Variations on Bogleheads® investing
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 a few of the principles.
Having a play money account
Some investors find financial markets fascinating, and like trying alternative approaches. If you are one of them, John Bogle recommends setting aside a just a tiny part of a retirement portfolio as "play money".[note 1]
One approach would be to choose individual stocks. Another would be following a "tactical asset allocation" strategy, where you move some of your money in and out of stocks based on your prediction of what the market will do next. Or, you could invest in a fund in the belief that it will outperform the market. Just note that even several years of market-beating performance is not proof that you can beat the risk-adjusted returns of diversified equity index funds over time. So please do not become overconfident.
Investing in actively managed funds
Other Bogleheads like to invest a part of their assets in a few carefully-selected actively-managed mutual funds; but if you do this, Vanguard recommends that total market index funds should still make up the bulk of your equity holdings.[2][3] Most managed funds are tax-inefficient, so any that you do hold are best placed in tax-advantaged accounts.
Adding and overweighting of Real Estate Investment Trusts
Real Estate Investment Trusts (REITs), such as Vanguard's REIT Fund, are also a common addition to some Bogleheads portfolios, because they have sometimes provided additional diversification from equities and bonds.
For an example, see the portfolio recommended for individual investors by David Swenson, investment manager of the Yale endowment, in Figure 1. REITs are tax-inefficient, and so are best held in tax-advantaged accounts.
Adding more asset classes to a portfolio
Adding additional asset classes to a portfolio like gold, commodities, various bond sub-classes like asset-backed, mortgage securities, inflation indexed securities, zero coupon can increase your portfolio's diversification.
Tilt to value and small cap
Many Bogleheads, following the research of Eugene F. Fama and Kenneth R. 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. The popular "Coffeehouse Portfolio" recommended by Bill Schultheis in Figure 2 is an example of a size and value tilted portfolio. There is a great deal of historical evidence that this type of portfolio will produce higher volatility-adjusted returns over time, but only if you can not only manage a more complex allocation plan, but can stick with it through inevitable periods of underperformance.
You can achieve most, if not all, of the expected benefits of slicing and dicing very simply, by "tilting" a total market portfolio with the addition of a small value fund (like Vanguard Small Cap Value). But again, this type of portfolio has often underperformed a total market portfolio for a decade or more.[4] If you are someone who would be discouraged by this underperformance, it is better to simply stick with total market investing.
Slicing and dicing the market
Slice and Dice refers to dividing allocations within a given single asset class, such as stocks. Slice and dice portfolios are essentially diversified portfolios that try to beat the broad market index by systematically overweighting various sub-asset classes.
Portfolio slice and dice is intended for experienced investors only. It is not recommended for new investors, as it intentionally deviates from the Bogleheads approach to managing your portfolio, which is investing in the total market. Past performance does not guarantee future performance.
Notes
- ↑ John Bogle recommends setting aside no more than 5% of your investments as "fun money", which is the most you can afford to lose and not jeopardize your retirement:[1]
Life is short. If you want to enjoy the fun, enjoy! But not with all of your hard-earned resources. Specifically, not with one penny more than 5% of your investment assets. At most! Have the fun of gambling, but not with your rent money - and certainly not with your retirement assets nor with your funds for your college education.
See also
- Bogleheads® investment philosophy
- The Twelve Pillars of Wisdom
- Vanguard's investment philosophy
- Video:Bogleheads® investment philosophy
References
- ↑ John Bogle (2001). John Bogle on Investing, the First 50 Years. McGraw-Hill. p. 24. ISBN 0-07-136438-2.
- ↑ Gus Sauter (2013). "Active and index funds: No contradiction". Archived from the original on July 19, 2014. Retrieved July 13, 2023.
- ↑ "Building a global core-satellite portfolio" (PDF). Vanguard. 2013. Archived from the original (PDF) on July 13, 2023.
- ↑ William Bernstein (1997). "The Loneliness of the Long Distance Asset Allocator". Efficient Frontier. Retrieved July 13, 2023.
External links
- Bogleheads forum topic: "Laura’s tips on posting your portfolio and asking related questions"
- Bogleheads forum topic: "Laura’s investment planning overview"
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