Investors have to have nerves to weather market cycles.  Heart is making inroads in social investing.  Brains on the other hand, are hit or miss.  It’s not that any investor lacks the brains, it’s that human behavior sometimes trumps our rational sense.  At Index Universe, an experienced active stock picker reflects on his metamorphosis to a passive indexing strategy.

It is fairly safe to say that most investors start off as active stock pickers.  In discussing with my colleagues, it is easy to trace why this is the case.  During our college years, the emphasis is typically on quantitative, technical, and fundamental analysis.  We study statistics, economics, corporate finance, and accounting.  Then we learn how to adjust financial statements given various situations, and how to recalculate our ratios.  With this depth of knowledge, speculating and forecasting is a natural progression.  There comes a point where the path can become more important than the destination.  That can be a slippery slope.

Investing is a way to help us achieve our goals.  Roads are not paved in gold, and usually they are full of potholes, ice, and detours.  Still, if we drive safely and smartly, our chances of reaching our destination are that much better.

Ten years ago, John Bogle, founder and retired CEO of The Vanguard Group, wrote a book titled “Common Sense on Mutual Funds.”  This long-running national best-seller has been praised since the day it was first published.  On one of our favorite blogs, the author reviews some of the updates that Bogle has made to the new edition.  Bogle didn’t make dramatic changes; rather, he updated his text based upon his last decade of experience.  His findings are what we would expect.

Followers of our blog will not be surprised by what Bogle confirms and highlights.  Essentially, Bogle’s updates expand upon the belief that one can achieve financial goals and be a successful investor by taking some simple steps.

1. Maintain a long-term horizon.
2. Diversify through broad index funds
3. Invest in low-cost funds
4. Avoid over-trading
5. Keep tax-efficiency in mind
6. Beware of active fund managers
7. Hold a balanced portfolio of equity and bonds - per your risk preferences.

Perhaps investing should not be as exciting as many pretend it should be.  A disciplined approach may be boring, but it also continues to prove to be effective.

Back around Halloween, we posted a blog titled, “Trick or Treat?”, which was about active funds that at their core, are basically passive index funds.  Today, the Wall Street Journal expounded upon this topic.  Check it out here.