# The Bogleheads' Guide to Investing  ## Metadata - Author: [[Taylor Larimore, Mel Lindauer, Michael LeBoeuf]] - Full Title: The Bogleheads' Guide to Investing - Category: #books ## Highlights - In all, Franklin’s legacy matches the legacy of the Bogleheads, “a doctrine, my friends, of Reason and Wisdom . . . and Frugality and Prudence, though excellent Things. Ask God’s blessing humbly and be not uncharitable to those who seem to want it, but comfort and help them . . . What is the noblest question in the world? ‘What good may I do in it?’” Again using the words Franklin chose, the members of this investment association have “dedicated themselves to assuming the obligations of virtue and of serving others.” ([Location 604](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=604)) - Anyone can do it, although very few choose to do it. It turns out that an investment of $601 at the beginning of each month in stock index funds, coupled with an average annual return of 10 percent, grows to the sum of $1,249,655 in 30 years. Incidentally, $601 a month is approximately 28.9 percent of a yearly salary of $25,000. And in case you might be wondering, yes, the math works the same for everybody. ([Location 921](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=921)) - If you want to achieve your financial goals in less time, here’s one of the simplest, best pieces of advice that we can give you: When you earn a dollar, try to save a minimum of 20 cents. ([Location 985](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=985)) - A 25-year-old who invests $5,000 in a Roth IRA once a year for 40 years reaches age 65 with a tax-free fortune of $1,625,149. ([Location 1029](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=1029)) - He is also maxing out his matching 401(k) at work, and is investing the maximum allowable amount in Roth IRAs for him and his wife. ([Location 1087](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=1087)) - If you decide to create added sources of income, do your homework. The secret of any successful business lies in fulfilling unmet needs and wants. Find a need and fill it. Find a problem and solve it. Find a hurt and heal it. People pay money for goods and services that make them feel good and solve their problems. Odds of success are good if you choose an activity that’s in step with your educational background, previous job experiences, aptitudes, and interests. ([Location 1092](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=1092)) - Stocks represent an ownership interest in a corporation. ([Location 1141](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=1141)) - So, in reality, a bond is nothing more than an IOU or promissory note that pays interest from time to time (usually semiannually) until maturity. ([Location 1162](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=1162)) - U.S. Savings Bonds can be purchased online at TreasuryDirect (www.treasurydirect.gov). Savings Bonds purchased via TreasuryDirect are held in book entry form only; the Treasury does not issue statements on these accounts. So while the Savings Bond purchases and redemptions are easily handled online, it’s up to you to keep a paperwork trail. ([Location 1218](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=1218)) - Mr. Bogle suggests that owning your age in bonds is a good starting point. So, a 20-year-old would hold 20 percent of his/her portfolio in bonds. By the time this investor reaches 50, the bond portion of the portfolio would have gradually increased, in 1 percent increments, to now represent 50 percent of his portfolio. ([Location 1339](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=1339)) - With the introduction of these life-cycle funds, the mutual fund companies are attempting to simplify things for investors by relieving them of the need to rebalance on a regular basis. And with these funds, there’s no need for an investor to have to change their portfolio as they age and get closer to retirement. The Target Retirement series of funds from Vanguard and the Freedom series of funds from Fidelity are good examples of this type of fund. ([Location 1484](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=1484)) - So where can an investor turn to for a guaranteed positive real return? The U.S. Treasury currently offers two choices that satisfy this need Bonds and Treasury Inflation-Indexed Securities, commonly referred to as TIPS (Treasury Inflation-Protected Securities). We’ve mentioned both in previous chapters, but let’s now examine how they work in more detail. ([Location 1659](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=1659)) - Hopefully the pattern is becoming clear. The higher the I Bond’s fixed rate, the lower your tax bracket, and the longer the holding period, the better the odds are that you’ll realize a higher after-tax real return. ([Location 1871](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=1871)) - Investing in a TIPS fund, such as Vanguard’s VIPSX or Fidelity’s FINPX If you’re looking for guaranteed inflation protection from TIPS, with no risk of principal, buying your TIPS at the Treasury auction and holding them to maturity would be your best choice, since there’s always the risk of some loss of principal with the other two options. For many investors, however, the flexibility and benefits of a TIPS mutual fund more than offset the risk of possible loss of principal, just as it does with any other bond mutual fund. ([Location 1920](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=1920)) - To overcome any recency bias, you need to be aware of and understand the powerful magnetic market force known as reversion to the mean (RTM). Although there are no absolute guarantees with RTM, usually asset classes that have outperformed for a period of time are likely to underperform for another period of time. ([Location 2112](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=2112)) - calculate the needs of someone who is 30 years from retirement and has an expected return of 8 percent. If that person needed to withdraw $30,000 