Bogleheads® investing start-up kit

Get your expenses under control first.

Define your objectives.

Set your percentage of stocks and bonds.

Only consider taxes after you have set your asset allocation.

Welcome to the !

This kit is designed to help you begin or improve your investing journey. If you haven't already, visit the Getting started page which will introduce you to the Bogleheads® and help you find the right starting point for exploring all of the content in the wiki. Investing is a complex topic and can easily become overwhelming, but we're here to help! Here are a few tips to help you start getting organized in your investing journey.


 * Get organized! Wiki's are meant as a reference and aren't designed to provide a step by step walk-through. Consider reading the summary content on these start-up kits before diving deep into the main articles that are linked. Consider creating a document to keep track of your progress. Eventually you will create an investment plan that will help you identify your personal strategy and help you stay the course. This approach will help you get an overview of all the important concepts and then you can dig into the details necessary to build a sound plan grounded in Bogleheads® investment principles, which are designed "to give ordinary investors a fair shake".

Ready to invest?
Take a step back at look at the big picture. Investing only comes after you have a sound financial footing and addressed your wider financial planning.

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 yet, read a good book on saving and budgeting, or consider this helpful video.

Investing should only commence after you have established your emergency fund (save a minimum of 6 months of living expenses; preferably more). You should establish a healthy savings rate and budget a certain portion of your income for investing.

Start an investment plan
What is this investment used for? When are the funds needed? Defining clear objectives will determine how you configure your portfolio.

Start with a simple investing plan where your objectives can be something like "I want to retire in 10 years". As you continue with this investing start-up kit you can expand it so it becomes a full blown investment policy statement (IPS) that describes the strategies that will be used to meet these objectives and contain specific information on subjects such as risk tolerance, asset allocation, rebalancing stretgies and liquidity requirements.

Avoid common behavioral pitfalls
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.

Risk tolerance and asset allocation
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.

Risk tolerance is an investor’s emotional and psychological ability to endure investment losses during large market declines without selling or undue worry, such as losing sleep. It is a key factor in creating an asset allocation (the percentage of stocks, bonds, and cash) that will allow investors to stay the course during the inevitable market downturns.

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. This means distributing your investments across the major investment categories known as asset classes, which are  stocks,  bonds, and cash or  cash equivalents.

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
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 index 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.
 * 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
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.