Jack Bogle was the founder of the Vanguard Investment Group - one of the two largest fund managers in America. Vanguard also pioneered the concept of the indexed funds - funds which are invested to mirror the stock market index, such as the S&P index and carry very low expense ratios.
He explained the difference between investing in stocks and investing in companies. The stock investor takes a short term view and trades on the price of the stocks. The investor in companies takes a long term view and looks at the profits earned and dividends distributed by the companies, and is not bothered with the daily price movement of the stocks.
It is difficult for an investor to pick the right companies to invest in. Jack Bogle advise them to invest in the indexed fund, which is invested in a large number of companies that represent the economy. For example, the S&P Index contains the top 500 companies in America that has operations around the world.
The Vanguard S&P funds have an expense ratio of about 0.3%. This is very low compared to an expense ratio of 2%t o 3% charged by many actively managed funds, including the unit trusts available in Singapore.
It may be difficult to find a fund that charges as low as Vanguard. But it is acceptable to invest in a fund with an expense ratio of 0.5% (such as the STI ETF). Here is the accumulated amount from investing $500 a month over 30 years:
Net yield of 5.5% (i.e. 6% - 0.5%), total of $459,517
Net yield of 3.5% (i.e 6% - 2.5%), total of $320,577
You give away 29% of your accumulated savings of $459,517 to get a reduced amount of $320,577 when you invest in a fund that has an expense ratio of 2% higher.
When you invest in companies, you should not bother about any the temporary y fluctuation in the share prices. Although the dividend may be cut during an economic recession, it will be restored when the economy recovers. You only need to make sure that your investments are well diversified, i.e. the fund is invested in many companies, so that any failure of a single company will have a small impact on the fund.
Tan Kin Lian
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