Investing like a Boglehead

Jack Bogle• Founded Vanguard in 1974, now manages $3

trillion in assets

• In his Princeton thesis, found that 75% of mutual funds performed worse than the S&P500, almost all did after subtracting management fees

• Pioneered the no-load, low cost index fund, Vanguard 500, now with $355B in assets

Boglehead’s Principles1. Live below your means

2. Invest early and often

3. Bear the right amount of risk

4. Diversify

5. Use index funds

6. Don’t time the market

7. Keep costs low

8. Minimize taxes

9. Invest simply

10. Stay the course

1. Live below your means

• Pay off credit cards (~15% APR)

• Pay off student loans?

• Aim to save 10-20% of income

2. Invest early and often

8% return

Starting Age Amount at age 60

35 $570,265

30 $787,568

25 $1,071,477

Investing 100K over 10 years (10K/year) starting at…

3. Bear the right amount of risk

• Stocks: Owning a small slice of a company and its profits. Higher risk, higher reward.

• Bonds: Owning an IOU from company to pay back a loan on a pre-set schedule. Lower risk, lower reward.

Asset allocation• The more risk you can handle, less bonds you need

• When young, longer investing timeline, greater ability to recover from large losses

• When older, more to protect, less time to recover from large losses

• Allocation must be stomach-able at all times

• Starting rule of thumb: Your age - 10 in bonds

4. Diversify

• Buy the entire stock market (eg. Vanguard Total Stock Market has 3,657 stocks)

• Don’t try (and fail at) trying to pick winners (even most professionals suck at this)

Use index funds• Index funds track indices (eg. S&P 500)

• Costs are low

• Everything is automated (not paying for a $1MM/year fund manager)

• Little turnover (buying/selling of stock which are taxable events)

6. Don’t time the market

• Past does not predict future performance

• You’ll probably buy high, sell low (ie. suck at it as do most professionals)

• Contribute regularly (automated is best) and ignore the market

7. Keep costs low

• Expense Ratio: Percentage paid annually (keep low)

• Load Fee: Purchase fee (AVOID!)

• Redemption Fee: Sales fee (AVOID!)

1% compounds to 20%

Total at age 60, contributing $17,500/year returning 8%

Starting Age / Expense Ratio 1.2% 0.2%

35 $1.15 MM $1.34 MM

30 $1.70 MM $2.06 MM

25 $2.47 MM $3.11 MM

8. Minimize Taxes• Maximize the use of tax-advantaged accounts (401K and IRA

etc)

• Place tax inefficient investments in tax-advantaged accounts

• Bonds pay interest regularly, incur tax every time

• Stock appreciate, incur tax on sale (and on dividends distribution if applicable)

• Index (low turnover) vs actively managed funds (high turnover)

• Capital gains: short vs long term

401K and IRA

• Retirement accounts, usually can’t touch till ~age 60

• Limit, per year: 401K = $17,500, IRA: $5,500

• Fund choices

Traditional vs ROTH• Pay tax now (ROTH) vs later (Traditional)

• Consider current vs retirement tax bracket

• ROTH IRA advantages: Can withdrawal contributions anytime tax and penalty free (great for young people without significant savings/emergency fund)

• Beware: Income limits, future tax changes

9. Invest simply• Target Retirement (automatic re-balancing)

• Example: Vanguard Target Retirement 2055 (0.18% ER)

• Simple 3 fund portfolio

• Total Stock Market (0.17%), Total International Stock Market (0.14%), Total Bond Market (0.20%)

• Re-asses asset allocation regularly!

10. Stay the course

Now what?• Invest (for retirement) in the following order

• If no 401K match: IRA, 401K, after tax

• If 401K match: 401K to maximize match, IRA, 401K, after tax

• Index funds and/or target retirement account

• Don’t watch CNN, ignore your friend’s hot stock tip

• Profit!

Learn More

• http://www.bogleheads.org/ (forum & wiki)

• Boglehead’s Guide to Retirement (on Scribd!)

• Boglehead’s Guide to Investing

• Learn about and how to minimize taxes :(