Review: The Bogleheads’ Guide to Investing

The Bogleheads' Guide To InvestingAs an investor with Vanguard and an occasional visitor to the Vanguard Diehards forum, I’ve been looking forward to reading The Bogleheads’ Guide to Investing for a while now. It’s a guide to how to invest your money written based on the principles of Jack Bogle, the founder of Vanguard. Is it a good read for you? Let’s find out.

A good subtitle for this book would be “An introduction to how to invest conservatively,” because that’s exactly what you’ll find within the covers of this book. It is a fantastic guide for investing for the long term, minimizing the costs and taxes associated with investing, and most of the basic principles of conservative investment (diversifying your portfolio widely, not betting the whole farm on stocks, and so on).

The book basically moves deliberately from the basics behind investing and what you need to get started, then moves from investment to investment, explaining the ins and outs of each and explaining the fundamentals of an overall investment philosophy. These guys are as low risk as can be for investors in the stock market, which is a welcome change of pace from some of the frenetic individual stock pickers I’ve read recently.

In fact, that’s what makes this book stand out: rather than just distributing a bunch of bromides, it is clear from beginning to end that this book is describing an overall philosophy about what to do with your money. Many other books of this type simply provide a bunch of rules to follow; this one is rooted in the basic idea that you should be an investment conservative: low risk with growth targeting the long haul. It’s an interesting approach – and it makes for a very interesting book.

A Tour Of The Bogleheads’ Guide to Investing

Chapter 1 – Choose a Sound Financial Lifestyle
Before you even begin thinking about investing, you need to get your financial house in order. The book breaks this down into three main parts: graduate from a paycheck-to-paycheck mentality to a net worth mentality (get started by calculating your net worth), pay off all of your credit cards and high interest debts, and start an emergency fund. These are essential tools a person needs to have before they begin investing.

Chapter 2 – Start Early and Invest Regularly
If you’ve got the fundamentals in place from the first chapter, it’s time to start investing now, because the earlier you begin to invest for long-term goals, the longer you have for the power of compound interest to work for you. One thing that really impressed me about this chapter is the idea that frugality is a very good thing for an investor, as it frees up money you would otherwise waste on trivial things and instead puts it into investments that can really build up your worth.

Chapter 3 – Know What You’re Buying – Part One
This chapter is mostly about buying bonds, and a big part of the focus is on securities issued by the United States Treasury Department. As a general rule of thumb, the book recommends that you have a percentage of your portfolio in bonds – a percentage equal to your age. This is pretty conservative by any measure, but it is a good way to soften risk.

Chapter 4 – Know What You’re Buying – Part Two
Mutual funds are great! The book lists ten reasons why they’re great; I particularly like them because they make stock diversification easy and they’re also simple to buy automatically. It also covers ETFs (essentially mutual funds that are traded) and annuities (you give an institution $X, they give you some percentage of that every year until you and/or your spouse passes on).

Chapter 5 – Preserve Your Buying Power with Inflation-Protected Bonds
This chapter talks about ways to guarantee that the money you put away will beat inflation, via I-bonds (savings bonds that earn about 1.5% plus whatever inflation is) and treasury inflation-protected securities (TIPS; similar to I-bonds – they earn a little more but are less flexible). If you’re really conservative and just want to beat inflation over the long term, these are a great way to go.

Chapter 6 – How Much Do You Need To Save?
I really enjoyed this chapter, as it did some very interesting calculations that show exactly what your target amount should be for retirement. For example, I plan to retire in thirty years, I expect an 7% return on my invested money in retirement, and I want $50,000 a year in income from it. How much do I need? $2,213,300. That’s my target number to retire in thirty years. I’m going to work on a spreadsheet that will do these calculations for me – and maybe post a tutorial.

