- Bargaineering - http://www.bargaineering.com/articles -

Bogleheads Guide to Investing Review: Chapter 7 – Keep It Simple

Welcome to a review of the seventh chapter of the Boglehead’s Guide to Investing [3] titled Keep It Simple. While the message of this chapter is quite elementary, the backing behind the argument, that one should “keep it simple” when it comes to investing, is quite compelling. Through very little work, very little investment knowledge, zero skill, and with almost no time whatsoever – you can outperform 80% of all investors. How is that possible? Index funds.

Here is the crux of the strategy: Instead of hiring an expert, or spending a lot of time trying to decide which stocks or actively managed funds are likely to be top performers, just invest in index funds and forget about it!

The chapter goes on to list and explain why index funds are so good and here are the seven reasons they list:

  1. There are no sales commissions.
  2. Operating expenses are low.
  3. Many index funds are tax efficient.
  4. You don’t have to hire a money manager.
  5. Index funds are highly diversified and less risky.
  6. It doesn’t much matter who manages the fund.
  7. Style drift and tracking errors aren’t a problem.

Of course I won’t go into those seven reasons, I invite you to read the book if you want a deeper explanation around those reasons but they seem pretty straight forward. Passive investing is a strategy that has been repeated by many an investment guru and the Boglehead’s even included quotes from twenty contemporary names you’ll likely recognize (including Warren Buffett, Jane Bryant Quinn, Charles Schwab, and John C. Bogle himself).

Tomorrow, Chapter 8, about Asset Allocation, will get put under the microscope by none other than my pal and yours, Flexo at Consumerism Commentary [4]. For additional chapters, check out the Bogleheads October Project [5].