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Actively Managed Funds Are Risky Business

Book: The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

Author: John C. Bogle

Genre: Personal Finance

Written in 2007, this book is very much in keeping with its title; it sets out clear and concise arguments to persuade you why you should be investing in Passively Managed Index Funds, rather than in their riskier counterparts: Actively Managed Funds. It teaches you how to make sensible investment choices for long-term financial gain

This book ranks 3 out of 22 in my personal rank of investing books. I loved this simple style of writing. One of the biggest things I took out of this book was a chart which Bogle produced which broke returns over the last century down into three elements: Dividends, earnings growth, and PE change. This was where I got the idea of my concept of “The Dream Factor” and showing the main factors that drive markets.

John Clifton Bogle is the founder and retired CEO of The Vanguard Group. His 1999 book Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor became a bestseller, and he followed this investment classic with four more titles, of which The Little Book of Common Sense Investing was one.

The Little Book delves into the differences between Actively Managed Funds (AMFs) and Passively Managed Index Funds (PMIFs) in a language even the newbie financial investor can understand, and it offers concrete facts to support its arguments.

A Book With a Bias

Bogle argues that AMFs are risky because the fees and the cost of investing in them add up to a hefty chunk of your expected return profit. If they perform well, you are still likely to gain less profit from them as lone funds than if you invest in PMIFs, which mimic the performance of the overall market. He offers sweeping statistical evidence to support his arguments too.

Fund Managers Rarely Disclose the Actual Dollar Amount for Their Fees

Pretty amazing. According to Bogle, they play on their ‘high’ returns and don’t actually tell unsuspecting investors what they will earn after the Fund Manager’s fee deduction. So investors can go into this type of investment without all the facts solidly presented to them. Investing in Actively Managed Funds will eat up your hard earned money while making your financial mediator a small fortune.

Don’t Let Emotions Run Your Finances

One of Bogle’s suggestions is to not fall victim to overconfidence, a tendency some investors have when trying to pick and invest in individual stocks and funds. Instead of making short-term, volatile bets on the market with AMFs because of sway from popular opinion or clever marketing, try and invest in PMIFs which hold diversified portfolios. A more cost-efficient method of investing long-term.

If Bogle cannot persuade you away from AMFs entirely, he offers sound and sensible advice for the other suggested 95% of your financial investments to put towards returns from the real value of the market in the long run. Good advice to consider for your financial future.


Haven’t read it yet? It won’t be a waste of time.

Have you read The Little Book of Common Sense Investing? What do you think about it?

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.