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  • Writer's pictureWilliam Webster

Do less and make more

Updated: Jan 13

If you run your own money this may save you ten years of work, (honestly). My investment journey started over thirty years ago. I didn’t think too much about it, returns were high, my money went into “funds” and who worried about costs? It was easy to do some simple maths, the message couldn’t be clearer, if you wanted to keep your money, costs had to be low. At the time that meant paying at least 1% per annum plus hidden trading commissions. Herein was a problem over an investment lifetime even “modest” fees of 1% lead you to hand half of the investment return whilst still taking all the risk. It’s the simple maths of compounding and it’s like going to a restaurant, paying for a three-course meal and just getting the starter and desert. I started to read about indexing, something that had got going a lot earlier on the other side of the Atlantic. The pioneer, the late John (Jack) C. Bogle, had set up the mutual fund group Vanguard in 1974. My first introduction to his writing was “Don’t Count On it!” Now, over the years I’ve read quite a lot about investment. I really like Buffett’s style, Munger is pithy, Fisher asks the questions and Graham, well he’s the guru. But, to be honest, I’m just not as smart as they are. This is where Bogle differs, his strategy can be followed by anyone. Put 40%-60% in low-cost index trackers, the rest in low-cost bond funds and leave it well alone. It’s a case of the less you do the more you get. It’s even the strategy Buffett has followed for his wife’s trust. This year I picked up a copy of Bogle’s book “The Little Book of Common Sense Investing”, it’s an investment classic and I recommend reading it. In it he sets out the case for low-cost index investing in easy to read and insightful manner. There’s a lifetime of work here but some things really hit home, and I’d like to share them with you: Long run GDP growth is everything: Cumulative long run performance of the stock market is governed by GDP growth; one follows the other. Stock returns: Stock returns have two sources, investment return (dividend yield and earnings) and speculative returns, (the price of those earnings as expressed as the price/earnings multiplier). Investor returns: Returns earned by all investors must equal returns earned by the market. However, returns received by all investors equal returns earned by the market less fees and expenses. Outperformance: All evidence shows that over the long run market outperformance is random. So, although some win over short periods it is not something that can be done consistently. For this reason, by using low-cost index funds, your chance of beating the performance of a fund manager is 90% over 10 years and 98% over 50 years. We are all indexers: If you imagine a pie of all investors’ money and cut out the slice that is index tracking the remaining investors, as a whole, have to be indexers too. But individually they hold different positions and in the short run some win, and some lose. Collectively this group incurs significant trading costs that act as a drag on their returns. Market prediction: Short run predictions are guesses, but dividend yield, earnings and P/E can be used to provide a predictive look at what returns may be in the next ten years, the conclusion is that we are looking at substantially lower returns (3%) on a balanced portfolio over the next decade. After inflation of 2% and investment costs of 1.5% that’s a flat or negative real return only avoided by getting rock bottom costs. Behavioural bias: This plays against the investor. They tend to buy funds that have gone up and sell those that have gone down. This buy high, sell low, strategy acts as a drag on returns leading to a reduction in the order of 1.5% per annum. Keep it simple: Between 1926-2016 total market annual return was 9.8%, for the S&P 500 it was 10%. The S&P 500 index is about 85% of the value of all US stocks and being capital weighted doesn’t need rebalancing. The winning strategy is to own the index at minimum cost and let compounding work in your favour. Exchange traded funds: Bogle’s resistance to ETFs is clarified, he did not like the way they encourage trading but held for long periods broad range low-cost ETFs achieve much the same as an index fund. Asset allocation: Investment performance is dictated by asset allocation; Bogle considers the merits of 50/50 working up to 80/20 stock/bond portfolios. In essence it depends on the risk you can afford to take and what you feel comfortable with. What’s particularly thought-provoking is the common sense view that lower investment costs mean that you can take significantly less risk to achieve the same level of return. It’s not often less leads to more, and what I particularly like is that Bogle is an amusing writer, full of anecdote but above all backs up his case with irrefutable analysis where you can clearly see that he’s on your side. Don’t take my word for it, read the book and in the years to come you won’t regret it, after all he is setting out a strategy, where you will have an investment portfolio, that is worth at least a third more, or as I put it earlier, the option to retire early. I’m sure you too will see John Bogle as one of the greats in the investment world.

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