Investing Rule #6: Use index funds when possible (common sense investing)

http://www.financinglife.org Minor Update 27june2011. Learn how to tell a good mutual fund from a bad one. What is an index fund? And why do they outperform in the long run? This is part of ten short videos series that summarizes the common sense investment advice from John Bogle, which his followers endearingly call the Boglehead Investment Philosophy. It describes the best ways to invest money, and the best place to invest money. You'll learn how to choose mutual funds, why index funds are smart investments, and how to invest in bonds which should be a part of everyone's asset allocation.

Comments

1. 1:00 WHAT??
   no... that is not true, the company could have made a profit.... Thus both could be the a "winner" while the customer on the backend is the one who lost money....
2. lesson from bogle
3. Is starting at 27 starting late? I'm considering starting index funds with $5500 each year in TFSA.
4. Well Done!!
5. Thanks for your comments Branden. The videos serve as brief introductions to these basic principles. Everyone would be well served to pursue the topics further with good books, and articles. Numerous outstanding references can be found on sites such as Bogleheads (dot) org (slash) wiki It’s challenging to squeeze these videos down to a few minutes each. I’m glad you are on board with indexing, and thanks for watching. Rick
6. I'm on board with indexing. I just think some of the information in this video is misleading/unsubstantiated.
7. Yes, the bar chart is the probability of an active fund beating the market (or, index funds). You also asked whether 2% higher cost was still a fair assumption. I pointed to a recent compelling study where the difference in expense ratios of only 1.06% has a staggering cumulative impact. If you wish to substantially beat the market, please search my site for the video “Warren Buffett on Index Funds” where he tells you how to do this, and why the 99% rest of us should use low-cost index funds.
8. But what about my post above?
9. Making same point in a 2013 article “The Arithmetic of Investment Expenses”, Nobel Laureate William Sharpe compares two similar funds with a difference in expense ratio of 1.06%. The cumulative impact over 20 to 30 years is staggering. In the author’s words, “Under plausible conditions, a person saving for retirement who chooses low-cost investments could have a standard of living throughout retirement more than 20% higher than that of a comparable investor in high-cost investments.” Thanks.Rick
10. When watching this video, it appears that the graphic is depicting the historical percentage of funds that have beaten the market. I took a look at the reference described above, which said: "In certain cases I will make assumptions about the future return of index funds relative to active returns without the benefit of historic numbers (Figure 2-2)" <--The graphic in discussion The graphic also assumes a 2% per year higher cost. Is that really a fair assumption in today's market?
11. Hi Branden, Yes I do. I post my transcript with footnotes on my website FinancingLife (dot) org, but the source you are requesting is this book: All About Index Funds, by Richard A Ferri, 2nd Edition, McGraw-Hill, 2007, p.25. I'll also note that if you follow the discussion forum at Bogleheads (dot) org, you will see that this gets validated annually. Thank you for your comment, I suspect many others wondered the same. Best of luck to you and your investing, Rick
12. Do you have a source for the 50 years 1% figure?
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14. I'm saving $40 off every check for my first index fund investment. half way there. i'm just wondering if i should use my bank. or Investment banker?
15. Whoops, I got that backwards didn't I. More stock when the market is down...
16. Absolutely! First, dollar cost averaging means investing regularly--like $100 from every paycheck--and this is the most important habit. Second, it removes the emotional component. The $100 buys more stock when the market is up, and less stock when the market is down. Congratulations to you for starting at age 25. You'll be happy you did.
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18. @conillusionist Thanks for watching! You can help spread the word. Too few people are ever taught this stuff. Tell your friends what you learned and point them to the book or videos. All the best to you! -Rick
19. thank you so much for these wonderful videos!