Foreword for the 10th Anniversary Edition

Jack Bogle deserves the profound gratitude of the American public. First, he devotes enormous amounts of time and energy to showing investors how to navigate the treacherous marketplace for financial services. Second, he created Vanguard, a rare financial institution that places the interests of the investor front and center. Without Jack Bogle’s efforts, Americans would face a financial landscape nearly barren of attractive alternatives.

Bogle offers disarmingly simple advice: employ low-cost index funds in a low-turnover, disciplined portfolio strategy. Unfortunately, few follow his sensible advice. The vast majority of investors play an active management game in which they lose two ways. First, they lose by choosing actively managed mutual funds that almost always fail to deliver on the promise of market-beating results. The shortfall comes from wildly excessive, ultimately counterproductive trading (with the attendant market impact and commissions) and from unreasonable management fees (that far exceed the managers ’ value added, if any). And, as Bogle points out, nearly all mutual fund managers behave as if taxes do not matter, thereby imposing an unnecessary and expensive tax burden (that often blindsides the investing public when they deal with the IRS on April 15).

Second, investors lose by trading mutual funds with eyes fixed unwaveringly on the rearview mirror. By dumping yesterday’s faded idol and chasing today’s hot prospect, mutual fund investors systematically sell low and buy high (which is a poor approach to making money). Moreover, the frenzied switching of funds often triggers a further tax burden. If investors followed Bogle’s advice to use index funds, by dint of low costs they would beat the vast majority of fund managers. If investors followed Bogle’s advice to take a steady approach to allocating assets, by avoiding perverse timing moves they would benefit from realizing nearly all that the markets have to offer.

Of course, as a financial professional I have my own views and offer two small amendments to Bogle’s recipe for investment success. I would place a greater emphasis on the value of international diversification, particularly with respect to exposure to emerging markets. Second, I would limit holdings of bonds to full-faith-and-credit issues of the United States government. The experience of investors in the recent financial crisis (as well as the experience of investors in the market dislocations in 1998 and 1987) illustrates in high relief why exposure to credit risk (and optionality) undermines the very reason for holding bonds in the first place. That said, Jack Bogle gets the essential elements right. Follow his advice.

Bogle’s sage advice deserves far more attention than it receives. Individual investors must educate themselves to have any hope of executing a successful investment program. Regardless of the approach that investors pursue, reading provides the essential underpinnings for an investor’s education. Jack Bogle belongs to a small group of thoughtful author-practitioners, including Burton Malkiel and Charles Ellis (dare I include myself?), who articulate a reasoned, thoughtful approach to investment. After reading Common Sense on Mutual Funds, move on to Malkiel’s A Random Walk Down Wall Street, Ellis’s Winning the Loser’s Game, and my own Unconventional Success. This handful of books competes with the marketing hype of the mutual fund industry, the blathering blandishments of the brokerage community, and the enervating cacophony of television’s talking heads. (Even after being eviscerated by Jon Stewart on The Daily Show, Jim Cramer continues unashamedly to offer seriously damaging advice to viewers of Mad Money. Across nearly every dimension of the investment world, Jim Cramer stands opposite Jack Bogle. Ignore Jim Cramer. Pay attention to Jack Bogle!)

Jack Bogle’s accomplishments extend far beyond educating the investing public. His Vanguard offers investors an alternative in a mutual fund industry that overwhelmingly fails investors. As one of only two mutual fund complexes (TIAA-CREF, where I serve on the board, is the other) that operate without a profit motive, Vanguard gives investors a fair shake. Aside from Vanguard and TIAA-CREF, nearly all mutual fund management companies seek to generate profits and purport to serve investors. Unfortunately, when the profit motive comes into conflict with fiduciary responsibility, greed wins and profits triumph. The idea of serving investor interests disappears and the investor loses. As Jack Bogle so convincingly tells us, today’s profit - motivated mutual fund companies pay close attention to marketing, make sure to collect high fees, and provide little in terms of actual investment management. Sensible investors avoid the active management morass, embrace the certainty of indexing, and select an investor-centric fund manager.

In spite of his gloomy message about the fund industry’s structural, operational, and performance failures, Jack Bogle retains an optimistic view of the world. I like to think of myself as a positive person, but I worry about the individual investor’s chances for success. In recent years, the burden of providing for retirement has shifted dramatically from the employer to the employee. This policy shift creates a number of issues. First, individuals do not save enough. Second, not surprisingly, those who save tend to enjoy high incomes. Stunning statistics from the Federal Reserve Board’s Survey of Consumer Finances indicate that 88 percent of the top-income quintile participate in defined contribution plans, in which they hold an average balance of more than $260,000; less than 11 percent of the bottom-income quintile participate in defined contribution plans, in which they hold an average balance of less than $2,000. Are retirement programs only for the rich? Third, rich or poor, investors face a substandard set of choices dominated by for-profit mutual funds. Fourth, investors take those substandard investment vehicles and use them to make consistently flawed timing decisions. The net result, as Jack Bogle points out, is that investors fail to capture a fair share of the rewards of investing in the world’s security markets.

Jack Bogle gave the investing public two magnificent gifts—Vanguard, a rare investment management company that acts in the best interests of the investors, and Common Sense on Mutual Funds, a readily accessible guide on how to manage personal investment portfolios. Take advantage of Jack Bogle’s gifts and pass them on to someone you love.

DAVID F. SWENSEN

Chief Investment Officer, Yale University