How to Invest Like a Boglehead

bogleheads

Even though investors have been wringing their hands over the dwindling number of publicly traded companies in recent years, there are more than 3,600 stocks to choose from. That number can be overwhelming. How do you know which investments to pick for the best results? What if you make the wrong choice?

The good news is you don’t have to worry about picking stocks. You can benefit from the performance of a wide swath of the market, thanks to John C. Bogle’s 1975 revolution in investing. Bogle’s invention of the index fund spawned an investment movement. Today, more than 40 years later, his followers, known as Bogleheads, are still spreading the good word.

If you’re new to investing, or even if you’re not, Bogle’s strategies are worth a look for both their simplicity and their effectiveness. Here’s everything you need to know to get started putting your money to work the Bogle way.

Who is John C. Bogle?

John Bogle is the founder of investing company Vanguard. He’s a best-selling author of several investing books, but “The Little Book of Common Sense Investing” is probably his most famous work. It’s enjoyed great popularity since it came out in 2007, and it’s one of my favorite books on investing.

Bogle worked his way up from an impoverished broken home in New Jersey to Princeton University and a top job in finance. In 1974, he founded The Vanguard Group, and the following year, he created the world’s first index fund.

As a pioneer in investment management, he spawned a movement around indexing. Bogle paved the way for ordinary people to access the market in a new way — by buying the market with low-cost index funds instead of picking individual stocks or getting stuck with high mutual fund management fees.

“I was drawn to the Bogleheads philosophy when I learned about John Bogle and index funds,” said Doug Nordman, a longtime investor and an active participant on the Bogleheads wiki. “We were paying mutual fund sales charges of 2 to 3 percent, and we thought expense ratios [the annual fees charged by funds] of 1.5 percent were acceptable. It was shocking to see John Bogle write about passively managed index funds and rock-bottom expense ratios.”

Over the years, Bogleheads have created their own communities and forums online to discuss the investment principles espoused by Bogle. They even hold meetups in the “real world.” If you’re looking for a group of people who are excited about sharing their knowledge and helping you become a better investor, joining the Bogleheads forum could be a good first step.

What is the Bogleheads investment philosophy?

“I’ve been investing for a little bit over a decade, but that’s not to say I’ve been doing it correctly the entire time,” said Jon Luskin, a fee-only financial planner and Bogle disciple.

“It wasn’t until I wrote a thesis on investment management, evaluating the performance of hundred-million-dollar endowment portfolios, that I really had the obligation to crunch the numbers and figure out what does and doesn’t work in investing,” Luskin said.

The investment philosophy Nordman, Luskin, and thousands of other Bogleheads use can be boiled down to nine basic principles.

1. Develop a workable financial plan

First, it’s important to look at your household finances and create a long-term plan that promotes living within your means and saving for retirement. While it’s impossible to know the future, Bogleheads promote putting something down in writing and then being willing to tweak it as you get more information and your circumstances change.

2. Invest early and often

When you invest, starting early can mean big gains later, thanks to compounding returns. Using Student Loan Hero’s investment calculator, you can estimate what to expect. If you start saving at age 25 and want to retire at age 60, you’ll need $450 a month to save $1 million. If you wait until you’re 35 to start the same program, you’ll need to set aside $1,100 each month.

The earlier you start investing, the more likely you are to reach your goals. Nordman started investing in 1982 and saved aggressively for the next 20 years. He was able to retire at age 41 in 2002.

Without his early investing habits and frugal lifestyle, Nordman’s Navy pension wouldn’t have been enough. “Like many service members, I’d have needed a bridge career at the end of my 20 years in the Navy,” he said.

3. Never bear too much or too little risk

Bogleheads also focus on making sure you have the right portfolio composition — or “asset allocation” — for your risk tolerance.

Bogle’s recommendation, according to the Bogleheads wiki, is to start with “roughly your age in bonds.” So if you’re 25, this calculation indicates about 25 percent of your portfolio should be invested in bonds. However, this number isn’t set in stone. It can be adjusted to reflect your goals, your risk tolerance, and your overall financial position.

With too little risk in your portfolio (like a heavy bond allocation at a young age), you might not see high enough returns to reach your long-term financial objectives. However, with too much risk, you could wind up losing more than you can afford to.

4. Diversify

Part of managing your risk tolerance is using different types of investments in your portfolio, a concept called “diversification.” The ideal Bogleheads asset allocation is often accomplished using stocks and bonds.

