The Bogleheads' Guide To Investing

What are the big ideas?

1. The Boglehead Way: This book introduces readers to a unique investing philosophy named after John C. Bogle, the founder of Vanguard Group. The Boglehead Way emphasizes low-cost index funds and evidence-based investment strategies to build and manage wealth over the long term. The approach is distinct because it focuses on the practical application of academic finance research to everyday investors.
2. The Importance of Asset Allocation: The book highlights the significance of asset allocation in creating a diversified, low-risk portfolio tailored to an individual's financial goals and risk tolerance. It also provides clear instructions for using Vanguard's online Asset Allocation Questionnaire to determine your target asset mix.
3. Retirement Planning: The book offers a detailed guide on retirement planning by covering topics like retirement income sources, Social Security strategies, and the importance of inflation-adjusted withdrawals from savings. It also provides examples using real-life scenarios and calculators to help readers develop a plan for their specific circumstances.
4. Avoiding Common Investor Mistakes: The book delves into common investor pitfalls like market timing, performance chasing, and emotional biases, providing practical tips on how to avoid them. It offers strategies based on academic research and real-world experiences from successful long-term investors.
5. Estate Planning and Tax Considerations: The book discusses the importance of proper estate planning to ensure assets pass to heirs in a tax-efficient manner. It covers various methods, such as trusts, powers of attorney, and beneficiary designations, to minimize taxes and simplify the transfer process.

These unique learnings come together to create a comprehensive guide for building, managing, and preserving wealth through a practical, evidence-based approach rooted in academic finance research and real-world experiences.

Summary

Know What You're Buying: Part One

Takeaways

• Stocks represent ownership in a corporation and offer potential for capital appreciation and dividend income.
• Diversification is essential when investing in stocks, as it helps to reduce overall portfolio risk.
• Index funds provide broad market exposure at a low cost.
• The price of a stock is determined by its earnings power and the level of investor demand.
• Earnings growth is important for long-term capital appreciation.
• Dividend reinvestment can significantly increase an investor's wealth over time.
• Owning individual stocks requires research, time, and management.
• Stock funds offer diversification benefits and professional management, but also come with higher costs.
• Asset allocation is important for a well-balanced portfolio, considering factors such as age, risk tolerance, and investment horizon.
• Bonds provide income, stability, and diversification benefits to a portfolio.
• Duration measures the sensitivity of a bond or bond fund to changes in interest rates.
• Determine bond fund suitability based on time horizon and risk tolerance.
• Owning bonds can help stabilize a portfolio due to their low correlation with stocks.
• A starting point for bond allocation is age, but individual circumstances and risk tolerance should also be considered.

Quotes

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years. —Warren Buffett”

“stock’s value at any given time depends on how much another buyer is willing to pay for a share of that company’s stock, and how much the seller is willing to accept. On one hand, if the outlook for the company is good or improving, buyers might be willing to pay more than you paid for your share of stock, and if you sold it at the higher price, you’d make a profit. On the other hand, if you had to sell at a time when the price of the stock was lower than you paid, you’d lose money. Investors who decide to hold their shares of stock, rather than sell them, expect to profit from the dividends the company pays them from time to time, and/or from the increase in the value of their stock shares as the company (they hope) grows and prospers.”

“children, you can use any EE Savings Bonds purchased after 1989 and all I Bonds, regardless of purchase date, tax-free, for all qualifying educational expenses. However, to qualify for this tax-free educational benefit, the Savings Bonds must be registered in one or both parents’ names.”

“It’s important to understand that bonds and bond funds have a low correlation (they don’t always move in the same direction at the same time) to stocks, so bonds can be a stabilizing force for a portion of your portfolio.”

“Mr. Bogle suggests that owning your age in bonds is a good starting point. So, a 20-year-old would hold 20 percent of his/her portfolio in bonds. By the time this investor reaches 50, the bond portion of the portfolio would have gradually increased, in 1 percent increments, to now represent 50 percent of his portfolio.”

