Book Review: Common Sense on Mutual Funds

Today I’m reviewing the book Common Sense on Mutual Funds by John Bogle (see my other book reviews). You can browse the book’s table of contents through Amazon reader.

John Bogle (Wikipedia bio) is the founder of The Vanguard Group, winner of TFB Award for Best Mutual Fund Company. I have the highest respect for Mr. Bogle for his innovation and altruism. Instead of making Vanguard a for-profit entity, which would’ve reaped billions of dollars for himself, Mr. Bogle gave the company to the fund investors, the general public, and only took compensation as an employee.

The book is divided in five parts:

  1. On Investment Strategy
  2. On Investment Choices
  3. On Investment Performance
  4. On Fund Management
  5. On Spirit

The chapters are organized like a series of essays, each addressing a specific question. Because Vanguard, the company John Bogle founded, is best known for its low cost index funds, naturally the book advocates investing in low cost index fund. I think it made a compelling case, using many tables and charts throughout the book. I’m an index fund convert myself. This book, and my personal experience investing in actively managed mutual funds that charged too much and delivered too little, made me change the way I invested my money. Whenever possible, I invest my money only in index funds.

However, this book is not for the beginners. It lacks introductory context if the reader doesn’t know much about mutual funds at all. The heavy use of tables and charts can be overwhelming. The books in the Basics category on my Recommended Reading List do a better job for beginners. If you already understand the basics, but you are not investing in index funds yet, this is a good book for you.

The only thing I don’t agree with what Mr. Bogle wrote in the book is on international diversification. The book says that because many large U.S. companies are global companies which derive a large share of their revenue from other countries, it isn’t necessary to invest in international funds but it’s OK if one invests up to 20% of the stock allocation internationally. I think international diversification is very important. Japan is a perfect example. Although top Japanese companies (Toyota, Sony, etc.) are global companies, if a Japanese investor only invested in Japan, their returns would’ve been dismal in 17 years from 1990 to now. In a recent column on the Wall Street Journal, Jonathan Clements reported that Mr. Bogle also changed his view on this point. He now recommends that people invest in both U.S. domestic funds and international funds.

Rating: **** (Good).

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  1. EasyChange says

    I had a question after reading this book quite recently. I posted the mutual fund transfer question on my blog and over at Free Money Finance. What do you think is the correct move in light of Mr. Bogle’s book?

  2. Harry Sit says

    FMF gave a good answer and I agree. This sums it up well:

    Performance comes and goes. Expenses are forever.

    Front end load is a sunk cost. So forget about that. Ongoing expenses are going to stay. If a high cost fund had high enough returns to compensate for its high expenses, count yourself lucky. You luck may not run forever, but the high expenses will. You also have to look at how the high cost fund had high returns. Perhaps it took high risk. You are better off with a low expense fund with lower risk and the same return.

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