Variations on Bogleheads® investing

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Bogleheads follow a set of principles that maximize the chances of a good retirement. But there are many different plans which are compatible with these underlying principles. Some investors diverge somewhat on some of the principles.

Having a play money account

Some investors find financial markets fascinating, and like trying to pick individual stocks. If taking this approach, John Bogle recommends setting aside 5% of a retirement portfolio as "play money". [1] Additional examples of strategies for this account include following a "tactical asset allocation" strategy in which the investor moves a portion of money in and out of stocks based on a prediction of what the market will do next. Or an investor could invest in a fund in the belief that it will outperform the market. Just note that even a couple of years of market-beating performance is no assurance of one's ability to beat the risk-adjusted returns of diversified equity index funds over time. So please don't become overconfident.

Investing in actively managed funds

Other Bogleheads like to invest a portion of their assets in a few carefully-selected actively-managed mutual funds, but, when adopting such strategies, Vanguard recommends that total market index funds should still make up the bulk of one's equity holdings. [2] Most managed funds are tax-inefficient so one is usually advised to hold them in tax-advantaged accounts.

Slicing and dicing the market

David Swenson's Lazy Portfolio, employing a REIT allocation
Bill Shultheis' Coffeehouse Portfolio, employing value and small cap tilts

REITs (such as Vanguard REIT Fund) are also a common addition to some Bogleheads portfolios, since they have sometimes provided additional diversification from equities and bonds. As an example, refer to the portfolio recommended for individual investors by David Swenson, investment manager of the Yale endowment, in the figure to the right. REITs are tax-inefficient, and so need to be held in tax-advantaged accounts.

Many Bogleheads, following the research of Fama and French, like to slice and dice their equity holdings among multiple asset classes with the goal of overweighting small and value holdings relative to the total market. Refer to the popular "Coffeehouse Portfolio" recommended by Bill Schultheis in the figure to the left for an example of a size and value tilted portfolio. There is a great deal of historical evidence that such a portfolio will produce higher volatility-adjusted returns over time, but only for those investors who can not only manage a more complex allocation plan, but can stick with it through inevitable periods of underperformance. Most, if not all, of the expected benefits of slicing and dicing can be achieved very simply by "tilting" a total market portfolio with the addition of a small value fund (like Vanguard Small Cap Value). But again, such a portfolio has often underperformed a total market portfolio for a decade or more. [3] Investors who conclude they would be discouraged by such underperformance, should just stick with total market investing.


See also

References

  1. In The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns, pp. 202-205. Wiley (March 5, 2007), ISBN 978-0470102107, John Bogle says that investors with an itch for speculating can allocate 5% of a portfolio to a "funny money" account.
  2. Active and index funds :No contradiction, Gus Sauter, and Building a global core-satellite portfolio, Vanguard | 10/11/2010.
  3. The Loneliness of the Long Distance Asset Allocator, William Bernstein, Efficient Frontier, April, 1997.

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