Know What You're Buying: Part Two

Takeaways

• Diversification is important to minimize risk and maximize returns in a portfolio.
• Index funds, particularly those that track broad market indexes like the S&P 500 or Total Stock Market Index, offer low expenses, broad diversification, and tax efficiency.
• Mutual funds come in various types, such as open-end, closed-end, and exchange-traded funds (ETFs), but for most investors, open-end index mutual funds are the best choice due to their low costs, convenience, and wide availability.
• Bonds provide income and can help reduce portfolio volatility. A well-diversified bond fund or a mix of individual bonds can be part of an investment portfolio.
• Annuities offer tax deferral but have high fees and surrender charges that make them unsuitable for most investors. Variable annuities are particularly expensive and complex.
• ETFs are similar to mutual funds but trade like stocks, offering continuous pricing throughout the day. They may be suitable for certain investors who make large, infrequent trades or need a specific index exposure not available in open-end mutual funds.
• Vanguard is one of the largest and most respected providers of low-cost index mutual funds and ETFs. Their offerings include both actively managed and index funds, as well as various fund-of-funds solutions for those who prefer a more hands-off approach to investing.
• Dollar-cost averaging is an investment strategy that involves investing a fixed amount of money at regular intervals, regardless of market conditions, to reduce the impact of volatility on your investments. This can be an effective way to build wealth over time while reducing risk.
• Regularly rebalancing your portfolio helps ensure that it remains aligned with your target asset allocation and maintains the desired level of risk and reward.
• The financial industry may sometimes offer complex or high-cost investment products, but for most investors, a simple, low-cost index fund portfolio is the best choice to build long-term wealth while minimizing costs and maximizing returns.

Quotes

“mutual fund prospectus is the single best way to find out about the objectives, costs, past performance figures, and other important information about any mutual fund you’re considering investing in.”

“An Investor in Early Retirement Diversified domestic stocks 30% Diversified international stocks 10% Intermediate-term bonds 30% Inflation-Protected Securities 30% An Investor in Early Retirement Using Vanguard Funds Total Stock Market Index Fund 30% Total International Index Fund 10% Total Bond Market Index Fund 30% Inflation-Protected Securities 30%”

Taxes: Part One

Takeaways

• Understanding taxes is crucial for maximizing investment returns.
• Taxes can significantly reduce an investor's returns, especially in taxable accounts.
• Tax-efficient mutual funds, such as index funds and tax-managed funds, are preferable for taxable accounts due to their low turnover and capital gains distribution.
• Strategies like holding securities for more than one year, using tax-loss harvesting, and timing sales before or after distribution dates can help minimize taxes in a taxable account.
• Municipal bond funds can be beneficial for higher-income taxpayers looking to invest in bonds within their taxable accounts due to their federal and sometimes state tax exemptions.

Quotes

“On Nov. 11 of 1998, a physician in San Francisco invested $50,000 in a mutual fund called BT Investment Pacific Basin Equity. In January, scarcely seven weeks after he had bought the BT fund—he got the shock of his investing life. On his original $50,000 investment, BT Pacific Basin had paid out $22,211.84 in taxable capital gains. Every penny of the payout was a short-term gain, taxable at Dr. X’s ordinary income tax rate of 39.6 percent. He suddenly owed nearly $9,000 in federal taxes. As a California resident, he was also in the hole for $1,000 in state tax.”

Taxes: Part Two

Takeaways

• Use tax-advantaged accounts like 401(k), 403(b), and IRAs for retirement savings.
• Use taxable accounts for short-term goals due to the higher tax implications of withdrawals from retirement accounts before age 59½.
• Use index or tax-managed funds in taxable accounts for their tax efficiency.
• Keep turnover low to minimize taxes on capital gains.
• Use only tax-efficient funds in taxable accounts, such as those with a low dividend yield and a high percentage of qualified dividends.
• Avoid short-term gains, which are taxed at ordinary income tax rates.
• Buy fund shares after the distribution date to minimize taxes on capital gains distributions.
• Sell fund shares before the distribution date to defer capital gains taxes until the next year.
• Sell profitable shares after the new year to realize long-term capital gains, which are taxed at a lower rate than short-term capital gains.
• Harvest tax losses by selling losing investments to offset gains in other investments and reduce overall tax liability.
• Place funds for maximum after-tax return: place less tax-efficient funds (bonds) in tax-deferred accounts and more tax-efficient funds (stocks) in taxable accounts.
• Consider municipal bond funds and U.S. Savings Bonds for their tax advantages: municipal bonds are exempt from federal income taxes, while U.S. Savings Bonds have certain tax advantages for specific uses like education or home purchases.
• For long-term investments in taxable accounts, select taxable funds that will be held for a long time to minimize the impact of taxes on returns.

Quotes

“The rule is simple: Place your most tax-inefficient funds into your tax-deferred accounts, then put what’s left into your taxable account.”

