A little while back I went to a talk that John Bogle gave about his new book “The Little Book of Common Sense Investing”. John is the founder of the Vanguard, the huge mutual fund company, and one of the pioneers in the whole concept of index mutual funds.
Primarily John talked about how, in his opinion, passive investing is superior to active investing. He feels you are much better off putting money in an index fund and forgetting about it. This has been John’s main message for the last 30 years.
But there were a couple of things that he said that surprised me. One was that John likes the ‘target’ funds. These are funds that are targeting a particular retirement year and changes their asset mix as the investor nears the target. His take was that if you invest in one, that should be your only investment, since you’re have a diversified portfolio in the fund by definition.
The other thing that really caught me off guard was that he doesn’t like ETF funds. Considering that Vanguard has some ETFs, I was surprised. John’s contention is that since ETFs trade like stocks, people tend to trade them, rather than looking at them as long term investments. He feels that a fund that tracks a basket of technology stocks (or whatever) is the same thing as trying to stock pick, which he is vehemently against.
I disagree with many of John’s ideas, which is hardly surprising as I’m a stockpicker by trade. The complete failure of cap weighted indexes over the last 7 years is a strong argument against big cap index funds. If you invested in one 7 years ago, you still haven’t made any money. But I strongly agree with John’s assessment about trading. Whether it’s a mutual fund or an ETF or a stock, buy cheap and hold for a long time. And pay fewer taxes, fewer spreads and fewer commissions. That can substantially increase your profits over the long haul.