Smart Investing for the Long Term

So you want to invest intelligently for the long term, but the stock market is going nuts. Take some advice from John Bogle. Two words: index funds.

Bogle is the anti-Cramer. He does not pick stocks. He owns everything through low cost, diversified index funds, even in today's wild and crazy stock market. Such a strategy is definitely the best approach for the average investor.

As Bogle recommends in "Six Lessons for Investors," an incredible January 8, 2009, Wall Street Journal editorial:

Owning the market remains the strategy of choice. Such a strategy guarantees a return that lags the market return by a minuscule amount, and exceeds the return captured by active equity-fund managers as a group by a substantial amount. Why? Because the heavy costs incurred by investors in actively managed equity funds can easily amount to 2% to 3% annually...

As a group, investors are by definition indexers. (That is, they own the entire market.) So indexing wins, not because markets are efficient (sometimes they are, sometimes they are not), but because its all-in annual costs amount to as little as 0.1% to 0.2%.

Indexing won in 2008 by an especially wide margin. Low-cost, low-turnover, no-load S&P 500 index funds outpaced nearly 70% of all equity funds, and (admittedly a fairer comparison) more than 60% of all funds focused on large-cap U.S. stocks. This continues the pattern - with some variations - that goes back to the start of the first index fund 33 years ago...

In sum, active management strategies as a group lose because they are expensive. Passive indexing strategies win because they are cheap.

So forget Jim Cramer. Think John Bogle.