Recapping John Bogle’s Common Sense on Mutual Funds

bogle vanguard history

If you’ve been following along, earlier this year my dad issued a challenge for me to start reading investment books. You can read my recap of book #1 here and book #2 here. Today it’s time to recap book #3 in the challenge: Common Sense on Mutual Funds by John Bogle.

This book was a long read, at over 650 pages, but it maintained my interest throughout. It was written by Vanguard founder John Bogle, and was the book I was most interested in reading out of the four.

The key takeaways from this book are straight forward, and the majority of the book provides the context and reasoning surrounding those basic principles.

Here are my key takeaways:

Simplicity with index fund investing

This is the whole book in a nutshell. John Bogle launched the first index fund in 1976 that was both low-cost and mirrored the market as a whole.

He’s a huge fan of simplicity and he says that many people make the mistake of overthinking their investments. He writes that it’s better to pick one index fund than it is to micromanage your portfolio. Index funds keep things simple, which is why the fees to manage them are inexpensive.

Bogle talks about keeping your focus on the circumstances you can control: risk, cost and time. Investors have no control over whether the market goes up or down. An investor’s best bet is to invest in a broad investment with low costs – index funds. Leave it in the market and continue to contribute more over time.

Costs Matter

Limiting costs is a theme that Bogle returns to time and time again, hammering home the point that costs matter. By choosing actively managed funds you’re losing on three levels: higher fees, more portfolio turnover, and higher taxes. Your asset allocation is important too, but not as important as limiting costs. If your costs are too high they will undue even the perfect asset allocation. Costs eat away your net returns, so lower costs mean you maintain a larger percentage of your returns.

Risk vs Return

There is no certainty in investing, but without risk there would be no returns.

Finding a fund the beats the market consistently doesn’t happen, it’s much more effective to find a fund that matches the market with low costs. Trying to time the market and trading often are both tactics that lead to lower returns. Index funds will lead you to beat nearly all other investors.

While volatility will occur, Bogle emphasizes that you will succeed as long as you stay the course and limit fees. To be successful in investing you must invest for the long-term. The longer your time horizon the less variability in your average annual returns.

Stocks vs Bonds

Long-term investors should be heavily committed to stocks, as they have much higher historical returns than bonds. People like to talk about stocks being risky, but Bogle shuts that theory down: “The data make clear that, if risk is the chance of failing to earn a real return over the long term, bonds have carried a higher risk than stocks.”

That being said, bonds still have a place in investor’s portfolios “as insurance against the possibility of short-term, or even extended, weakness in stocks.” Essentially including bonds in your portfolio helps smooth the ride of the ups and downs of the market.

Invest now to maximize the time your money is in the market. Stocks and bonds are unpredictable on a short term basis, but the variability decreases significantly the longer your time horizon. It’s best to have a mix of both to help smooth the ride and reduce overall risk.

Vanguard Stands Alone

Bogle emphasizes that mutual funds must be operated in “the most economical, most efficient, and most honest way possible.” He calls investors owners, instead of customers like many other companies in the industry. He also refuses to refer to mutual funds as products. While these are small distinctions, it’s important to note because it shows Vanguard’s commitment to its investors.

Vanguard is the only investment company with no outside owners, meaning clients keep more of any returns a fund earns. This is huge differentiator as it means the company is committed to its clients rather than purely focused on generating a profit.

The mutual fund industry spends millions on advertising and claims they can beat the market, but in most cases they’ll come up short and you’ll end up paying significantly higher fees.


Here’s a snapshot from Vanguard’s website that breaks down the difference in ownership structures.

Reversion to the Mean

You may be able to pick some stocks that outperform the market in the short term, but over the long term all stocks tend to revert back to the market average. With the additional costs added in, you end up doing worse than if you had just picked an index fund to mirror the market as a whole.

Entrepreneur at Heart

This section discusses the history of how and why Bogle started Vanguard. It’s clear he has an entrepreneurial mindset. This section references a paper that a student from Yale wrote about Bogle. One of the themes was based on Joseph Schumpeter’s description of three personal characteristics that make a successful entrepreneur: “the dream and the will to found a kingdom, the will to conquer and to succeed, and the joy of creating and exercising one’s energy and ingenuity.” These characteristics seem spot on about Bogle and are displayed in his story of how Vanguard came to be.


The last key point Bogle makes is to touch on what makes a successful leader. He talks about the importance of leading by example and principle. “Readiness, foresight, a sense of purpose, passion, the idea of the leader as servant, failure, determination, patience, and courage. Based on my experience, these are nine of the principal attributes essential to effective leadership.”

Final Thoughts

These principles are straight forward to understand, but it takes patience and focus to stick to your investment plan throughout all the highs and lows. Bogle says it best when he states: “The greatest enemy of a good plan is the dream of a perfect plan.” Investing in low cost, low turnover index funds is a great plan for building wealth and Vanguard is a tremendous vehicle to do this.

Stay tuned for my takeaways from the fourth book: The Intelligent Asset Allocator by William Bernstein

Related Reading:

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