Back to Basics with John Bogle

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pkcrafter
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Back to Basics with John Bogle

Post by pkcrafter » Tue Jul 17, 2007 9:43 pm

The Vanguard Diehards forum has a well-earned reputation as one of the best investment resources on the internet because of it’s long history of attracting and helping newer, inexperienced investors. The seeds of success have grown from the fundamental teachings of our mentor, Jack Bogle. I feel our mission has been, and continues to be, to pass along the wisdom of Mr. Bogle.

In recent years, the forum has also attracted more knowledgeable investors who enjoy discussing sophisticated ways to reduce risk and/or increase investing returns. This is interesting and educational for knowledgeable and experienced investors. However, our advanced discussions are sometimes confusing and possibly even overwhelming for newbies and less-experienced investors. As a result of these more sophisticated conversations (about which experts often disagree), it is not unusual to see new investors with a few thousand dollars trying to start with complicated slice-and-dice portfolios.

I discussed this problem with Mel and Taylor with the idea that the best way to help new and less sophisticated investors would be to post a series of conversations that will bring us back to Jack Bogle's common sense, easy-to-understand ways to invest successfully. Mel and Taylor agreed and suggested I review each of Jack's "12 Pillars of Wisdom."

Since the Bogleheads forum is a highly successful offshoot of the Diehards and is also seeing its share of sophisticated discussions and a steady stream of new investors, we thought it would be beneficial to post the review here as well.

The 12 Pillars were originally published in 1994 as an Epilogue in Mr. Bogle’s first book, Bogle on Mutual Funds. I will post a series of conversations featuring one of Mr. Bogle's "Pillars of Wisdom" for the benefit of our new and less-experienced investors. Mel and Taylor generously agreed to provide background assistance in developing the series of posts. Replies to help our less-experienced investors are encouraged. So...beginning now, we will discuss, "Pillar # 1 -- Investing is not nearly as difficult as it looks."

"The intelligent investor in mutual funds, using commons sense and without extraordinary financial acumen, can perform with the pros. In a world where financial markets are highly efficient, there is absolutely no reason that careful and disciplined novices--those who know the rudiments but lack the experience--cannot hold their own or even surpass the long-term returns earned by professional investors as a group. Successful investing involves doing just a few things right and avoiding serious mistakes[/i]

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Rick
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Post by Rick » Tue Jul 17, 2007 9:54 pm

Being new here, I am all for this effort--thanks!

Regarding Pillar #1 ... I totally agree. I started with the basic index funds in a 401k and have been a buy & hold guy for many yrs. This strategy has paid off well. I now have an Investment Policy Statement and an Asset Allocation Plan. The more I study, the more I see the wisdom of simple.

I did put my wives IRA in a Slice & Dice Portfolio. I am not sure if the S& D value tilt portfolio is the way to go...but I do not plan on changing it for quite a while. The bulk of our portfolio is in a simple S&P 500, Wilshire 4500, Int Index and US Bond index funds, along with some company stock which I am divesting.

I will retire in 5-7 yrs at age 55-57 and the plan is working. This forum has been very helpful...and we now have a Houston Chapter, which is also a great expierence.

I am actually considering managing the investments in retirement...but still not sure as some of the low cost diehard type providers may well be worth thier reasonable fees.

Rick
"Money doesn't grow on fees." "Money in motion-costs money"

mwgr5
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Post by mwgr5 » Wed Jul 18, 2007 8:39 am

I think this is a very important concept. With the overwhelming amount of investing information and media, it is easy to assume that investing is a difficult task that requires the help of "experts." However, by simply buying and holding low-cost index funds and staying the course, the average investor can achieve above average returns with below average effort.

As mentioned in the 1st post, this forum discusses many advanced topics. I think this discussion reflects the knowledge and investing interest of most forum members. The average investorthat has limited interest in finance or investing could simply choose an asset allocatio,utilize Taylor's 4-fund portfolio idea or another simple portfolio structure, and have excellent long term returns without understanding advanced finance and investing topics.

"A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money" - Warren Buffett

psueeret
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The Fundamentals

Post by psueeret » Wed Jul 18, 2007 9:10 am

I applaud the effort in this thread to get newbies up to speed. I am a newbie to this forum, but I feel attached for two reasons. I opened my first Vanguard account in '84 by walking into the HQ in Malvern. Then I attended a financial seminar in the late 1990's here in ATL and I met John Bogle. It was a financial forum and he was the most impressive of speakers. Continuing his work herein is important, as the defined pension plans across the USA are reduced every year.