Chapter 7 – Keep It Simple
The idea here is that basic life principles that work in most situations fail when you invest, so if you try to apply your common sense to it, you’ll fail. For example, in life we shouldn’t settle for average, but it’s hard to find an investment that beats the “average” – that is, that beats the growth of the overall stock market. How can you get around this? Put your cash in diversified index funds, let the market carry you, and don’t sweat it.

Chapter 8 – Asset Allocation
This chapter boils down to an extensive guide to how to allocate your assets, but the guide basically boils down to four questions you need to answer:
What is your age?
What are your goals?
What is your risk tolerance?
What is your time frame?

With the risk tolerance question, ask yourself how much of a loss would make you want to start selling immediately. The more loss you can accept, the greater the potential for a huge gain – but there’s also way more volatility.

Chapter 9 – Costs Matter
This chapter makes yet another good point why index funds are preferable over managed mutual funds: the average managed fund in the United States charges 3.3% for expenses. Ouch! Basically, the chapter implies that managed funds are a waste of money, as they don’t consistently beat the market and charge significantly more than index funds for expenses.

Chapter 10 – Taxes – Part One
Yet another reason to buy index funds – taxes. They have low turnover within the fund, so you’re rarely hit with capital gains taxes. If this doesn’t work for you, look for a tax-managed account, which is a managed one that picks for the long haul and only rarely sees moves within the fund. If you’re still stung, use it as an opportunity to sell of your losing mutual funds to counterbalance the capital gains you’ll be hit with.

Chapter 11 – Taxes – Part Two
Sound the horns: tax-protected investments are great, especially when you can get employer matching. If you have a 401(k) available to you, the investments might not be stellar, but the employee matching is so incredible that it blows away other options you may have. The chapter also goes through other investment options, including Roth IRAs, which they laud.

Chapter 12 – Diversification
Basically, the best way to easily diversify your stock investment is to buy a broad-based index fund, like the Vanguard 500 or the Vanguard Total Market fund. Both of these are incredibly diversified and will protect you somewhat from a sector collapse. You should also invest in index funds for other types of investments, like bonds and perhaps precious metals.

Chapter 13 – Performance Chasing and Market Timing Are Hazardous to Your Wealth
Here, the truly conservative nature of the book comes through. This chapter is a lengthy argument against the concepts of cyclical investing, market timing, and chasing specific investments based on recent performance. Instead, you should just invest in the broad market and hold.

Chapter 14 – Seven Ways to Invest for College
There are a lot of different investment opportunities for college, ranging from handling it all yourself for flexibility to various accounts of different varieties. I have a 529 managed by Vanguard which has been returning very nicely, so I’m going to stick with it, I think. The most important lesson here is that you should start investing for your child’s future sooner rather than later.

Chapter 15 – How to Manage a Windfall Successfully
I didn’t expect it, but one of my favorite pieces of advice appeared in this book: if you get a huge windfall, put it in a short term investment for six months and just think about it and plan carefully what you’re going to do with it. This is also a situation where you really should have a professional help you, as you’ve just jumped into a completely different investment category and lots of things are available to you.

Chapter 16 – Do You Need an Advisor?
In general, this chapter basically says that you don’t need one – you’re better off on your own, doing your own research and making your own investments (with the windfall caveat from the last chapter, of course). If you do get an advisor, do your homework extensively and make sure they have certifications as anyone can claim to be a financial advisor.

Chapter 17 – Track Your Progress and Rebalance When Necessary
When you invest, even in a “buy and hold” philosophy as advocated by this book, you need to keep tabs on what’s going on, and you should make adjustments when necessary. Generally, the Bogleheads seem to believe in rebalancing every 12 to 18 months. How do you rebalance? Basically, it simply comes down to moving your investments so that they match what you’ve decided your portfolio should be like. For example, let’s say you want to have 80% stocks and 20% bonds in your portfolio, so you make it so. Eighteen months later, the value of your portfolio is 83% stocks and 17% bonds, so you move that 3% where it should be. Eighteen months after that, your portfolio is 74% stocks and 26% bonds, so you move that 6%.