“TAX-SAVVY IDEAS We suggest 14 tax-reducing ideas for tax-savvy investors. Most are easy to understand and to implement. We can think of no better way for most taxpayers to maximize their after-tax returns. Use tax-advantaged accounts (401(k), 403(b), IRAs, 529 tuition plans, etc.). Buy fund shares after the distribution date. Place tax-INefficent funds in retirement accounts, and tax-Efficient funds in taxable accounts. Use tax-managed or tax-efficient index funds in taxable accounts. Avoid balanced funds (stocks and bonds) in taxable accounts. Keep taxable fund turnover low to avoid capital-gains taxes. Avoid short-term gains by holding for more than 12 months. Sell losing shares before year-end (tax-loss harvest). Sell profitable shares after the new year (to delay tax payment). Determine the most favorable tax-basis method before selling fund shares. Consider municipal bonds and U.S. Savings Bonds for taxable accounts. During years of low income, consider converting to a Roth. Consider gifts to charities of securities with large capital gains. Appreciated holdings in taxable accounts are capital gains and income tax free if left to heirs.”

INTRODUCTION

Takeaways

• Save early and save regularly.
• Live below your means.
• Spend less than you earn.
• Create a budget and stick to it.
• Eliminate debt as soon as possible.
• Protect yourself with adequate insurance coverage.
• Build an emergency fund equal to six months of living expenses.
• Invest in low-cost, tax-efficient mutual funds indexed to the S&P 500 Index.
• Rebalance your portfolio periodically, usually annually or every other year.
• Avoid actively managed funds and high-fee index funds.
• Minimize taxes by investing in municipal bonds, tax-efficient mutual funds, and your own IRA or 401(k).
• Identify and tune out noise from Wall Street and the media that benefits them, not you.
• Control your emotions to avoid destroying your nest egg.
• Prepare financially for potential catastrophes by having adequate insurance coverage and saving for an emergency fund.
• Live a comfortable retirement without running out of money by planning and living according to your personal spending habits.
• Pass assets efficiently to heirs by using trusts, bequests, and other tax-advantaged methods.
• Keep your investing style simple and efficient, giving you more time to live your life to the fullest.

START EARLY AND INVEST REGULARLY

Takeaways

• Start saving early and invest regularly
• Max out employer-matched retirement plans
• Save future pay increases for investing
• Shop for used items
• Lower transportation costs by buying a used car and driving it for as long as possible
• Move to a lower cost of living area or downsize housing
• Create a side income
• Not all debt is bad, but be selective about taking on debt
• Saving early and consistently is more important than finding the best investments.

Quotes

“It turns out that an investment of $601 at the beginning of each month in stock index funds, coupled with an average annual return of 10 percent, grows to the sum of $1,249,655 in 30 years. Incidentally, $601 a month is approximately 28.9 percent of a yearly salary of $25,000. And in case you might be wondering, yes, the math works the same for everybody.”

“The Rule of 72 is very simple: To determine how many years it will take an investment to double in value, simply divide 72 by the annual rate of return. For example, an investment that returns 8 percent doubles every 9 years (72/8 = 9). Similarly, an investment that returns 9 percent doubles every 8 years and one that returns 12 percent doubles every 6 years. On the surface that may not seem like such a big deal, until you realize that every time the money doubles, it becomes 4, then 8, then 16, and then 32 times your original investment. In fact, if you start with a single penny and double it every day, on the thirtieth day it compounds to $5,338,709.12. Are you starting to understand the power of compound interest? No wonder Einstein called it the greatest mathematical discovery of all time. Let’s assume a child is born today. For the next 65 years, she or her parents will deposit a certain amount into a stock mutual fund that pays an average annual return of 10 percent. How much do you think they need to deposit each day in order for her to have $1 million at age 65? Five dollars? Ten Dollars? In fact, a daily deposit of only 54 cents compounds to more than $1 million in 65 years. It really helps to start early.”

“A 25-year-old who invests $5,000 in a Roth IRA once a year for 40 years reaches age 65 with a tax-free fortune of $1,625,149.”

“Being a Boglehead requires planning, commitment, patience, and long-term thinking.”

“What most young people don’t understand is that SAVING is more important in the beginning than finding the best performing investment. Having the ability to “Pay yourself first,” manage your debt load, and determine a vision of what you want to accomplish is vital to your success.”

HOW MUCH Do YOU NEED TO SAVE?

