Top 5 Investment Lessons From John Bogle – Investing for long term

Bogle revolutionized the mutual fund world by creating index investing, which allows investors to buy mutual funds that simply track the broader market.

In Warren Buffett's words, Bogle did more for American investors as a whole than any individual. Buffett, one of the most iconic and successful investors of our time, once said, "A lot of Wall Street is devoted to charging a lot for nothing. He (Bogle) charged nothing to accomplish a huge amount."

Here are 5 investment lessons from Bogle that have been vindicated by the market time and again.

Investing in equities is necessary

Bogle believed that mere savings cannot help people achieve their financial goals. In order to beat inflation with a good margin, investing in equities is necessary for average investors. While investing carries short-term risk and volatility, not earning a good return on your capital in the longer-term is a much bigger risk than any short-term market volatility.

The reason he gave so much importance to investing is understandable when you realize how inflation erodes the value of your savings.

For example, assume the inflation is 5% throughout your life and your current monthly expenses are around Rs. 35,000. In such a scenario, you will require Rs. 1.51 lakh per month to maintain a similar standard of living after 30 years. Now if you are 30 today and plan to retire at 60 and expect to live till the age of 80, you will need nearly Rs. 3.80 crore to maintain your lifestyle post-retirement. That is a big number and to achieve this, you need to earn returns that beat inflation consistently over the long-term. This cannot be achieved by merely saving. You need to invest.

Let us show you how. To build this Rs. 3.80 crore corpus you can either invest by starting a SIP in Equity Mutual Funds or save by starting a Recurring Deposit (RD). And let's assume you have Rs. 12,000 that you can keep aside for your retirement every month. Here is what your corpus will look like after 30 years.

Time Is Your Friend

"Compounding is a miracle. So, even the modest investments made in one's early 20s are likely to grow into staggering amounts over the course of an investment lifetime"- John Bogle

Bogle always advised investors to start investing as early as possible to become successful at investing. He was of the view that if you start early then you are allowing your returns to compound over time and your money can grow exponentially all by itself.

Bogle said that even the modest investments made in one's early 20s are likely to grow into staggering amounts over the course of an investment lifetime. So, it is important to spend time in the market. Bogle has also advised that one should never try to time the market, instead the focus should be to spend time in the market.

For example, assume you start investing when you are 23-years-old. You can earn Rs. 5 crore by the age of 60 if you invest Rs. 6,100 a month through SIP in equity funds (assuming a 12% average annual return).

On the other hand, if you start your SIP in equity funds at 35 years of age, you need to do a monthly SIP of nearly Rs. 26,600 to earn Rs. 5 crore by the time you are 60-years-old.

Starting Age Investment Period (in Years) Amount Need at 60 Monthly SIP Needed

23 37 ₹5 crore ₹6,100

35 25 ₹5 crore ₹26,600

Impulse Is Your Enemy

Bogle's famous quote, "Impulse is your enemy" warns against falling prey to our instincts and emotions. Investors often end up selling when markets tumble and buy when they rise because they allow their emotions to dictate the terms.

Bogle always advised investors to have rational expectations. In fact, he said that those investors who cannot see their investments in stocks decline by 20% should not invest in stocks. The stock market correction in March 2020 has once again proved Bogle right. If you are investing in stocks, be prepared to witness a 20-30% drop every few years and then recovery from those lows to touch new highs. Last year in March 2020, when the Sensex fell below 30,000, many were expecting it to plunge further to as low as 20,000 and may take years to recover given the uncertainty amid the pandemic.

However, all such speculations proved to be wrong. Those who sold their holdings at that point missed out on the bounce back in the next 9 months. Sometimes this bounce back happens within a matter of a few months like the recent one, but it might also take a few years. So, only invest in stocks with money that you wouldn't need for at least 5 years.

Cost Matters

Bogle maintained that investment is not just about risk and return. He asked investors to keep a careful balance of risk, return and cost while investing, as low costs enable lower-risk portfolios to provide higher returns than higher-risk portfolios. He warned those investors who choose, or are persuaded by their brokers, to actively trade the near-inevitability of counterproductive market timing. In such cases, often investors bet on sectors as they grow hot and bet against them when they grow cold. In addition, the heavy commissions and fees accumulate over time as expenses take a toll on returns earned by investors.

Together, these two enemies of the equity investor – emotions and expenses are sure to be hazardous to their wealth. Bogle suggested buying a low-cost index fund and then holding it forever is likely to be the optimal strategy for the vast majority of investors.

For instance, assume that a Large-Cap Index Fund's expense ratio is 0.1%, while an active fund is charging 1.3%. Also, assume the stock market offers an average annual return of 10%. With the index fund, you are likely to earn 9.9%. On the other hand, even if the large-cap actively managed fund beats the market consistently – which is very rare these days anyways – and gives you around 10.5% annualized returns, your net returns will be 9.2% (10.5%-1.3%), lower than the Index Fund. Note that there is a possibility of underperformance in the actively managed funds, whereas there is no such possibility with an index fund as it simply tracks the market.

Consider you have done SIP of Rs. 10,000 per month in both these funds. Here's how the amount would grow over time at these rates:

Simply put, the active fund will have to earn a higher return to compensate for their additional charge. And Bogle believed that it is difficult for all fund managers to beat the market returns consistently. This is why he advocated in favor of low-cost index funds that just replicated the market.

Stay Invested

Investing at regular intervals, irrespective of the state of the market will lead you to capture the average, believed Bogle. He wrote in his book The Little Book of Common Sense Investing that focusing on the long term, doing one's best to ignore the short-term noise of the stock market, and eschewing the hot funds of the day, the index fund can be held through thick and thin for an investment lifetime. Emotions need never enter the equation. The winning formula for success in investing is owning the entire stock market through an index fund and then doing nothing. Just stay the course.