I recently picked up the late John Bogle’s book, “The Little Book of Common Sense Investing” and I plan on reading through it despite knowing the basic jist of it. Bogle was famous for creating the low cost index fund and the main thrust of his argument is keep expenses low and diversify into indexes. He started the Vanguard Mutual Funds and is the king of passive investing and many people got rich off his philosophy.
I like the idea of doing less in the markets and actually listening to the markets. This is why I also liked Ray Dalio’s “Principles: Life and Work” book and W. W. Norton’s “A Random Walk Down Wall Street.” Both books have had (are having) a profound impact on how I see and what I do in the markets. Over time I’ve put more money into funds and ETFs and less into individual stocks. Do I own AAPL and MSFT? Sure, but they are a tiny fraction of my holdings. Most of my money is in mutual funds and retirement accounts and doing quite well.
You need to spend money to make money
How I hate that saying. I used to believe that you had to spend money to make money. Leverage debt and spend so that in the future you get back more money. Little do they tell you that its best to actually have money coming in first before you take on debt. Then it makes sense. However, stupid younger me fell into this trap and racked up debt in my early years. It wasn’t until I met my wife that I learned how to properly manage debt and how to actually earn money if I was running a business.
The same principle applies in trading and investing. The more you trade, the more you make your broker rich. Granted, trading costs are very low now, I pay $7 per trade but that means I can’t dollar cost average in without having to pay $7 every time. For $7 I still can find a modest lunch these days, so that sum is nothing to sneeze at in my humble opinion (IMHO).
The best route, and I’ve written about this before, is to invest in diversifed funds or ETFs with low expense costs. That’s been the consistent way I’ve been building my wealth and it should be your way too.
I posted a weekly chart of VTI above, one of Bogles’s greatest inventions. Since inception VTI has made a return of 7.11% vs the market’s 7.13%. I’m not quibbling because it’s expenses are a mere 0.03%. Right now I’d have to buy the ETF to get into this ‘fund’ because the mutual fund of the same name is currently closed. So paying $7 to buy this ETF isn’t ideal because of the fee you’d have to pay each time you want to dollar cost average.
For example, if you dropped in $1,000 each month for year, you’d be paying $84 in trading fees (assume $7/trade). Which is ok I guess considering you end up with about $12,472 dollars at the end of the year @ 7.11% rate of return. Roughly speaking, you’d have spent 17% in trading costs to make $472. In essence, your net profit BEFORE the expense ratio of the ETF would be $388.
There you have it, the expenses will eat you alive.