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The Little Book of Common-Sense Investing Book Review

How do index funds differ from other stocks and mutual funds? Read here to learn more about it from Sir John C Bogle’s Little Book of Common Sense Investing.

A book that revolutionized the world of investing and how people save their money, The Little Book of Common-Sense Investing by John C. Bogle is an excellent book for those new to the world of investing. If you prefer not investing your money because it might incur losses and because you hate risks, there’s a good chance that this book will change your life!

The basic premise of the book is very simple. If you could buy some shares in all the businesses in a market, giving weightage to their size and current state of operations, you’ll grow with the market. As traditionally seen, over a long period, markets tend to grow and give you secure and stable returns on your investment. But how? The answer is simple: index funds.

John C. Bogle was the founder of the first index fund, Vanguard. And he has ever since advocated and promoted index funds throughout years and years of stock market volatility. A large part of the book consists of economists, businessmen, and other renowned people in this field accepting or showing the benefits of choosing to invest in index funds over other forms of stocks and mutual funds.

Index Funds

The market has several companies, each capturing a fragment of the market for itself. With time, as generally happens, the market observes positive growth. What an index fund does is replicate that market growth for itself. It achieves that by investing in different companies in the same ratio as they have captured the market for themselves. 

So, say, there are three companies- A, B, and C- and they own 68%, 22%, and 10% of the market respectively, an index fund will invest in these companies in the same ratio. Now, with time, as these ratios change in the market, and new players get added while old players get eliminated, the index fund automatically adjusts its investment ratios accordingly to reflect the market ratios. 

All of this makes sure that index funds earn at the same pace that the market does. And instead of trying to get ahead of the market, it simply follows it.

But Why Index Funds?

Look at it this way. Suppose some business suddenly booms and their profits increase drastically, it would come at the expense of some other business that might have even gone bankrupt. When you’re investing in stocks of a business, you’re playing a gamble that the company you’re investing in should win. 

Compared to that, if you can invest in the market itself, it’ll cancel out all the bumps and bulges in the road and give you a return that has much lesser risk. Not to mention when you partake in choosing stocks and mutual funds, there’s a good probability you’ll have to pay extra taxes and commissions to the different fund managers and traders. 

All of this means that your effective rate of return would probably be less than the return a market would’ve given you otherwise. This is what the crux of the book is. This is what common sense is: to not give in to the temptations of short-term investing and go for the long-term haul. As Warren Buffet says, the more the motion of funds, the lesser the returns are for investors generally.

How Most Investors Turn a Winner’s Game into a Loser’s Game

As shown in the book, through exhaustive data points from decades of stock market trends and growth, two certainties come out:

1. Trying to beat the market before cost deductions is usually a game with a tie as the best result.

Now what does that mean? Does he mean to say all the portfolio agents, all the agents, all the analysts, they’re for nothing? Yes, that’s exactly what he says. And proves again and again. Not only is the probability of beating the market extremely low, growing at the same rate as the market is often the best-case scenario, why this is a zero-sum game at best. However, when you deduct all the associated costs with managing and handling your funds, that’s when the game changes completely.

2. Trying to beat the market after all the cost deductions only results in a loss.

The actively funded stocks charge a large part of your gains as their costs, taking away from the profits you were getting at a high risk already. And therefore, the final profits after taxes come out to be a fraction of what the index funds would’ve provided you otherwise. Because of all the expenses in other stocks, they often underperform relative to what they usually claim.

And this is how, by investing in actively managed stocks, investors turn a winner’s game into a loser’s contest. There are taxes to pay, inflation to beat, portfolio managers to pay, and much more. It’s best to reduce as many of these costs as possible, and go for low-cost funds like index and bond funds. 

Investing in index funds is choosing your interests over the interests of some agency or agent or a corporation. By investing in index funds, you allow your money to grow at a high rate with minimal risks. It’s a simple story. Do you want to keep the money to yourself while reaping the profits of the market or do you want to give away your money to different professionals who’re going to give you the same returns at best, while charging exorbitant amounts? The first chapter of the book is a parable with the same lesson at its core.

Choose the Market Over Trends

Investors often make the mistake of going for some new trends when the market is rising as well, such as the Internet boom in the early 21st century or the many other speculative booms in the market over decades. What that does is create a temporary illusion of immense riches in no time, attracting investors to put in all of their savings in hopes of great profits. But as always, the market comes back toward the mean, correcting itself in due course. And what all that ensures is a market crash that brings all those dreams and money crashing down.

Instead of that, if you choose to bet on the market, which is what index funds essentially are, you can make sure your investments see a positive growth over a substantial period of time. Yes, it’s boring. Yes, it requires patience on your part. But it’s the least risky and often the most rewarding option out of all. Isn’t that enough reason to give it a chance? Remember, these trends will go away as they always have, but the market is here to stay.

Don’t Look for the Needle, Buy the Haystack!

When you bet on an actively managed fund, you’re essentially choosing a needle in a haystack. The chances of that needle being “the one” are immensely low, the past performances are often misleading unless you can find out the exact reason behind their performance. And therefore, why not bet on the haystack itself and reap the overall benefits? That’s what the idea of an index fund is. It’s simple, it’s cheaper with higher dividends, and it’s always more rewarding in the end. You make sure that the charges are the least while you get profits equivalent to that of the market growth. 

If you want a low-risk investment asset, index bond funds are also a great option to choose. They have all the features of stock index funds, whether it’s low costs or diversified investments or high tax efficiency.

Which Haystack to Choose?

Once you’re convinced to buy index funds, which one should you purchase? It’s easy. All you have to do is look at the expense ratios of each index fund. The differences might seem miniscule, but they largely affect your final profits over a long period. Go for index funds with lower expense ratios as they would help maximize your final returns. In the end, choose funds as per your appetite for risk and your present circumstances.

So, even if you have a high appetite for risk, you have to make sure you’re investing as per your present age and financial situation. Then you can decide how much you want to invest in bonds and how much in stocks, and if you want to invest some part in actively managed stock funds. In the end, it’s necessary to remember that higher risk portfolios often give lesser returns in the longer term as they have higher costs associated with them. So, it’s always better to go for low-risk, low-cost funds that help you get the best returns over a time frame.


The primary conclusion of the book is just this: go for low-cost investments that help you bet on the market instead of individual fads or companies. And the best way to do that is by investing in index funds that purchase the entirety of the market shares in the same proportions, essentially replicating the market’s performance. The market adjusts itself after every high and low, always showing positive growth in the longer term.

Therefore, by putting your money in index funds, you get some of the highest returns while paying negligible amount to other mediators. It’s the common sense of investing that is out there for everyone to see, and yet not many can resist the temptation for those actively managed funds, losing their hard-earned money in the process. Not only that, the index funds, ever since their creation, have only shown time after time, why they’re the best option to invest in. Of course, for a better understanding of the concepts discussed here, you can read the book for yourself.

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