Bogleheads® investing start-up kit

Bogleheads® investing start-up kit
Introduction to Investing
Investment Philosophy Risk
Asset Classes
Money Markets CDs Bond Basics Treasury Inflation Protected Securities Stock Basics Domestic/International
Implementing an Investment Plan
Investment Policy Statement Mutual fund Mutual Funds and Fees Mutual Funds: Additional Costs Indexing Vanguard Target Retirement Funds Lazy Portfolios Prioritizing investments Principles of Tax-Efficient Fund Placement Asset Allocation in Multiple Accounts Rebalancing Tax Loss Harvesting Comparing Investments

The Bogleheads® Philosophy
Develop a workable plan Invest early and often Never bear too much or too little risk Never try to time the market Use index funds when possible Keep costs low Diversify Minimize taxes Keep it simple Stay the course Watch the Video

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;

• Laura’s tips on posting your portfolio and asking related questions
• Laura’s investment planning overview

Are you ready to invest?

Main article: Financial planning

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

Main article: Video: Start with a Sound Financial Lifestyle

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

Main article: Investment Policy Statement

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.

Set your level of acceptable risk

Main article: Risk and return: an introduction

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. 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.

Main article: 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.. 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 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."

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

Main article: Bogleheads® investment philosophy

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 Target Date Retirement Fund.
• 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:

• Mutual fund
• Mutual Funds and Fees
• Mutual Funds: Additional 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.

• Principles of Tax-Efficient Fund Placement

Maintain your portfolio

Main article: Rebalancing

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.

See also

• Indexing
• Comparing Investments - Basic financial concepts needed for investment decisions.

External links

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

 

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