Bobbleheads? No, Bogleheads’ Guide to Investing

If you’re a fan of Vanguard, like I am, you’ve likely heard of the Bogleheads. They’re a group of Vanguard investing fans that hang out over on the Bogleheads forum, and have developed a personal finance and investing wiki that everyone should read. So this week I decided to take another trip through their book, The Bogleheads Guide to Investing, written by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf.

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As usual I took the book out from my local library. Although this version was written in 2006, back before the Great Recession, the advice and examples are timeless. I’ve read it before but its been a few years, so I was happy to re-read it again to try and pick up advice I may have missed the first time around.

Chock full of excellent advice for the everyday investor

The book starts out with an introduction from the group’s namesake, the founder of Vanguard himself, Jack Bogle. The authors then go through the basics of sound investing principles – what are stocks and bonds and why you need both, steps to take before you think about investing like paying off debt and saving for emergencies, and the importance of starting early. Like any good Vanguard fan they then talk about the “tyranny of compounding costs“, which is the dampening effect on your investments by paying a high percentage of your earnings out in fees-likely in funds that won’t even match market returns.

A lot of people will try to make money from you by telling you that saving and investing is complicated, and you need to pay them to do it for you. They’ll then proceed to invest in complex things for you to justify their fees. Instead, you can just keep it simple – a three fund portfolio of Total Stock, Total Bond, and Total International is all you need. As long as you save and invest for the long haul, staying the course even when the market is going crazy (up or down), you will build wealth for yourself and build a legacy for your family. Everything else is tweaking around the margins.

Performance chasing and market timing? Just don’t go there. Although it makes for good television (Buy! Sell! The market’s going to crash! This person made millions from $10,000!) it doesn’t make for good returns for most people. You’ll tend to buy high, sell low-the opposite of what you should be doing. Those who track the performance of the television talking heads over time know they are likely to underperform the market. Even successful investors in the short run tend to experience a reversion to the mean, where they underperform in the long run.

Don’t follow the herd, don’t let yourself get caught up in analysis and fail to start investing, rebalance periodically, invest in index funds to capture the market return, diversify your investments, keep costs low, start early and stay the course for the long haul-the Bogleheads go through all of these concepts and more. Although it might sound like basic advice, the book is written in an interesting, down to earth way that feels almost like you’re listening to a good speech by wise and experienced investors. Even if you’ve been an investor for a while, this book is certainly worth a read.

The Way to Wealth

One of the things I found most interesting was in the introduction where Bogle quotes Benjamin Franklin’s “The Way to Wealth” from 1757, which you can read in it’s entirety at that link. The advice, recapped on page xvii of the foreward, (with comments by me in italics) is:

  • If you would be wealthy, think of Saving as well as Getting
    • Don’t spend everything you make
  • He that lives upon Hope will die fasting
    • To be wealthy you need to take action instead of just wishing you’d win the lottery or find some gold in your backyard
  • There are no Gains without Pains 
    • Saving and investing involve short term sacrifice, and taking on some risk, for long term gains
  • He that hath a Trade hath an Estate
    • If you have a good job or career, you can be wealthy
  • Taxes are indeed very heavy (but) we are taxed twice as much by our Idleness, three times as much by our Pride, and four times as much by our Folly
    • Don’t spend a ton of time complaining about taxes when the things inside your control make a much bigger difference in the course of your life
  • Beware of little Expences; a small Leak will sink a great Ship
    • Watch your spending – little expenses add up to a lot
  • Learning is to the Studious, and Riches to the Careful
    • Don’t take thoughtless risks
  • If you would have a faithful Servant, serve yourself
    • No one cares about you and your family, and your money, like you do. Invest it yourself
  • Always taking out of the Meal-tub, and never putting in, soon comes to the bottom
    • You can’t keep withdrawing from your savings to spend money, or you soon won’t have any
  • Great Estates may vendure more, but little Boats should keep near shore
    • Small investors can’t afford the same kind of speculative risks as large ones
  • For Age and Want, save while you may; no Morning Sun lasts a whole Day
    • Start early, save often-before you know it you won’t be able to, whether because of retirement or disability

The reason I found this to be so interesting is it just goes to show how basic and timeless good financial advice really is. This was written over 250 years ago but it’s just as true today as it was back in Benjamin Franklin’s day.

Why Indexing?

I’m a huge proponent of index fund investing. I’ve seen first-hand over time how funds get decimated by trying to beat the market, and simply matching the market is a victory for a majority of people. I found that the authors recapped the reasons I prefer indexing very will on Page 78:

  1. There are no sales commissions
  2. Operating expenses are low
  3. Many index funds are tax efficient
  4. You don’t have to hire a money manager
  5. Index funds are highly diversified and less risky
  6. It doesn’t much matter who manages the fund
  7. Style drift and tracking errors aren’t a problem

Most of us don’t have the time or inclination to spend hours every day researching investment opportunities. We also usually don’t have access to information that the best money managers in the world, whose full time job it is to research investment options, haven’t already seen and taken into account. Of course there are exceptions-your friend that bought the Google, Apple, or Netflix IPO – but the reason you hear so much about the exceptions is because people don’t like to talk about their bad choices. You don’t hear about that purchase of, or the investment into Kodak right before it declared bankruptcy. Plus it happens so infrequently that it makes good press.

Slowly and steadily saving and investing in index funds over years makes bad press and bad television. What kind of dramatic music would you put to the annual rebalancing? Every month when investment dollars are automatically drafted from your account, will the camera dramatically zoom in on your account balance the moment of withdrawal? The year that index funds return 5% over the full year, will the fireworks come out as they did with DOW 20,000? No. The Millionaire Next Door already covered that wise financial decisions, slow and steady investing, and not spending on things that you don’t need would make for a really boring television show.

All in all – even though index fund investing might not make for an exciting show like Mad Money, it makes for wealth. And this book will set you on the right path to get there.

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11 thoughts on “Bobbleheads? No, Bogleheads’ Guide to Investing”

  1. Great review, thanks for sharing. I’m also a big believer in index funds and you could probably call me a Boglehead as well. I just wish I knew about it when I first started out. I made a lot of investing mistakes purchasing individual stocks and mutual funds with high fees. At this point, I try to keep it simple, with a mix of basic index funds matching my desired asset allocation mix.

    1. I made similar mistakes back in the late 90’s with my first investment into the “Janus 20” fund. At the time it was well known that indexing usually beat active management, but “this time it was different” as technology funds skyrocketed. If course we all know how that turned out in the early 2000’s!

  2. Financial Panther

    Terrific breakdown of the Boglehead philosophy! It’s always confused me, given all the evidence showing that indexing is the way to go, why high fee active investing still exists at all.

    1. I think many people want to believe they can be the exception that beats the market. Also financial advisors livelihood depends on people not just indexing their investments themselves. As that old saying goes, it’s hard to convince someone of something when their livelihood depends on them not understanding it

  3. As I dive farther and farther into the world of personal finance, the more I learn about investing, the more Vanguard comes up and the more I become convinced! I actually have moved my Roth IRA, my old work 401k, my wife’s old 401k and Roth 401k over to Vanguard now! It’s amazing how low the expense ratios are compared to where we were investing. Plus, the returns have historically been just as good! Looking forward to doing more index fund investing over the long term! I’m going to have to pick up this book soon and check it out!

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