Steve in ATL

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johnnywill08
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Post by johnnywill08 » Wed Jul 18, 2007 10:52 am

as a 33 year old newbie, i say thanks. it'll probably take an army of you guys to get me ack to speed after the finacial wreckage of my past, but hey rome wasnt built in a day!

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Clutch Cargo
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Post by Clutch Cargo » Wed Jul 18, 2007 11:11 am

"Pillar # 1 -- Investing is not nearly as difficult as it looks."
I can remember that for me the most difficult parts about investing were twofold: 1) just getting started, and 2) not knowing what fund(s) in which to invest.

No one that I know of accidentally gets started. It's tough. It takes both a plan and then some action. For most, the plan would include creating a budget so that you can easily see where you stand based on your current income and monthly expenses. You would then know how much to regularly allocate to investing, on a weekly, monthly or quarterly basis. Planning for investing with an actual line item in your budget also helps prevent squandering those dollars on impulse purchases. It's nothing more than the "pay yourself first" principle.

Opening the account is taking the next step and preferably setting it up using the concept of "dollar cost averaging," meaning you invest the same amount on a regular basis, no matter what the market is doing. For most, this account would be a 401K plan at work where your investing dollars are automatically deducted from your paycheck (hopefully you'll work for a company with a company matching program -- read: free money in a tax-deferred account!). If you use the 401K plan at work, your options for picking funds is limited by those offered by your employer. So check the expense ratios of all the funds offered, and pick low cost index funds if they're offered.

With regular investing, you will be surprised at how fast your account will grow. I think it's a sound way to start. In the meantime, select a few of the books listed in this forum's Library (I highly recommend those by John Bogle), and begin to learn from the experts. Study the basics, and keep it simple.

Clutch Cargo

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fundtalker123
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Post by fundtalker123 » Wed Jul 18, 2007 12:04 pm

Bogle primarily recommends investing in just two funds:

Total stock market index
Total bond market index

This is quite simple. Anything more complicated (at least on the stock side) requires guessing which segment of the market will outperform in the future. No need to guess when you can equal the market average with 100% certainty, and beat most other investors after taking into account the cost of fees and taxes.

If you want to get a little bit fancier he says you can also consider a third fund

Total international stock index

bolt
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Post by bolt » Wed Jul 18, 2007 12:41 pm

[removed at request of poster]

mptfan
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Post by mptfan » Wed Jul 18, 2007 12:51 pm

I think it would be a good idea to add a subcategory on this forum for beginners. You could call it "Beginner's Forum" or some such thing. That way, I think the beginner investor who feels intimidated by many of the advanced discussions would have a place to go and feel better about posting, and the posts within that category would be easier to read and digest.

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CyberBob
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Post by CyberBob » Wed Jul 18, 2007 12:55 pm

bolt wrote:I think these 3 are a wise play...
The pinnacle of portfolio sophistication and simplicity; Taylor's 4-Fund Portfolio:

THE 4-FUND PORTFOLIO:
  1. A Money-Market Fund
  2. Total Stock Market Fund
  3. Total International Fund
  4. Total Bond Market Fund
THE ADVANTAGES:
  1. Maximum Diversification (low risk)
  2. Zero overlap
  3. No manager changes
  4. No style drift (from benchmark index)
  5. Desired stock/bond/cash allocation is easy.
  6. Never a need to rebalance within asset classes
  7. High probablity of beating most funds
  8. Never below index performance
  9. Minimum maintenance
  10. Lowest possible cost
  11. Low taxes
  12. Simplicity
Bob

rwm
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Post by rwm » Wed Jul 18, 2007 1:51 pm

And the pinnacle on the pinnacle - even simpler and more sophisticated: a Target Retirement Fund.

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Cosmo
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I agree

Post by Cosmo » Wed Jul 18, 2007 2:57 pm

I agree with mptfan in setting up a sub-category for beginners on this formum. It may prove to be less intimidating for them.

Cosmo

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Cosmo
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Post by Cosmo » Wed Jul 18, 2007 3:02 pm

And the pinnacle on the pinnacle - even simpler and more sophisticated: a Target Retirement Fund.
Agree if this is your sole holding. However, when commingling with other index funds, rebalancing/maintaining your AA becomes potentially much more complicated IMO.

miriam
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beginner's forum

Post by miriam » Wed Jul 18, 2007 11:52 pm

I have read or skimmed 10-20 books suggested by diehards, but still find a lot of the discussions on this forum way over my head. So I appreciate any advice that is geared to less knowledgeable investors like myself.

