On Tuesday I reviewed John Bogle’s take on simple investing in his book Common Sense on Mutual Funds. He suggests purchasing low-cost, index funds and even thinks you can cover all of your needs by investing in one balanced fund.

However, as I mentioned, some people might find this approach too simplistic. For those determined to take an active-investing approach, Bogle also offers eight rules for picking assets for your portfolio if you decide not to index.

Rule 1: Select Low-Cost Funds: It’s easy to see why this rule comes first. Plain and simple, costs have a huge affect on your total return.  Look for funds with a low expense ratio.  While index funds are going to be the lowest (20 basis points or less), you can likely find some actively managed funds with competitive rates.  Keep in mind, those funds are likely to have low turnover (buying and selling portfolio securities).

Rule 2: Consider Carefully the Added Costs of Advice: This rule also involves costs, but it’s the costs of paying a commission (or load) on a fund or paying for an advisor. Look for “no-load” funds that won’t costs you anything to invest. You should also look for “fee-only” investment advisors that can tell you exactly how much they will charge, whether it’s an hourly rate or percentage of the assets.

Rule 3: Do Not Overrate Past Fund Performance: You hear all the time “past performance does not guarantee future results.” This point is most true in the investing world. If you could determine winners by their past performance, investing would be very easy.  Bogle points out that “reversion to the mean” – funds that are up, go down, and funds that are down, go up – is inevitable.

Rule 4: Use Past Performance to Determine Consistency and Risk: Despite Rule 3, Bogle argues that past performance can provide insight into consistency.  He suggests looking at a fund’s ranking among other funds with similar objectives, and choosing funds with at least six to nine years in the top two quartiles of performance and no more than one or two years in the bottom quartile.

Rule 5: Beware of Stars: This rule guards against picking funds solely based on their all-star manager.  Many fund managers may gain notoriety from a few years of success. However, there have been very few stars that have withstood the test of time. And those that have, could not have been predicted beforehand.

Rule 6: Beware of Asset Size: Bogle believes that funds can get too big to achieve investment success. Admittedly, “too big” is a complex issue that depends on many factors. But he thinks “unbridled asset growth” should be a read flag to intelligent investors.

Rule 7: Don’t Own Too Many Funds: As a reference to his discussion of using one balanced fund, Rule 7 cautions against holding too many funds. Too large of a number can lead to overdiversification and unnecessary risk. He even gives an example of a simple five-fund portfolio that contains 50% large-cap stock, 10% mid-cap, 20% small-cap, 10% specialty (REIT, health care, etc.) and 10% international.

Rule 8: Buy Your Fund Portfolio and Hold It: Lastly, Bogle’s final piece of advice is to stay the course after you’ve determined your long-term objectives, defined your tolerance for risk and selected your index and/or actively managed funds. The emotions such as greed, fear, exuberance and hope can lead to rash behavior that will end up destroying your portfolio. Have confidence that your strategy will benefit you in the long run.

I can’t say enough about how much I enjoy this book.  If you haven’t read it yet, you definitely should. You will find much more on these rules and other good-to-know investing advice.