Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition

Chapter 1. On Long-Term Investing: Chance and the Garden

Investing is an act of faith. We entrust our capital to corporate stewards in the faith—at least with the hope—that their efforts will generate high rates of return on our investments. When we purchase corporate America's stocks and bonds, we are professing our faith that the long-term success of the U.S. economy and the nation's financial markets will continue in the future.

When we invest in a mutual fund, we are expressing our faith that the professional managers of the fund will be vigilant stewards of the assets we entrust to them. We are also recognizing the value of diversification by spreading our investments over a large number of stocks and bonds. A diversified portfolio minimizes the risk inherent in owning any individual security by shifting that risk to the level of the stock and bond markets.

Americans' faith in investing has waxed and waned, kindled by bull markets and chilled by bear markets, but it has remained intact. It has survived the Great Depression, two world wars, the rise and fall of communism, and a barrage of unnerving changes: booms and bankruptcies, inflation and deflation, shocks in commodity prices, the revolution in information technology, and the globalization of financial markets. In recent years, our faith has been enhanced—perhaps excessively so—by the bull market in stocks that began in 1982 and has accelerated, without significant interruption, toward the century's end. As we approach the ...