Variations on Bogleheads® investing

Bogleheads follow a set of principles that maximize our chances of a good retirement. But there are many different plans which are compatible with these underlying principles. Some people diverge somewhat on some of the principles, which is fine, in moderation.

Having a play money account
Some of us find financial markets fascinating, and like trying to pick individual stocks. If that sounds like you, we recommend that you set aside 5% of your retirement portfolio as "play money", which you can invest as you see fit. Some people like to follow a "tactical asset allocation" strategy with their 5% play money by moving that portion of their money in and out of stocks based on what they predict the market will do next. Or you could invest in a fund that you will believe will outperform. Just note that even if you have a couple of years of market-beating performance, very few investors are able 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 total market index funds should still make up the bulk of your equity holdings. Most managed funds are tax-inefficient so one is usually advised to hold them in tax-advantaged accounts.

Slicing and dicing the market
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 their  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. If you would be discouraged by such underperformance, you should just stick with total market investing.