Vanguard founder's top 10 rules of investing

Few people in history have impacted investing as much as John (Jack) Bogle. Not only was he founder of the Vanguard Group, which today has $US8.6 trillion ($A13.4 trillion) of assets under management, he helped popularise the index fund, which over time morphed into today's ETFs. 

Bogle's idea of 'investment over speculation' has helped millions of mum-and-dad investors build their wealth in a low-risk way. Warren Buffett said, "Jack did more for American investors as a whole, than any individual I've known". 

Here are Bogle's top 10 rules for investing.

1. Remember 'reversion to the mean'

The stocks that are hot today, won't be the same stocks that are hot tomorrow. Don't buy stocks based on extraordinary share price performance, as it likely won't last, and could in fact reverse. When stock prices become out of sync with intrinsic value, it's the stock price that will eventually revert.  

2. Time is your friend and impulse is your enemy

If you invest wisely through diversification, and have a long runway, the miracle of compound interest will work for you. However, impulsiveness can lower your returns. Examples of this include buying on a 'hot tip', buying when markets are skyrocketing or selling when markets are tanking. 

3. Buy right and hold tight

According to Bogle, buying right means to diversify, diversify and diversify. This can be done via a broad-based ETF. If you own the whole market, you get your share of that market, which means that if energy or technology is up, your share of that market is also up. Downturns are an important time to hold tight, as storms will eventually pass, and markets again move to new highs. 

4. Have realistic expectations

Growing wealth does take time, and Bogle likes the 'Bagel and doughnuts' analogy to show how we can achieve this. Bagels, he considers, are healthy, nutritious and good for your body. Doughnuts, on the other hand, will give you a quick sugar rush, but in the long-term are unhealthy. He equates long-term investing as the bagel, and short-term investing as the doughnut. 

5. Forget the needle, buy the haystack

This is the ultimate argument for indexing. Finding that elusive needle in a haystack is extraordinarily difficult. Bogle believes that we should forget about trying to find that needle, and instead 'buy the haystack', which is buying into the whole stock market. 

6. Minimise the croupier's take

Paying lower fees is always a good idea, but it becomes especially important when considering the negative impact that high fees have on the long-term compounding of your investments. 

7. There's no escaping risk 

There will always be risk in investing, however, it can be minimised with diversification and having a long-term time frame. Even holding cash has some risk, as cash can slowly be eaten away by inflation. 

8. Beware of fighting the last war

We tend to think a lot about previous returns and previous economic conditions. The future, however, can be quite different to the past. Bogle believes that history is interesting, and may rhyme (as Mark Twain says), but doesn't repeat itself. 

9. The hedgehog beats the fox 

Ancient Greek poet Archilochus said, "The fox knows many things; the hedgehog knows one big thing." The meaning of the saying is that the fox may know many strategies, but if it finds a hedgehog, the hedgehog will roll into a ball, be safe and win the day. Active investing is like the fox, and passive investing is like the hedgehog. Despite the many strategies of the active investor, the strategy of diversification and investing for the long term will always win. 

10. Stay the course 

Once you've invested in a diversified portfolio of ETFs, it's important that you stay the course, especially through the market's inevitable fluctuations. In other words, sit back, take it easy, and let the stocks do their thing. As a bonus, you'll only need to check up on them every now and then. 

These 10 simple rules provide an excellent framework for investing and are ideas every investor should absorb. If investors make a plan, diversify their holdings, invest at regular intervals, and stay the course, they will surely do well.