Takeaways

• I Bonds offer both a fixed rate and inflation protection, making them an attractive option for investors seeking to protect their purchasing power against inflation.
• The interest earned on I Bonds is subject to federal income tax, but not state or local taxes if held in a tax-deferred account such as a Traditional IRA or 401(k).
• I Bond fixed rates are set by the U.S. Treasury and change semi-annually based on market conditions. The inflation adjustment is calculated using the Consumer Price Index (CPI) and applied to the adjusted principal semiannually.
• TIPS offer similar inflation protection but with a guaranteed real rate of return. They are sold in the primary market through U.S. Treasury auctions and can be bought and sold in the secondary market.
• The choice between I Bonds and TIPS depends on various factors, including tax bracket, investment horizon, and preferred level of inflation protection and interest rate risk.
• Historically, I Bond fixed rates have been lower than TIPS guaranteed yields, but the difference has not been significant enough to make a meaningful impact on an investor's return.
• Cautions for investing in TIPS include the potential for broker fees, reinvestment of interest payments, and the requirement to hold the bonds to maturity to ensure no loss of principal.

KEEP IT SIMPLE

Takeaways

• To calculate how much you need to save for retirement, consider your expected retirement age, current income and expenses, desired retirement income, estimated investment returns, inflation rate, inheritance potential, and other sources of income.
• Use a retirement calculator that allows you to input your own assumptions or uses assumptions that align with your expectations.
• The higher your expected return, the less you need to save per dollar of required retirement income.
• Younger investors should expect higher returns due to a higher percentage of equities in their portfolios, but older investors should expect lower returns as they transition to more conservative investments.
• Regularly review and adjust your assumptions to ensure accurate retirement savings goals.

Quotes

“Remember, one of the greatest gifts you can give your children is to be financially independent in your old age, thus ensuring that you won’t become a financial burden to them.”

ASSET ALLOCATION

Takeaways

• Index investing involves purchasing a fund that tracks a specific market index, such as the S&P 500 or the Total Stock Market Index.
• Index funds have lower fees and expenses than actively managed funds due to their passive investment strategy.
• Indexing provides diversification, reducing risk by spreading investments across various industries and sectors.
• Historically, most actively managed funds have underperformed the market indexes they are meant to mimic.
• Vanguard is a pioneer in index investing and offers a wide range of low-cost index funds.
• Consider purchasing index mutual funds or exchange-traded funds (ETFs) with an annual expense ratio of 0.5% or less.
• While actively managed funds can potentially offer greater returns, they also carry greater risk and are best suited for tax-deferred or tax-free accounts.

Quotes

“There is a crucially important difference about playing the game of investing compared to virtually any other activity. Most of us have no chance of being as good as the average in any pursuit where others practice and hone skills for many, many hours. But we can be as good as the average investor in the stock market with no practice at all. Jeremy Siegel, Professor of Finance, Wharton School, University of Pennsylvania, and author of Stocks for the Long Run”

“Index investing is an investment strategy that Walter Mitty would love. It takes very little investment knowledge, no skill, practically no time or effort-and outperforms about 80 percent of all investors. It allows you to spend your time working, playing, or doing anything else while your nest egg compounds on autopilot. It's about as difficult as breathing and about as time consuming as going to a fast-food restaurant once a year.”

“Here is the crux of the strategy: Instead of hiring an expert, or spending a lot of time trying to decide which stocks or actively managed funds are likely to be top performers, just invest in index funds and forget about it!”

“Let’s assume someone puts $10,000 in a mutual fund, leaves it there 20 years, and gets an average annual return of 10 percent. If the fund had an expense ratio of 1.5 percent, the fund is worth $49,725 at the end of 20 years. However if the fund had an expense ratio of 0.5 percent, it would be worth $60,858 at the end of 20 years. Just a 1 percent difference in expenses makes an 18 percent difference in returns when compounded over 20 years.”

“If you buy an S&P 500 index fund, your investment is highly diversified and its performance will match that of 500 leading U.S. corporations' stocks. Is it possible to lose all of your money? Yes, but the odds of that happening are slim and none. If 500 leading U.S. corporations all have their stock prices plummet to zero, the value of your investment portfolio will be the least of your problems. An economic collapse of that magnitude would make the Great Depression look like Lifestyles of the Rich and Famous.”

