The Little Book of Common Sense Investing, Updated and Revised

Chapter ThirteenProfit from the Majesty of Simplicity and Parsimony

Hold Traditional Low-Cost Index Funds That Track the Stock Market.

WHAT LESSONS HAVE WE learned in the previous chapters?

• Costs matter (Chapters 5, 6, and 7).
• Selecting equity funds based on their long-term past performance doesn’t work (Chapter 10).
• Fund returns revert to the mean (RTM) (Chapter 11).
• Relying even on the best-intentioned advice works only sporadically (Chapter 12).

If low costs are good (and I don’t think a single analyst, academic, or industry expert would disagree with the idea that low costs are good), why wouldn’t it be logical to focus on the lowest-cost funds of all—traditional index funds (TIFs) that own the entire stock market? Some of the largest TIFs carry annual expense ratios as low as 0.04 percent, and incur turnover costs that approach zero. Their all-in costs, then, can come to just four basis points per year, 96 percent below even the 91 basis points for the lowest-cost quartile of funds described in Chapter 5.

And it works. Witness the real-world superiority of the S&P 500 Index fund compared with the average equity fund over the past 25 years and over the previous decade, as described in earlier chapters. The case for the success of indexing in the past is compelling and unarguable. And with the outlook for subdued returns on stocks during the decade ahead, let’s conclude our anecdotal stroll through the relentless rules of humble arithmetic with a final statistical example ...