per year from a retirement plan when he or she retired, that individual would need to have accumulated approximately $1,193,460 ($39,782 30) by the retirement date. ([Location 2247](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=2247)) - There is a crucially important difference about playing the game of investing compared to virtually any other activity. Most of us have no chance of being as good as the average in any pursuit where others practice and hone skills for many, many hours. But we can be as good as the average investor in the stock market with no practice at all. ([Location 2261](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=2261)) - However, with a very simple, no-brainer investment strategy called passive investing you have, at the very least, a 70 percent chance of outperforming any given financial pro over an extended period of time. ([Location 2271](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=2271)) - Through education and experience, most of us come to learn and practice certain life principles that serve us well. For example: Don’t settle for average. Strive to be the best. Listen to your gut. What you feel in your heart is usually right. If you don’t know how to do something, ask. Talk to an expert or hire one and let the expert handle it. That will save you a lot of time and frustration. You get what you pay for. Good help isn’t cheap and cheap help isn’t good. If there’s a crisis, take action! Do something to fix it. History repeats itself. The best predictor of future performance is past performance. Well, guess what? Applying these principles to investing is destined to leave you poorer. ([Location 2278](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=2278)) - Here is the crux of the strategy: Instead of hiring an expert, or spending a lot of time trying to decide which stocks or actively managed funds are likely to be top performers, just invest in index funds and forget about it! ([Location 2314](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=2314)) - Tags: [[pink]] - Index funds outperform approximately 80 percent of all actively managed funds over long periods of time. They do so for one simple reason: rock-bottom costs. In a random market, we don’t know what future returns will be. However, we do know that an investor who keeps his or her costs low will earn a higher return than one who does not. That’s the indexer’s edge. ([Location 2322](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=2322)) - Richard Ferri, author of Protecting Your Wealth in Good Times and Bad: “When you are finished choosing a bond index fund, a total U.S. stock market index fund, and a broad international index fund, you will have a very simple, yet complete portfolio.” ([Location 2422](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=2422)) - “Never buy anything whose price you can’t follow in the newspapers—and you shouldn’t buy anything too complex to explain to the average 12-year-old.” ([Location 2723](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=2723)) - Accordingly, we will concentrate our attention on these three primary asset classes and use three guidelines to allocate between stocks, bonds, and cash: Jack Bogle’s rough guide is that bonds should equal our age. Table 8.2 shows the decline we might expect with various stock/bond combinations. Vanguard’s online questionnaire and suggested asset allocations in Appendix IV. ([Location 2726](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=2726)) - Stock traders often say, “Bulls make money, bears make money, but hogs get slaughtered.” ([Location 2774](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=2774)) - We also suggest a broad-based, diversified bond fund such as Vanguard’s Total Bond Market Index Fund. ([Location 2839](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=2839)) - The expense ratio is the only reliable predictor of future mutual fund performance. ([Location 3163](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=3163)) - It’s very important (from both a cost and tax standpoint) to avoid selling or exchanging profitable mutual funds in a taxable account. This is because every sale of shares in a profitable, taxable fund is subject to transaction costs and a capital gains tax. ([Location 3328](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=3328)) - If your 401(k) falls short, based on its cost and the criteria we discuss in this book, we suggest you do the following: Invest in your 401(k) up to the company match. The company match is free money you cannot afford to forfeit. If eligible, invest in an IRA up to the maximum. Contribute to the 401(k) up to the maximum. Additional funds should go into tax-efficient mutual funds. ([Location 3504](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=3504)) - For instance, you can own nearly the entire U.S. equity market relatively inexpensively with just a single equity fund, such as Vanguard’s Total Stock Market Index Fund (VTSMX). The minimum purchase price for VTSMX is only $3,000 for both IRA and taxable accounts. ([Location 3746](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=3746)) - It’s the mutual fund companies that have turned the star rating system into a misleading marketing tool—a fact that’s understood by most Bogleheads. ([Location 4038](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=4038)) - Wall Street can’t stand buy-and-hold strategies because brokers need trading activity to make money. ([Location 4282](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=4282)) - It’s sad, but so many well-meaning relatives and friends have given children Savings Bonds as gifts, intending them to be used later for the child’s education, and incorrectly titled them in the child’s name. ([Location 4462](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=4462)) - all sources are allowed to be made until the total balance in an account reaches as high as $300,000 per individual. The earnings in the 529 plans grow tax-deferred, and withdrawals for qualifying education expenses are currently