“Warren Buffett, chairman of Berkshire Hathaway and investor of legendary repute: "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”

COSTS MATTER

Takeaways

• Mutual funds have various fees and expenses that can significantly reduce an investor's returns over time.
• Load fees, management fees, 12b-1 fees, administrative fees, custodian fees, transfer agent fees, distribution fees, and other fees can add up to a significant percentage of an investment's value over the long term.
• Expenses are not always clearly disclosed in mutual fund prospectuses, so it is important for investors to do their due diligence and research the total cost of investing in a particular fund.
• Index funds generally have lower expense ratios than actively managed funds, making them a better choice for cost-conscious investors.
• Wrap fees, which are charges levied by brokerages for bundling investment management services with mutual fund trading and other services, should be avoided as they add unnecessary costs.
• The expense ratio is the most reliable predictor of future mutual fund performance, making low-cost funds a good choice for investors seeking above-average returns.
• Reading the prospectus and researching fees and expenses are essential steps in the mutual fund selection process.

Quotes

“we suggest that you add from 10 percent to 20 percent more bonds than you think you need for safety. This will be your insurance against worry, and might help prevent you from selling at the wrong time.”

“And someone with significant net worth or a large portfolio does not need to invest in risky investments in search of higher returns.”

“We know a very successful executive who, upon retirement, put all his investments into high-quality, diversified, municipal bonds. The income from the bonds is more than sufficient for his family’s lifestyle. This executive wants to spend his time traveling and on the golf course—not managing a complex portfolio of assorted securities. His simple portfolio may be unusual, but we think it’s probably a very suitable portfolio for him. However, most of us want a return greater than is available from savings, CDs, and bonds. This is why we use stocks to provide the growth and additional income needed to meet our goals. DESIGNING OUR PERSONAL ASSET ALLOCATION PLAN We have discussed the Efficient Market Theory and Modern Portfolio Theory.”

“The Coffeehouse Investor by Bill Shultheis (Kirkland, WA: Palouse Press, 2005). A little book with a big message: How to invest simply and successfully.”

“The shortest route to top quartile performance is to be in the bottom quartile of expenses. —Jack Bogle”

“The expense ratio of each mutual fund is available from the mutual fund company, from Morningstar, and it’s sometimes included in newspapers and other sources of mutual fund performance data.”

PERFORMANCE CHASING AND MARKET TIMING ARE HAZARDOUS TO YOUR WEALTH

Takeaways

• Diversification is essential in investing to avoid putting all eggs in one basket and losing significant investments.
• The dot-com mania serves as a reminder of the importance of diversification to mitigate risks and prevent heavy losses.
• Diversify your portfolio by finding investments that don't always move in the same direction at the same time for reduced risk.
• A relatively small number of stocks, like 20-30, may not be enough to eliminate nonsystematic risk entirely.
• Mutual funds are an excellent option for diversifying your portfolio with minimal investment.
• Diversification extends beyond individual stocks and includes bonds, bond mutual funds, and various asset classes.
• Understanding correlation coefficients can help determine the level of diversification benefits between investments.
• Overlapping and highly correlated investments do not offer additional diversification benefits.
• Adding investments with a low correlation to your other holdings can help apply the principle of diversification effectively.
• Keep in mind that correlations change over time, and be cautious about selecting funds based on their current low correlations.

SAVVY WAYS TO INVEST FOR COLLEGE

Takeaways

• Diversification is important to reduce risk and increase returns over time by investing in a mix of assets, such as stocks, bonds, and real estate.
• Asset allocation refers to how much you should allocate to different types of investments based on your investment goals, risk tolerance, and time horizon.
• Rebalancing is periodically adjusting your asset allocation back to your target mix as the market moves assets around.
• Index funds are a type of investment vehicle that aims to track a specific index, such as the S&P 500 or the Dow Jones Industrial Average.
• Passive investing involves buying and holding a diversified portfolio of low-cost index funds instead of trying to actively pick individual stocks or time the market.
• The media, Wall Street firms, and financial experts often provide misleading information about investment returns, past performance, and market predictions, which can lead investors to make poor decisions.
• Staying disciplined and sticking to a long-term asset allocation plan is essential for achieving your investment goals and avoiding the temptation to chase short-term gains or react to market volatility.

Quotes

“In contrast, the majority of profits in an index fund are not taxed annually, but are deferred until the money is withdrawn—and then taxes are paid at the lower capital gains rates.”

“When emotions run high, logic flies out the window, and performance usually follows.”

“Market timing is a poor substitute for a long-term investment plan.”

HOW TO MANAGE A WINDFALL SUCCESSFULLY

Takeaways

• UGMA and UTMA accounts have disadvantages when it comes to college funding due to their impact on financial aid eligibility.
• 529 plans, Coverdell ESAs, and U.S. Savings Bonds can be used for educational expenses with tax benefits.
• Each type of plan has its own rules and advantages, such as contribution limits, tax treatment, and flexibility in use.
• Consider the income requirements, age restrictions, and asset control when choosing a college savings plan.
• Shop around for the best available plan that offers solid investment choices and low costs.
• Grandparents can contribute large sums to their grandchildren's 529 plans to reduce their taxable estate while benefiting their children and grandchildren.

