Book Review > Common sense on mutual funds fully updated 10th anniversary edition

This is not an easy book to read. It has an immense amount of information, backed with statistics, analysis and anecdotal evidence to support its thrust – index funds outperform other mutual (managed in Australian terms) funds.  However the message suffers from too much repetition and a focus on its aim, that index funds are best, which it continually sets out to prove (and by the way very convincingly does). This is not surprising as John Bogle was the founder of Vanguard Funds Management and a pioneer in the index fund industry. He is honest in his analysis and scathing of those who have failed to focus on delivering investor value as opposed to enhancing their own returns via management fees.  Management fees which are normally paid regardless of a fund’s performance, incentive fees are rare – page 371
“Could it be that such incentive fees require performance that ultimately is impossible to deliver?”

The book is indeed a worthwhile addition to one’s library, particularly as a reference publication. I ended up skimming over some of the later chapters as they were more of a big picture consideration. The earlier chapters need to be surfed for the interesting information contained, as I found a straight read very technical and thus lost some of the good messages that abound in the pages. Much is made of the fact that there is no reporting of the effect of tax on returns. This is a very important consideration where managers turn over assets quickly in an attempt, usually unsuccessful according to the statistical evidence, to outperform the relevant index. This strategy also results in additional costs, particularly brokerage charges, which, according to the author, result in reduced returns.

This is a revision of a book written by John Bogle ten years ago - a revision, with the original text still present in the book, and an analysis of the predictions that were made ten years ago in the previous publication. This makes fascinating reading. The analysis of the predictions on their own makes the book worth a read, even if all one does is look at the coloured sections which contain the updated material.  For example: 
Page 290
“Funds That Have Beaten The Market
When we update the returns of those 12 funds (out of 258!) that outpaced the all-market index by a significant margin in the 1982-1998 period, two disappeared altogether (merged with other funds) and seven faltered (actually lagging the index during the subsequent period)...”

Worth having as a reference book – I think so.

Iain Smith is a member of the AIA. Neither Iain Smith nor his SMSF has any index fund investments.