tax-free. 529 plans offer other attractive features as well. There are no income limits for those contributing to a 529 plan, as there are with other education investment options. You can invest in both a Coverdell ESA and a 529 plan at the same time. You’re allowed to change the beneficiary to another family member. ([Location 4520](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=4520)) - It’s generally agreed by financial planners that one can spend $5,000 per year for every $100,000 of capital invested in a well-diversified, balanced portfolio. ([Location 4629](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=4629)) - As you will learn in Chapter 16, the terms financial professional or financial planner are meaningless. Many so-called financial professionals are really financial salespeople. ([Location 4669](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=4669)) - Once again, we recommend asking a CPA at the outset if he or she sells financial products, or is in any way compensated by the people they recommend, and steering clear of those who do. ([Location 4684](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=4684)) - The U.S. Securities and Exchange Commission (SEC) has published a list of helpful guidelines for investors thinking about hiring an investment professional. Here are some of the highlights. ([Location 4882](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=4882)) - The Certified Financial Planner Board of Standards also offers free online information on how to choose a planner. You can check out its website at www.cfp.net. ([Location 4898](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=4898)) - However, Morningstar found that investors who rebalanced their investments at 18-month intervals reaped many of the same benefits as those who rebalanced more often, but with less costs. ([Location 5021](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5021)) - addition, we tend to get more conservative as we get older and accumulate assets, so we should revisit our asset allocation plan to see if any changes are in order when it’s time to rebalance. If you’d rather not have to worry about this, then consider owning one of the funds from Vanguard’s Target Retirement series or Fidelity’s Freedom series, since they’ll automatically rebalance and grow more conservative with time. ([Location 5141](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5141)) - 1980, very few Americans owned stocks and only 6 percent owned mutual funds. Today, over half of all U.S. households own marketable securities in one form or another. It has been the single greatest financial change in U.S. households in the past quarter century and has created an enormous new market for financial products and services. ([Location 5156](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5156)) - Tags: [[pink]] - Note: Half.... So not all. Market could be twice as big 2014 this book - Just because you’re paranoid doesn’t mean they aren’t out to get you. ([Location 5171](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5171)) - Tags: [[pink]] - The paradox of money is while most people are very emotional about acquiring it, behaving emotionally about money is a recipe for losing it. ([Location 5417](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5417)) - If you want to enjoy the thrills and spills of trying to pick winning investments or time the market, take a maximum of 5 percent of your portfolio and create a casino account. You’re free to trade and try to time the market with this money as you see fit. However, there’s one overriding rule: If you lose it all, it’s gone forever. No more casino accounts. That way you can enjoy the excitement of chasing the action without jeopardizing your financial future. ([Location 5594](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5594)) - The second mistake is to underspend. This is usually driven by an irrational fear of running out of money—even when your portfolio and other sources of income are sufficient to sustain your desired standard of living. ([Location 5657](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5657)) - For example, someone whose full retirement age is 66 will receive a pension that’s 33 percent larger than he or she would receive at age 62. ([Location 5705](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5705)) - annuity. Finally, if you give the insurance company a hefty sum without choosing a term-certain payout option, and then die prematurely, it can be a very bad decision for your heirs. The money does not go back into your estate; rather, it’s retained by the insurance company. ([Location 5722](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5722)) - Most of the credible studies of 30-year portfolio survival rates conclude that you can withdraw from 4 to 6 percent of the portfolio value per year with a good chance of not exhausting the portfolio, depending on your portfolio’s asset allocation. ([Location 5737](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5737)) - summary, the most important key to making your money last is to be financially flexible, particularly in the early years. Keep your fixed expenses low and have a viable way to earn extra income if needed. It may be reassuring to have an ironclad rule telling you to withdraw no more than a certain percentage of your portfolio each year. However, to dogmatically follow such a rule is to risk both over- and underspending. During our working years, we have to make financial decisions in the face of uncertainty, and this new stage of life is no different. Most important, don’t let money concerns deprive you of enjoying the freedom to spend your time pursuing the activities—and enjoying the people—you treasure most. ([Location 5766](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5766)) - If you need life insurance, buy term insurance. Term insurance is basic pay-as-you-go, no-frills insurance. ([Location 5833](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5833)) - There’s a 20 percent chance that a 35-year-old will