Do YOU NEED AN ADVISOR?

Takeaways

• Understanding financial terms and designations is crucial when considering hiring a financial advisor.
• Some titles, like "financial consultant" or "financial planner," require no special education or experience.
• The Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP) designations have more stringent requirements.
• Fee-only advisors are preferred over those who earn commissions, as their interests are aligned with the client's.
• Payment methods include Assets Under Management (AUM), one-time fees, hourly rates, and wrap accounts. AUM is most common for good advisors but can be costly. Fee-only advisors work for you, while commission-based salespeople may steer clients into high-commissioned products.
• The U.S. Securities and Exchange Commission (SEC) offers guidelines on choosing an investment professional.
• Do your research before hiring a financial professional to ensure they meet your needs and have the appropriate qualifications.

Quotes

“Money buys a whole lot more than food, clothing, and shelter. It’s the power symbol of society. Money buys freedom, possessions, status, access, opportunities, experiences, and more choices. How”

“It’s been said that whom the gods would destroy they first make mad. A large sum of cash can create illusions of endless wealth, especially if it’s a new experience.”

“the terms financial professional or financial planner are meaningless. Many so-called financial professionals are really financial salespeople. While you may need what they have to sell, this is not the time to ask them for financial advice. That’s like hiring a fox to guard the henhouse. What you need is someone you can pay to provide you with objective advice that’s in your best interests. Asking people who sell financial products for financial advice creates a potential conflict of interest. Although many will act in your best interest, many are more interested in selling you what makes the most money for them. It’s a risk that you don’t have to take. Get your advice and your investments/insurance from different sources. A good place to begin seeking advice is from a Certified Public Accountant who does not sell investment products.”

“I helped put two children through Harvard—my broker’s children. —Michael LeBoeuf”

“advisors who’ve earned designations from institutions with these tougher standards are more highly regarded by most Bogleheads. Two of the professional designations that fall into this highly regarded category include the Chartered Financial Advisor (CFA) and the Certified Financial Planner (CFP).”

“Think about your financial objectives and know what type of financial services you need. Knowing what you need will not only help you find the professional that’s right for you, but it will also help prevent you from paying for services you don’t want.”

TUNE OUT THE "NOISE"

Takeaways

• Rebalancing is the process of bringing your portfolio back to its desired asset allocation.
• The need to rebalance arises due to market forces causing the asset classes in a portfolio to drift from their target percentages.
• There are different methods for rebalancing, including time-interval and expansion bands.
• Expansion band rebalancing may require more frequent monitoring of a portfolio.
• Rebalancing costs and taxes should be considered when deciding on a rebalancing strategy.
• Different methods for rebalancing include selling the overperforming asset class(es) and buying more of the underperforming ones, withdrawing funds from the asset class that's had the hot hand, directing new money into funds that are below their target asset allocation, and using tax-loss harvesting.
• It's often recommended to rebalance in a tax-deferred account first, consider getting rid of any funds that no longer fit into your overall plan, and use voluntary and/or required distributions from your tax-deferred account to help rebalance.
• Frequent rebalancing in a taxable account may result in paying taxes on profits sooner.
• Life changes and aging can also prompt the need to rebalance a portfolio.
• Owning a fund-of-funds that meets your target asset allocation requirements, such as one of the LifeStrategy series of funds from Vanguard or Fidelity's Freedom series, can simplify the rebalancing process.

Quotes

“Rebalancing may also improve your returns, since asset classes have had a tendency to revert to the mean (RTM) over time. By rebalancing, you’re selling a portion of your winning asset classes before they revert to the mean (drop in price) and you’re buying more of your underperforming asset classes when their prices are lower, before they revert to the mean (increase in value). So, you’re selling high and buying low. If you believe in RTM, rebalancing could increase your returns. Jack Bogle believes in RTM, and we do, too.”

“How Do We Know If We Need to Rebalance? We need to know several things in order to determine if our portfolio needs to be rebalanced. First, we need to know our desired asset allocation. This was determined when we first established our asset allocation plan, and possibly revised and refined it later as life cycles and events made changes to our plan necessary.”

“Additionally, our bond allocation may be further broken down into desired percentages in sub-allocations of the bond market such as intermediate-term investment grade bonds and inflation-protected securities.”

