THE LITTLE BOOK OF COMMON SENSE INVESTING (BOOK REVIEW)

The hands off guide to investing

The Little Book of Common Sense Investing is designed to help investors learn how to make smart decisions about investing. In it, author John C. "Jack" Bogle provides readers with simple tips and advice to help them build wealth over time.

John C. Bogle is known for his advocacy of low-cost index investing and has been called the father of modern day mutual fund investing. He founded the Vanguard Group, which now manages more than $2 trillion in assets.

Now this book is Bogle "talking his book." He believes passive investing is the best way to grow one's wealth. And he built an amazing business around this concepts. That's why Vanguard is the premier investment firm for passive investment funds. If you're going to buy passive fundsthis is a great place to do so.

This is not a book I would recommend for investors putting in the time to learn the wealth building strategies we love at BarbellAlpha.com. I can tell you from experience, it is possible to beat the market. And to do so with less volatility. 

But I'm sure you're wondering what the book is about...

WHAT YOU WILL LEARN

Two things: 

1. Active investing tends to underperform and

2. The best way to make money in the stock markets is to buy passive, low-fee index funds.

Yup, that's the gist of the book. 

Now this is good advice for 99% of people. If you're not going to take the time to follow the markets and learn how to invest this is great advice. 

That goes against everything we talk about here at BarbellAlpha.com. We believe we can beat the market, and get less volatile returns in the markets, using our barbell investing strategy. 

But if you don't want to take the time to follow the markets, this is a great book to get started with. 

For 99% of people, the best way to make money online is to invest in index funds. You don't even have to do anything. Just sit back and watch your investments grow.

Index funds are one of the safest ways to invest because you're investing in the entire stock market. When stocks go up, the fund should go up. When stocks go down, the funds go down. There's no guesswork involved.

But you shouldn't buy just any fund. It's important to watch the fees of the funds. And those fees tend to be higher in active funds. 

ACTIVE INVESTING

Active mutual funds are not nearly as great as most investors believe. In fact, studies show that actively managed mutual funds tend to underperform the broader stock market over long periods of time.

This is because active managers take actions based on short-term performance factors such as price momentum and sector rotation. These strategies don't work well over longer holding periods.

Active investing doesn't work (His words, not mine). There is no evidence that it works better than indexing. Here are the main reason most investors and active funds underperform.

Reason #1 They Underperform: Market Timing

Most investors are guilty of buying high and selling low. They believe that stock prices move up or down based on fundamental factors such as earnings growth, economic data, and investor sentiment. In reality, most stocks fluctuate within a narrow range over long periods of time. 

During bull markets, stocks typically rise sharply in the beginning and gradually level off. It's hard to buy stocks at the beginning of the rally. That is when it's scariest to buy. 

It's nearly impossible to pull the trigger when it looks like the financial world is about to end. And that's true. Even professionals fall into this trap. 

Investors should never try to predict where the market is headed. Instead, they should focus on investing based on fundamental analysis. If you want to know what the future holds, look at the past.

Reason #2 Most Investors Underperform: Fees and Taxes

Mutual funds charge fees that are far higher than those charged by index funds. This makes them less attractive to many investors. In addition, most mutual funds trade frequently, which reduces their tax efficiency. 

Finally, some mutual fund companies impose redemption charges on shareholders who sell shares during certain periods. These fees make it even harder to beat the market.

Index funds do not charge such high fees. They are often tax efficient because they invest in broad indexes like the S&P 500, rather than picking individual stocks. And since index funds don't trade frequently, they aren't subject to trading costs.

Put the majority of your money in safe, low-cost index funds.

Index funds are one of the most popular ways to invest. They're simple — you buy shares in a large group of stocks, like the S&P 500 or Dow 30, and let the market do the work. You don't have to pick individual companies; you just sit back and wait for the market to grow.

But there are hundreds of index funds out there, and choosing the wrong one could cost you big bucks. So what makes one better than another? We've got some tips to help you choose wisely.

Best quotes from The Little Book of Common Sense Investing

The best quote I've heard about investing came from Jim Rogers, co-founder of Quantum Fund, one of the most successful hedge funds ever. He told me once that "investors as a group don't know what they're doing."

I think that statement applies to many things in life, including investing. So here are some tips to help you avoid being part of the herd.

1. Don't look for the needles in the haystacks.

If you find yourself looking for the needle when buying stocks, you'll probably end up disappointed. You won't find the stock that's going to make you rich. Instead, you'll spend hours reading reports and trying to figure out why something happened. Then you'll invest in companies that aren't likely to give you much return.

2. Time doesn't heal all your wounds.

When you lose money, it hurts. But don't let it keep you down. If you want to recover, you must learn how to deal with losses. One way is to stop thinking about the loss and move on. Another is to take advantage of learning opportunities. For example, if you lost $10,000, you might try to learn how to manage your investments better. Or perhaps you could use the experience to teach others how to do it.

SHOULD YOU BUY THIS BOOK?

The author of "The Little Book of Common Sense Investing," John Bogle, has published his latest book called "Stock Market Wizards." In it, he talks about why you should invest in index funds and how to do it.

If you enjoy your job and want to put your investments on autopilot so you can concentrate on other things, this book is for you. 

If you want to take control of your investments and try to earn alpha in the market, you can ignore this one.

But if you want to read this book to see what Bogle is all about AND support the website, please click here.