One expert-recommended strategy for investing isn’t as complicated as you might think.
In fact, it’s simple enough for even beginning investors to execute: Invest in low-cost index funds. This subset of mutual funds includes those that are broadly diversified, hold many stocks, and operate with minimal expenses.
That’s what John “Jack” Bogle, founder and retired CEO of The Vanguard Group, recently recommended while sharing his model portfolio with NPR.
“Simplicity underlies the best investment strategies,” he tells NPR. “Basic arithmetic works.”
Rather than hand-picking stocks and trying to beat the market — which is extremely difficult to do — he says investors should stick to the less glamorous, yet reliable, basics.
It’s not too surprising that Bogle recommends this investing strategy, as he created the very first index fund in 1976.
Investing in low-cost index funds works for two main reasons, he says: They’re broadly diversified, which eliminates individual stock risk, and they’re low cost. You basically “own all of corporate America,” he tells NPR, and over time, that combination will outperform most actively managed mutual funds.
It’s important to note that not all index funds are necessarily low-cost — and cost is everything, Bogle says.
While there are options out there that carry expense ratios (the industry term for these fees) as low as .10%, others have expense ratios as high as .80%. What may seem like an insignificant difference can add up in an astonishing way, Bogle notes.
“If investors could rely on only a single factor to select future superior performers and to avoid future inferior performers, it would be fund costs,” he writes in his book, “The Little Book of Common Sense Investing.” “The record could hardly be clearer: The more the managers and brokers take, the less the investors make.“
Examples of low-cost fund examples include: Fidelity Spartan 500 Index (FUSEX), with an expense ratio of .10%, and Vanguard Total Stock Market Index (VTSMX), with an expense ratio of .17%.
You can find a fund’s expense ratio, the minimum investment required, and other helpful information about index funds by searching them on in the “quote” field on Morningstar.
SEE ALSO: 15 quotes from Warren Buffett that take you inside the mind of a legendary investor
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