“Obviously, at a minimum, you have to check your portfolio as frequently as you’ve decided to rebalance.”

“Morningstar.com also offers a free online portfolio tracker. And, if you’re a subscriber to its Premium Service, you can also use its enhanced Portfolio X-Ray feature that can provide a much deeper analysis of your portfolio.”

“In either case, you need to consider two factors: costs and taxes. Costs would include any commissions and fees incurred by trading. Taxes would be a factor if the rebalancing takes place in a taxable account, because you may realize capital gains.”

“Morningstar found that investors who rebalanced their investments at 18-month intervals reaped many of the same benefits as those who rebalanced more often, but with less costs.”

MASTERING YOUR INVESTMENTS MEANS MASTERING YOUR EMOTIONS

Takeaways

• Understand that all investment advice comes with some degree of noise and uncertainty
• Separate the helpers from the hustlers when seeking investment advice
• Be wary of sources of investment advice that promise market-beating returns or quick wealth, such as radio and TV infomercials, investment newsletters, invitations to free seminars, and noncredit investment courses
• Look for sources of investment advice that provide sound, unbiased information and are not selling a product or service, such as investment print journalism and books by reputable authors
• Use the Internet carefully and critically, as it is an unregulated source of investment information with a high degree of noise and potential for fraud
• Educate yourself through reading academic research and the works of experienced investors like Jack Bogle.

Quotes

“Wall Street wants you to believe they are there to make money for you, but their true purpose is to make money from you.”

“Create a simple, diversified asset allocation plan. Invest a part of each paycheck in low-cost, no-load index funds according to your plan. Check your investments periodically, rebalance when necessary, then stay the course.”

“However, just because it’s an institution of higher learning offering the course doesn’t mean it’s automatically free from bias and veiled sales pitches.”

“list of our favorite financial and investing websites is provided at the end of this book.”

MAKING YOUR MONEY LAST LONGER THAN YOU Do

Takeaways

• Behavioral finance recognizes that investors make decisions based on emotions, biases, and experiences rather than purely rational analysis.
• Recency bias: People tend to overemphasize recent events when making investment decisions.
• Overconfidence: Investors often believe they can consistently predict market movements or pick winning investments, which leads to poor decision-making.
• Loss aversion: People prefer avoiding losses to acquiring gains, leading them to make irrational investment decisions.
• Paralysis by analysis: Analyzing too much data can prevent investors from making decisions and investing in a timely manner.
• Endowment effect: People value things they own more than identical things they don't own, which can lead to poor investment decisions.
• Mental accounting: People treat different types of money differently based on their source or intended use, leading to suboptimal financial decisions.
• Anchoring: People rely too heavily on initial values (prices, targets) when making investment decisions and fail to adjust accordingly.
• Financial negligence: Procrastination and lack of attention to one's finances can lead to poor investment outcomes.
• To avoid emotional traps in investing, set financial goals, stick to a sound asset allocation plan, keep costs low, invest regularly, and maintain a long-term perspective.

Quotes

“Nevertheless, it’s money that won’t be compounding in their accounts and building their net worth.”

“Every day you don’t invest is a day less you’ll have the power of compounding working for you. Put together an intelligent investment plan and get started. If you need help, seek out a good financial planner to assist you.”

“Holding out until you get your price to sell an investment is playing a fool’s game.”

PROTECT YOUR ASSETS BY BEING WELL-INSURED

Takeaways

• Retirement is a major financial transition that requires careful planning and flexibility.
• The most important factor for a successful retirement is having sufficient income to cover expenses.
• Social Security, pensions, and savings are common sources of retirement income.
• Inflation-adjusted withdrawals from savings are a reliable way to ensure income for life.
• Delaying retirement and purchasing an immediate annuity can also provide additional sources of income.
• Spending rates should be based on historical portfolio performance and personal circumstances.
• It's important to maintain financial flexibility in retirement by keeping fixed expenses low and having a viable way to earn extra income if needed.
• The most important key to making your money last is to be financially flexible, particularly in the early years.

PASSING IT ON WHEN YOU PASS ON

Takeaways

• Insure your home and possessions against potential disasters such as fire, theft, and vandalism.
• Make a list of all personal possessions and store it in a safe place.
• Consider raising the deductible on your homeowner's insurance to reduce premiums.
• Purchase long-term care insurance if you have liquid assets between $200,000 and $2 million.
• Shop for insurance online and compare benefits and prices from different companies.
• Look for an insurance agent with a track record of high ethics, professionalism, and good service.
• Follow simple rules to reduce the odds of accidents and health issues: don't smoke, exercise regularly, eat well, get enough rest, and maintain a positive attitude.