Some adherents might include small amounts of other assets, but for the most part, it’s a boring crowd, according to Luskin. “Usually, you’re not going to come across people who get excited by Bitcoin or marijuana stocks or whatever the current trend is,” he said.

5. Don’t try to time the market

The idea that you can buy the perfect stock, watch it grow, and then sell it at just the right time to make a profit before the market tanks is antithetical to the Bogleheads investment philosophy. Luskin pointed out that most beginning investors don’t have the resources to beat the market.

Trying to time the market and beat market performance is a short road to frustration and loss, according to Nordman. “The Bogleheads approach is a huge bedrock of support when the next recession hits and markets turn gloomy,” he said. “People learn to stay the course and keep investing in their asset allocation.”

6. Use index funds when possible

Index funds allow you to buy large swaths of the market at a low cost. It’s an easy way to diversify your portfolio without the need to pick stocks.

“Some Bogleheads are vociferously opposed to investing in anything other than passively managed index funds,” said Nordman. “However, most forum posters agree that it’s fine to have up to a 15 percent asset allocation elsewhere.”

And of course, there are plenty of Bogleheads who focus on Vanguard index funds and index exchange-traded funds. “Some Bogleheads can’t tolerate the idea of investing anywhere other than Vanguard,” said Nordman, citing heated discussions on the Bogleheads forum.

However, you can follow the Bogleheads philosophy with other brokerages. Nordman pointed out that Fidelity and Schwab both have great index fund offerings. For beginners, who might not be able to meet Vanguard minimums, other options might make more sense.

7. Keep costs low

Bogleheads are almost fanatical about keeping costs low. The following Bogleheads chart illustrates the end result between an expense ratio of 0.15 percent and one of 1.5 percent.

bogleheads

Image credit: Department of Labor

“Most people who do anything but low-cost investing simply have not read or comprehended the true impact of their alternative investing philosophy,” said Luskin.

Today, a plethora of robo-advisors and brokerages offer low-cost choices that can save you hundreds of thousands of dollars in fees.

8. Minimize taxes

Paying attention to the tax implications of your portfolio is another principle of the Bogleheads investing strategy. The focus on tax-advantaged retirement accounts is a big part of long-term planning for Bogleheads. However, they also recognize the uses of taxable investment accounts and plan around capital gains taxes, trying to squeeze the maximum tax efficiency for their overall portfolios.

9. Invest with simplicity

Finally, Bogleheads like to invest with simplicity. One Bogleheads “lazy portfolio” is the three-fund portfolio. This portfolio is divided more or less evenly between foreign stocks, domestic stocks, and bonds, including inflation-adjusted U.S. Treasury bonds, known by the acronym “TIPS.”

“I think anyone who follows the Bogleheads philosophy will earn a greater return with much less effort,” said Nordman. “It’s the best approach for new investors who have never chosen an asset allocation or invested during a recession.”

There are different allocations for the Bogleheads lazy portfolio, and many Bogleheads go beyond three funds. However, the emphasis on simplicity and low costs makes the philosophy one even newbie investors can understand and use. After you do some research and become more confident, it’s possible to branch out a bit and look for better returns.

Participating with Bogleheads

If you want to join the Bogleheads and learn more about their style of investing, you can join the Bogleheads forum. There are different threads for basic topics, and it’s possible to find local chapters and different online communities. Nordman likes his role helping edit the military finances wiki for Bogleheads, and Luskin is an active member of the San Diego Bogleheads.

Even if you’re new to the Bogle philosophy, you can get involved in the Bogleheads community. One of the main benefits to beginning investors is the chance to ask questions and have them answered by enthusiastic veterans.

“These folks are smart, even though they’re not investing professionals,” said Luskin. “These are investors who understand the value of science when making money decisions.”

Nordman, however, warned that sometimes forum participants can go a little overboard. “Every forum has its crowd of zealots, and the Bogleheads are no exception,” he said. “Sometimes, the zealots stifle a reasonable discourse on opposing viewpoints. Happily, the moderators keep that zeal mostly under control and try to redirect posters back on topic.”

You don’t have to follow John Bogle and the Bogleheads exactly to find investing success, Nordman pointed out. In fact, some investors do well by flouting the rules Bogleheads set for themselves.

However, Nordman agreed with Luskin that many regular investors can benefit from using the Bogleheads strategies as a starting point and then fine-tuning the philosophy to meet their individual goals and circumstances.

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