Vanguard Icon Jack Bogle’s Simple Investing Rules Everyone Over 50 Should Follow
You don’t have to make investing complicated to generate long-term returns. Vanguard founder Jack Bogle advocated for keeping investing simple with low-cost funds.
People in their fifties — who are often inching closer to retirement — may be afraid of making mistakes that jeopardize their savings. Following Bogle’s investing advice helps minimize risk and costs while still seeing growth in your portfolio. Here are his rules you can use to continue building your nest egg.
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1. Own the haystack, not the needle
Looking for individual stocks can be akin to finding a needle in a haystack. You can do a lot of digging and still not end up with the stocks that will soar after you invest. Owning the haystack is a lot less risky and still results in solid long-term returns.
Think of the haystack as a collection of diversified stocks, like the S&P 500. It’s a broad market index that gives investors exposure to 500 of the largest U.S. companies. The S&P 500 has produced an average annual return of around 10% historically. That’s enough to beat inflation, and build wealth to support your retirement.
It’s possible to earn a higher return by picking individual stocks. However, it’s very difficult to outperform the market — and you expose yourself to the risk of having all your eggs in just a few baskets.
2. Keep costs low
Bogle emphasized the importance of low expense ratios and trading costs because fees can quietly chip away at your net worth. A 1% expense ratio may sound small, but that’s an extra $10,000 someone has to pay each year on $1 million in their portfolio. A 0.10% expense ratio only results in $1,000 in annual fees for the same net worth.
Index funds are generally cheaper than actively-managed funds, and over the long term, many index funds outperform their actively-managed counterparts.
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3. Stay the course through market noise
It’s no surprise that the creator of index funds was strongly against trying to time the market and chase momentum stocks. If investors chase soaring stocks, they risk buying high to avoid missing out and then selling low once the rally fades. Investors who only buy a stock because it is rallying may fail to understand the fundamentals, which can result in significant trading costs and realized losses.
Reacting to headlines and taking on more risk in a portfolio can be especially detrimental to someone who is over age 50, since their portfolio has less time to recover from market losses than a younger investor's. Many index investors put a little money into their positions each month with automatic money transfers so remove the emotions from investing.
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4. Match risk to age and horizon
Many investors become more risk-averse as they get older. Stocks are still important for growth, but diversifying into bonds can minimize volatility and provide steady cash flow. Bogle recommended an age-based bond/stock allocation. There are several ways rules of thumb that implement this, including to subtract your age from 120 to determine your stock allocation.
Keep in mind that rules of thumb are just general guidelines that may need some tweaking, depending on your circumstances. However, they offer a good starting point for determining your optimal allocation, especially since it is important to adjust your portfolio as your age to align with your changing time horizon, goals and risk tolerance.