Quotes

“To be a successful investor requires being a good risk manager. Managing risk means having a plan to cover the downside. That’s what insurance is all about—damage control to prevent the unforeseen from smashing your nest egg.”

“We don’t believe in mixing investing with insurance. Insurance is for protection and investing is for wealth building. Don’t confuse or mix the two.”

“Another option for lowering your health care costs is to join an HMO (health maintenance organization). While your premiums will be lower, your health care choices will likely be fewer. HMOs frequently limit your choice of doctors and some services. If freedom to select your choice of physician is important, you probably don’t want an HMO policy.”

“Finally, if you own a business, make sure you have a sufficient business policy to cover contingencies, such as key-man insurance, or insurance to cover a buy-and-sell agreement.”

“A good agent won’t sell you insurance based on the cheapest price but, rather, on what policy best fits your needs.”

YOU CAN Do IT 265

Takeaways

• Choose and live a sound financial lifestyle: pay off debt, establish an emergency fund, get spending under control, and learn how to live below your means.
• Start saving early and invest regularly.
• Understand various investment choices: stocks, bonds, mutual funds.
• Determine retirement needs and start saving accordingly.
• Indexing via low-cost mutual funds is a sound strategy.
• Create an asset allocation plan based on personal circumstances, goals, time horizon, and risk tolerance.
• Costs matter: keep them as low as possible.
• Taxes can be your biggest expense: invest in the most tax-efficient way possible.
• Diversify investments to minimize risk.
• Rebalance regularly to maintain target asset allocation.
• Avoid market timing and performance chasing.
• Save for children's education using tax-deferred or tax-free options.
• Handle windfalls wisely: consider paying off debt, saving for future needs, or investing.
• Consider getting a financial advisor if necessary.
• Protect assets with proper insurance coverage.
• Master emotions to make sound investment decisions.
• Make your money last as long as you do.
• Proper estate planning ensures that assets pass to heirs in a reasonable time and with minimum taxes.
• Get help from the Bogleheads online community if needed.

Quotes

“Taxes can be your biggest expense. Invest in the most tax-efficient way possible. Put tax-inefficient funds in your tax-deferred accounts, and select tax-efficient investments for your taxable account.”

“Protect your assets with the proper types and amounts of insurance. Insurance is for protection. It’s not an investment. Don’t confuse the two.”

“We can’t stress enough how important it is to establish your own personal financial plan, and then carefully follow that plan. Select low-cost mutual funds, preferably index funds, as the core of your investment portfolio.”

Recommended Resources

• Visit Eric Haas' Reading Room at www.altruistfa.com/readingroom.htm for investing knowledge.
• The Center for Retirement Research at Boston College (www.bc.edu/centers/crr) is a go-to source for retirement research and articles.
• Access financial news, bond prices, and yields on Bloomberg's website (www.bloomberg.com).
• Diehard Bylo Selhi's Canadian Web site (www.bylo.org) offers valuable mutual fund information.
• www.choosetosave.org assists with saving challenges and financial calculators.
• Bill Schultheis hosts a solid information resource at coffeehouseinvestor.com.
• Browse Bill Bernstein's Efficient Frontier Web site (www.efficientfrontier.com) for insights.
• Jim Mahaer's financeprofessor.com blends academia and real-world finance.
• Use FireSeeker.com for retirement portfolio withdrawal rate calculations.
• Roy Weitz's fundalarm.com provides insightful commentary on mutual funds.
• John Norstad's articles can be found at homepage.mac.com/j.norstad/finance/index.htm, with contributions from Mel Lindauer and Taylor Larimore.
• Frank Armstrong's Investing for the 21st Century is available on investorsolutions.com.
• Jason Zweig offers valuable learning resources at jasonzweig.com.
• Moneychimp.com provides articles, calculators, and comprehensive money information.
• Morningstar.com is the leading source of mutual fund information.
• Richard Ferri's Web site (www.portfoliosolutions.com) offers research papers and articles.
• John P. Scordo curates top academic and financial articles on research-finance.com.
• Retireearlyhomepage.com provides insights into early retirement strategies.
• Humberto Cruz's personal finance columns can be read at tmsfeatures.com/tmsfeatures/subcategory.jsp?catid=1055.
• Vanguard.com/bogle_site/bogle_home.html is home to John C. Bogle's ongoing work and speeches.

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