2. 15.2. Management versus Distribution
      3. 15.3. Information That Can Make a Difference in Your Fund Investments
        1. 15.3.1. Cost Information
        2. 15.3.2. Fee Waiver Information
        3. 15.3.3. Performance Information
        4. 15.3.4. Proxy Voting Information
        5. 15.3.5. Information about Alternative Investment Strategies
        6. 15.3.6. Investment Guidance Information
      4. 15.4. Esperanto-Type Cranks
    2. 16. On Marketing: The Message Is the Medium
      1. 16.1. Your Money Is No Object
        1. 16.1.1. Pandora's Box Is Opened
        2. 16.1.2. The Croupier's Take
      2. 16.2. 12b-1 Fees—Full Disclosure
      3. 16.3. Hawking Products, Hiding Risk
      4. 16.4. Owners versus Customers?
        1. 16.4.1. An Investment Firm or a Marketing Firm?
      5. 16.5. The True Business—Gathering Assets
    3. 17. On Technology: To What Avail?
      1. 17.1. Investment Technology—Bigger, Quicker, and More Complex
      2. 17.2. Information Technology—Information versus Wisdom
      3. 17.3. Transaction Technology—Switch When the Iron Is Hot
      4. 17.4. The Report Card
      5. 17.5. The Pervasive Impact of Technology
    4. 18. On Directors: Serving Two Masters
      1. 18.1. The Levers of Control
      2. 18.2. The Consequences of Control
      3. 18.3. What the Law Says
      4. 18.4. An Alternative Structure
      5. 18.5. Legal Action Coming?
      6. 18.6. Congress and the SEC
      7. 18.7. Summing Up
    5. 19. On Structure: The Strategic Imperative
      1. 19.1. Contrasting Ownership Structures
      2. 19.2. History in the Making
      3. 19.3. Strategy Follows Structure
        1. 19.3.1. Profit Strategy
        2. 19.3.2. Pricing Strategy
        3. 19.3.3. Service Strategy
        4. 19.3.4. Risk Management Strategy
        5. 19.3.5. Product Strategy
        6. 19.3.6. Indexing Strategy
        7. 19.3.7. Marketing Strategy
      4. 19.4. Looking to the Future
      5. 19.5. The Information Age to the Rescue
      6. 19.6. Revision or Restructuring?
        1. 19.6.1. Enhancing Economic Value
  13. V. ON SPIRIT
    1. 20. On Entrepreneurship: The Joy of Creating
      1. 20.1. I Meet a True Entrepreneur
      2. 20.2. A Merger, a Firing, an Idea
      3. 20.3. Steps and Stumbles
      4. 20.4. Schumpeter Describes the Entrepreneur
      5. 20.5. A Slice of the World in Context
    2. 21. On Leadership: A Sense of Purpose
      1. 21.1. The Majesty of Simplicity
      2. 21.2. A Fortuitous History
      3. 21.3. Readiness and Foresight, Purpose and Passion
      4. 21.4. Servant Leadership
      5. 21.5. Failure and Determination
      6. 21.6. Patience and Courage
      7. 21.7. Fate Takes a Hand
    3. 22. On Human Beings: Clients and Crew
      1. 22.1. The Investor as Human Being
      2. 22.2. Shareholders Respond
      3. 22.3. The Vanguard Crew
      4. 22.4. The Award for Excellence: Even One Person Can Make a Difference
      5. 22.5. Partnership: Sharing the Fruits of Our Labors
      6. 22.6. The Golden Rule
  14. Afterword
  15. I. Some Thoughts about the Current Stock Market as 2010 Begins
    1. I.1. Looking Ahead
    2. I.2. Future Investment Return
    3. I.3. Future Speculative Return
    4. I.4. Compared to What?
  16. II. Some Thoughts about the Current Stock Market as 1999 Begins
    1. II.1. Fairly Valued at 100 Times Earnings?
    2. II.2. Glassman-Hassett, Siegel, and Occam
  17. Notes
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 7
    6. Chapter 8
    7. Chapter 9
    8. Chapter 10
    9. Chapter 11
    10. Chapter 12
    11. Chapter 13
    12. Chapter 14
    13. Chapter 15
    14. Chapter 16
    15. Chapter 17
    16. Chapter 18
    17. Chapter 19
    18. Chapter 20
    19. Chapter 21
    20. Appendix I
    21. Appendix II