4. Invest in Low-Cost Funds
One of the most important investing lesson that Jack Bogle strongly advocates actually involve primary school mathematics. This lesson is best summarised by the following equation: Net return = Investment return – Cost Typically, investors put their focus on the investment return of their portfolio and seldom care about the cost that they have to deal with, in order to get these returns.
However, basic math concepts demonstrate that generating high investment return is as important as keeping the cost down if you want to get a positive net investment return. One of the largest components of cost in investing is the fees. Fees such as commission and management fees have a significant impact on investors’ net investment return.
Pretty Stretched
For example, the management fee in unit trusts can be anything from 1 percent to 5 percent of your invested capital. The STI’s 10-year annualized return is 9.2 percent per annum. In order for any managed fund (e.g. unit trust) to beat the STI, it needs to achieve at least 13 percent investment return per annum.
For anyone who has tried their hands on investing, you will know that 13 percent sounds like a pretty stretched target. The only person who can beat 13 percent consistently is probably Buffett! (whose annualized return is ~21 percent) So, here’s what Bogle suggested for commoners: Invest in a low-cost fund, i.e. an exchange traded fund (ETF). Keeping your investment cost as low as possible lets you keep most of the gains from the miracle of compounding returns.
There are increasingly more options for you to invest at a low cost, especially with the rise of the robo-advisory industry. If Bogle was still alive, we think that he would advocate robo-advisors as another good source of low cost investing.
