3 SIMPLE RULES

Many people in the financial business try and complicate investing. Generally for their own means. There is an old book titled "Where are the Customers Yachts?" referring to a story about a client looking out into NY harbor at all the brokers and bankers yachts, then asking where are the customers yachts? The moral is: Wall St firms make money at the customers expense, and they need to make investing seem complicated in order to justify their fees.

What research shows it that, over time, investors don't need to pay for research, complicated buying and selling schemes. What one needs to do is follow a few simple rules - 3 of the best are laid out in the link below.

I like to say that the secret to investing is: there is no secret. Follow a few simple rules and you will have success. I really like the approach that Bill Schutheis promotes in his book and blog "the Coffeehouse Investor"

Follow the link to his 3 simple rules:

http://www.coffeehouseinvestor.com/investing-you-understand/the-three-principles-of-investing/

Bogle on Bond Mutual Funds

When I first read "Common Sense on Mutual Funds" 8 years ago it was chapter 7, on bonds, that stood out. It stood out partly because I had already been exposed to the evidence supporting the idea that stock funds net of costs rarely beat their relative indexes. But mostly because of the overwhelming correlation between bond mutual fund expenses and performance.

Bogle examines 4 bond sectors: 1. long term municipal bonds, 2. short term US government bonds, 3. intermediate term US government bonds, and 4. intermediate term corporate investment -grade bonds.

In 3 of 4 of the categories, over a 5 year period, the low cost funds outperformed the higher cost alternatives. In the fourth case, the more expensive bond funds slightly out performed, but with significantly more risk.

Bogle does a nice job of demonstrating this lesson with graphs that chart costs versus return. Visually one can see all the data points and see that the simple low cost bond index fund generally outperforms its actively managed, more expense peers.

He concludes:

"In general, the lowest-cost group had the lowest duration, the lowest volatility, and the highest quality. The lowest-cost group had not only the highest returns, but also the lowest risks. Bond fund investors simply cannot ignore that message.

Finally, the bond cost analysis is a math issue, similar to stock funds. It is more pronounced with bond funds because they return less than stocks, so when fees are netted out it is hard for the active fund to outperform, net of those fees.