become disabled before age 65 and a one in seven chance that he or she will be disabled for at least five years. ([Location 5928](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5928)) - Five out of 1,000 people will experience a house fire: average cost: $3,400. Seventy out of 1,000 people will have an auto accident: average cost: $3,000. Six hundred out of 1,000 people will require a nursing home stay: average cost: $50,000 per year, with an average stay of three to five years. Since Ms. Stevens wrote that article, nursing home costs have risen substantially. In some parts of the country, average nursing home costs are well over $100,000 per year and will surely continue to rise in the future. ([Location 5969](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5969)) - If you go shopping for long-term care, here are some of the features a good policy will contain: ([Location 5987](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=5987)) - Some mutual fund companies also allow you to designate a beneficiary for your taxable accounts, which means those accounts would also avoid probate. At Vanguard, this feature is known as the Directed Beneficiary Plan. You need to understand, though, that avoiding probate does not mean avoiding estate taxes. ([Location 6093](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=6093)) - assets in a living or revocable trust avoid probate in your state of residence and also in other states where you might own property, if the out-of-state property is placed in the trust. After your death, the trust is similar to a will in some ways, in that the successor trustee will distribute the assets according to your wishes. However, since the trust assets don’t go through probate, your affairs are kept private. With a trust, there is a much smoother transition after your death, and the disposition of assets can start immediately. However, trusts are more costly to create than wills, so you need to be sure a trust is warranted in your situation. ([Location 6099](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=6099)) - Be aware that you might subject yourself to the gift tax if you exceed the annual exclusion limit to any one individual. There are, however, some exceptions to this annual gifting limit that you should be aware of: There is currently no limit on the amount you can gift to your spouse, as long as he or she is a U.S. citizen. There is currently no limit on the amount you can gift to pay for someone’s school tuition or medical bills, providing you pay them directly to the school or medical facility. Be aware, though, that while you can pay for someone’s college by paying their tuition bill directly to the college, you can’t pay for their other college expenses, such as room and board, under this exemption. Gifts to charities and other tax-exempt organizations of up to 50 percent of income are also excluded from the annual gift limit. ([Location 6157](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=6157)) - WHAT WE’VE LEARNED Choose and live a sound financial lifestyle. We need to pay off our credit card debt, establish an emergency fund, get our spending under control, and most importantly, learn how to live below our means, since that’s really the key to financial freedom. Start to save early and invest regularly. The earlier we start, the longer we’ll enjoy the powerful benefits of compounding. Know more about the various investment choices available to us, such as stocks, bonds, and mutual funds. For most investors, mutual funds offer great diversity in a single investment. Don’t invest in things you don’t understand. Figure out approximately how much you might need for your retirement, so you’ll know if you’re on track. You can’t reach your goal if you don’t have a target! Indexing via low-cost mutual funds is a strategy that will, over time, most likely outperform the vast majority of strategies. If you decide to own actively managed mutual funds, choose managed funds with low expenses and place them in tax-advantaged accounts. An asset allocation plan is based on your personal circumstances, goals, time horizon, and need and willingness to take risks. Risk and higher expected returns go hand in hand. There’s no free lunch. Make your investment plan as simple as possible. Costs matter. We can’t control market returns, but we can control the cost of our investments. Commissions, fees, and mutual fund expense ratios can rob you of much of your investment returns. Keep costs as low as possible. Taxes can be your biggest expense. Invest in the most tax-efficient way possible. Put tax-inefficient funds in your tax-deferred accounts, and select tax-efficient investments for your taxable account. Remember the importance of diversification. You want some investments that zig while others zag. Rebalancing is important. Rebalancing controls risk and may reward you with higher returns. Stick with your chosen rebalancing strategy. Market timing and performance chasing are poor investment strategies. They can cause investors to underperform the market and jeopardize financial goals. Invest for your children’s education. There are several tax-deferred and tax-free options available. Know how to handle a windfall, if you receive an inheritance or get lucky and hit the lottery. Answer the question of whether you do or don’t need a financial advisor, and some of the reasons for and against. Understand the importance of protecting the future buying power of your assets by investing in such things as inflation-protected securities. Remember, inflation is a silent thief that robs you of future buying power. Tune out the noise and do not get distracted by daily news events. Avoid hot investment fads and following the herd as it stampedes toward the cliff’s edge. Believing that “It’s different this time” can cause severe financial damage to your portfolio. Protect your assets with the proper types and amounts of insurance. Insurance is for protection. It’s not an… ([Location 6214](https://readwise.io/to_kindle?action=open&asin=B00JUV01RW&location=6214)) - Tags: [[pink]]