Bogleheads® investing start-up kit

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The Bogleheads® Philosophy
  1. Develop a workable plan
  2. Invest early and often
  3. Never bear too much or too little risk
  4. Never try to time the market
  5. Use index funds when possible
  6. Keep costs low
  7. Diversify
  8. Minimize taxes
  9. Keep it simple
  10. Stay the course
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Welcome to the Bogleheads® investing start-up kit!

This kit is designed to help you begin or improve your investing journey. The Bogleheads investing principles are shown to the right and are more fully explained in Bogleheads Investment Philosophy.

If you have questions regarding investing, just ask in the Bogleheads' forum. No question is too simple. Please refer to the following guides for asking investment planning questions;

Are you ready to invest?

Take a step back at look at the big picture. Investing only comes after you have a sound financial footing.

You need to save money to invest. This means spend less than you earn and have a sound financial lifestyle. If you can’t do that, read a good book on saving and budgeting, or consider this helpful video.

Investing should only commence after you have saved a minimum of 6 months of living expenses (preferably more). You should budget a certain portion of your income for investing.

Create an investment plan

What is this investment used for? When are the funds needed? Defining clear objectives will determine how you configure your portfolio. Your objectives can be anything from "I want to retire in 10 years" (a simple investing plan) to a full-blown investment policy statement.

Avoid common behavioral pitfalls

"If you want to see the greatest threat to your financial future, go home and take a look in the mirror.”
~ Jonathan Clements, former Wall Street Journal columnist.


Investing is much more than working with numbers or reading a fund prospectus. Emotions also play a large role. If you let your emotions control your investing decisions, your investing plans will quickly go off-track.

As an example, if you select an asset allocation without taking into account your emotional capacity for risk, you’re unlikely to stay the course in a down market or market crash

Poor decisions are not always caused by emotion or stress, other types of behavior can affect decision making as well. It is essential that investors recognize the behavioral pitfalls before committing to decisions which can affect portfolio or investment goals.

Set your level of acceptable risk

Risk is the uncertainty (variation) of an investment's return, which does not distinguish between a loss or a gain. However, investors usually think of risk as the possibility that their investments could lose money.

The major investment categories, known as asset classes, are stocks, bonds, and cash or cash equivalents.[footnotes 1] Diversification is an approach to distribute your investments across these asset classes. Risk can only be managed by diversifying your portfolio.

You set your level of risk, the tolerance you have to a decline in your portfolio's value, by adjusting your asset allocation.

Selecting the appropriate asset allocation (ratio of stocks to bonds) is essential to designing a portfolio that matches the investor's ability, willingness, and need to take risk.[1]. Asset allocation is one of the most important decisions that investors can make. In other words, the importance of an investor's selection of individual securities is insignificant compared to the way the investor allocates their assets to stocks, bonds, and cash equivalents.

Although your exact asset allocation should depend on your goals for the money, some rules of thumb exist to guide your decision.

The most important asset allocation decision is the split between risky and non-risky assets. This is most often referred to as the stock/bond split. Benjamin Graham's [2] timeless advice was:

"We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequence inverse range of 75% to 25% in bonds. There is an implication here that the standard division should be an equal one, or 50-50, between the two major investment mediums." [3]

Bogle recommends "roughly your age in bonds"; for instance, if you are 45, 45% of your portfolio should be in high-quality bonds. All age-based guidelines are predicated on the assumption that an individual's circumstances mirror the general population's. Individuals with different retirement ages (earlier or later), asset levels (those who have saved enough to fund their retirement fully with TIPS, or needs for the money (e.g. college savings) would be well-advised to consider what circumstances make their situation different and adjust their asset allocation accordingly.

Create a well diversified, low cost portfolio

Rather than trying to pick the specific securities or sectors of the market (US stocks, international stocks, and US bonds) that will outperform in the future, Bogleheads buy funds that are widely diversified, or even approximate the whole market. The best and lowest cost way to buy the whole stock market is with index funds (either through traditional mutual funds or exchange-traded funds (ETFs)).

We advocate investments in well-diversified, low-cost mutual funds. The following articles provide examples of broadly diversified investment portfolios.

  • Target date retirement funds - an all-in-one fund for investors who want simplicity of managing their investments.
  • Three-fund portfolio - often recommended for and by Bogleheads attracted by "the majesty of simplicity" (Bogle's phrase), and for those who want finer control and better tax-efficiency than they would get in a balanced fund.
  • Four-fund portfolio - Vanguard recommends a four-fund portfolio for global diversification. [footnotes 2]
  • Lazy portfolios - are designed to perform well in most market conditions. Most contain a small number of low-cost funds that are easy to rebalance. They are "lazy" in that the investor can maintain the same asset allocation for an extended period of time and are suitable for most pre-retirement investors.

It is important to keep investing costs low. The following pages examine mutual fund costs:

Consideration should be given to tax efficiency; which is an approach to minimize the effects of taxes on your portfolio. Tax efficiency should be considered after you select your asset allocation.

Maintain your portfolio

Once you have your portfolio, it's important to rebalance when your funds deviate more than 5%-10% from your asset-allocation plan. Target date retirement funds do the rebalancing for you.

Notes

  1. Fixed income is sometimes considered to be a combination of bonds and cash. See Fixed income.
  2. Vanguard offers an easy-to-use tool which will help you select a four-fund portfolio. See: Need an investment recommendation?, then select Answer a few questions for a recommendation.

See also

References

  1. Swedroe, The Only Guide You'll Ever Need for the Right Financial Plan, Bloomberg Press, 2010. ISBN 9780470929711
  2. Benjamin Graham, wikipedia
  3. The Intelligent Investor, p. 93 of the 2003 edition annotated by Jason Zweig, Collins Business, ISBN 978-0060555665

External links

  • The truth about risk, from Vanguard. A tutorial on the approach to configure and manage a portfolio.