Background
John Bogle, the founder of The Vanguard Group, preaches the idea of index investing. His company Vanguard Group also is one of the leaders in index funds. In his book he talks about why index fund is the best and safest strategy for average investors.
Index Fund vs Mutal Fund
John compares stock market to fable story, the Gotrocks family (link below). He explains how fund managers and wall street turn investing from a winning game to a losing game.
Mutual fund is a loser’s game because of 3 reasons: transation cost, tax and management fees. Mutual fund has turnover ratio, which means the amount of stocks they buy and sell over a year. The turnover rate will generate higher transaction cost which eventually lowers your returns.
Also most mutual fund charges a management fee from 1-3%. This may look small but actually eats up majority of your profit. For example, S&P500 returns about 10% annually, which means the management fee takes 10-30% of your profit. If you do this annually, this fee will cost you a lot.
Lastly, there’s the tax, US government tax when a transaction is finish. This hurts the most for short term investors.
Asset Allocation
There’s no definate answer on this, but basically the book suggest buying a well diverse index fund(S&P500, Total Market Fund) and a bond fund(total bond fund). The suggest the portion should base on your age. For example if you are 30, then you should have 30% in bonds and 70% in stocks.
Thoughts
In summary this book can be summarize in that longterm investing in equities market is a winner’s game and don’t get other people take your profit from you. There’s two times where there’s a race between index fund and mutual fund, one in 1993 hosted by NY Times and 2007 when Warren Buffet challenged Wall Street hedge fund for 10 year challenge. You can check both the story below. Basically in both index fund destroyed active managed fund by a large margin. In fact the 1993 race was stopped in 1999 because the spread was just too humiliating for active mutual funds.