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fundtalker123
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Post by fundtalker123 » Thu Jul 19, 2007 1:34 am

The only reason I can see not to use the target retirement fund is if you have both taxable and tax-deferred accounts, then you'd like to put as much as possible of the bonds in the tax-deferred account.

rwm
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Post by rwm » Thu Jul 19, 2007 7:19 am

Good points, cosmo and fundtalker123, but you're already on the slippery slope to complexity, which is what this topic is focused on avoiding.

rwm

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tfb
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Post by tfb » Thu Jul 19, 2007 11:57 am

"beginner" and "unsophisticated" have been mentioned a few times. It's as if we are saying "do what I say but not what I do." Most seem to agree that a 3-fund or 4-fund portfolio is good for beginners and unsophisticated investors, but that's not good enough for us. It implies one can do better than that. Well, pension funds with full time professional staff don't necessarily do better. Are we kidding ourselves?

I think it's more of a psychological issue. See related poll Are you a Maximizer or a Satisficer? Some (including myself) psychologically seek to maximize. The Internet makes that easier.

I think we should make the statement clear. A 3-fund or 4-fund portfolio is good enough for everyone. Some (we?) seek to improve on it but we are not sure we really can. We may fail miserably but we try it anyway.
Harry Sit, taking a break from the forums.

660ky612
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Re: beginner's forum

Post by 660ky612 » Thu Jul 19, 2007 2:21 pm

miriam wrote:I have read or skimmed 10-20 books suggested by diehards, but still find a lot of the discussions on this forum way over my head. So I appreciate any advice that is geared to less knowledgeable investors like myself.
10-20 books are very intimidating. The passive buy-and-hold indexing approach is supposed to be simple, isn't it? But how?

See http://www.diehards.org/forum/viewtopic.php?t=4201

Comments?

660ky612 from Hong Kong

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Post by unclemick » Thu Jul 19, 2007 5:18 pm

Hmmm - Target Retirement 2050 is ballpark 90% stocks vs TSM which is 100%(obviously).

Circa 1929 before all this new fangled index fund/modern portfolio theory stuff - a cat named Walter Morgan(I believe he had something to do with hiring Bogle) started the Wellington fund(ballpark 70/30).

Then there is the 'policy portfolio', the mythical 'typical 60/40 pension fund' and the 110 - your age rule or variations thereof.

Can a non engineer type summarize(simply??) in 25 words or less more better than I.

'God Looks After Drunkards, Fools, and The United States of America.' so buy the whole dang thing at the lowest possible expense and as you get old gradually toss in some bonds so it doesn't swing up and down(as much) when you are trying to sell dribs and drabs in retirement.

heh heh heh - it is so stone simple 99% refuse to believe the blindingly obvious. I know I did - at least in 1966. The light came on over ten years later. :lol:
Last edited by unclemick on Thu Jul 19, 2007 6:09 pm, edited 1 time in total.

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mephistophles
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IMHO

Post by mephistophles » Thu Jul 19, 2007 5:48 pm

The greatness of Jack Bogle is that he took the infinitely "complex" mechanics of investing and made them infinitely "simple" so that anybody with a high school education could understand and implement a good financial plan.

The not-so-greatness of The Diehard Boglehead Forum is that they have taken the infinitely simple concepts of Jack Bogle and recomplicated them to such an extent that most people with advanced degress cannot decipher them without reading 20 plus books and devoting years on these forums.

In summary, again IMHO, those Diehards responsible for creating this unnecessary complexity ultimately do not serve the cause of Jack Bogle well.

The only genuine Diehard here is Taylor. If you can follow Jack Bogle you can follow Taylor, and that is all that you need to know.

Regards,

ole meph

pkcrafter
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Thanks

Post by pkcrafter » Thu Jul 19, 2007 8:46 pm

Thanks to all who provided some insight. It's great to hear from newer investors because other new investors can relate. The input from the more experienced here is also helpful.

660ky612 (phew, that's a long name and hard to remember)
10-20 books are very intimidating. The passive buy-and-hold indexing approach is supposed to be simple, isn't it? But how?
How about reading one book.

Try one of these:
The Bogleheads Guide... (Larimore, Lindaur, LeBoeuf)
The Only Guide to a Winning Investment Strategy... (Swedroe)
The Four Pillars of Investing (Bernstein)

And I would encourage you to follow my posts on the 12 Pillars. Also note that pure passive investing is not mentioned in Pillar 1. Smart investing fundamentals hold for both active and passive.

I will, in a separate post, provide a simple review of passive investing.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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