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The Little Book of Common Sense Investing, Updated and Revised by John C. Bogle

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Chapter NineteenAsset Allocation II

Retirement Investing, and Funds That Set Your Asset Allocation in Advance.

IN MY 1993 BOOK Bogle on Mutual Funds, after discussing the large number of asset allocation strategies available to investors, I raised the possibility that “less is more”—that a simple mainstream (i.e., index) balanced fund, 60 percent in U.S. stocks, 40 percent in U.S. bonds, one that provides extraordinary diversification and operates at rock-bottom cost, would offer the functional equivalent of having your entire portfolio overseen by an investment advisory firm.

It was in 1992 that I decided to form just such a 60/40 stock/bond balanced index fund at Vanguard. Viewed through the lens of the quarter-century that followed, the fund has been an extraordinary success (Exhibit 19.1).

EXHIBIT 19.1 The Low-Cost Balanced Index Portfolio versus Its High-Cost Peers, 1992–2016

Returns
Annual* Cumulative Expense Ratio
Balanced index fund 8.0% +536% 0.14%
Average balanced
mutual fund 6.3 334 1.34
Index advantage 1.7% +202% 1.20%

*Correlation of annual returns, 0.98.

Let’s look at the remarkable record of that balanced index fund. During its 25-year lifetime, the fund has earned an annual return of 8.0 percent, as compared to 6.3 percent for its peers, an advantage of 1.7 percentage points per year. That margin resulted in a compound advantage in cumulative return of 202 percentage points.

The balanced index fund’s advantage has largely been the ...

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