Chapter 18 – Tune Out the “Noise”
Most of the people who spout financial advice are full of hot air. Ignore people who come at you with a “killer investment” or a “great tip” and stay focused on fundamentals: a broad, diverse investment that will grow well over the long haul. Hopefully, people who watch shows like Mad Money realize that they’re entertainment more than anything. If you take nothing from this review, do your homework before following anyone’s advice, including mine.

Chapter 19 – Mastering Your Investments Means Mastering Your Emotions
Panic. Fear. Greed. Overconfidence. These things strike everyone. The best ways to overcome them are by focusing on things that are provable and the logic that has worked for you in the past. Don’t believe in hype and don’t run in fear based on recent history; this is a common mistake called recency bias. Look for the long term and plan for the long term and you’ll be fine.

Chapter 20 – Making Your Money Last Longer Than You Do
This chapter basically boils down to one central idea: put plenty of money away, and then make sure you’re not spending so much of it that you could ever go broke in retirement. This means figuring on the very high end when calculating what you’ll need in retirement and then saving for it starting as soon as you possibly can.

Chapter 21 – Protect Your Asses by Being Well-Insured
This book is all about being a great risk manager, and insurance is all about managing risk, so it’s unsurprising that this chapter encourages you to insure yourself thoroughly and well, on everything from strong life insurance to health insurance to long-term disability insurance.

Chapter 22 – Passing It On When You Pass On
Finally, the book gets around to talking about wills, living trusts, power of attorney, and living wills. Basically, it boils down to making sure that the money you’ve been working so hard to earn throughout your life has a safe long-term home with your descendents and other institutions that you care about.

Chapter 23 – You Can Do It
This final chapter is basically just a review of the concepts throughout the book and some strong encouragement to get started now and build a lifetime of sound financial planning; a solid capper to the book.

Buy or Don’t Buy?

The Bogleheads’ Guide to Investing is a very detailed “starter manual” for conservative investors. The principles in this book are very fundamentally sound, but are not going to be the foundation for any “get rich quick” scheme.

Before you decide whether or not this is a good book for you, you need to ask yourself what your general investment goals really are. If your goal is to have a shot at getting rich quickly with a lot of risk mixed in, I don’t recommend this book. You’re better off reading something like Jim Cramer’s Real Money, which is an excellent book for people who are willing to take on some significant risk and dabble in individual stock investment (and even that is fairly moderate risk compared to some investments).

On the other hand, if you’re planning on investing for the purpose of building a stable, lifelong economic backbone, I couldn’t recommend this book more highly. It’s a well-conceived explanation, from top to bottom, of an investment philosophy that will create a life full of steady gains and sustainable wealth.

I really commend the writers for putting together a stellar book. I knew going in that there would be a focus on index funds and the like, but this book really spells out a great overall investing philosophy. Most of the personal finance books that I read I usually pass one; this one might just be a keeper.

I originally reviewed The Bogleheads’ Guide to Investing in five parts, which you can find here, here, here, here, and here if you would like to read the original comments.

The Bogleheads’ Guide to Investing is the nineteenth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

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  1. Mel Lindauer says:

    Hi Trent:

    Just wanted to say “Thanks” for the very nice and detailed review of our book. Glad to hear you enjoyed it, and hope your readers do too.

    Best regards,

    Mel Lindauer

  2. Mohammad says:

    Just pointing out a typo:

    Chapter 21 – Protect Your Asses by Being Well-Insured

    Asses should be Assets.

  3. Ryan says:

    Trent,

    That typo is still there. And it’s quite funny!

    Ryan

  4. Lo. Price says:

    I am a pretty big fan of indexing, but had never read this book and I was surprised by some of the advice given the I don’t agree with. From Chapter 5, I think in general I-bonds and TIPS are not very useful because many bonds (and bond funds) will provide better rates of return and equities tend to be a better hedge against inflation if that is your concern. Chapter 12- Diversification is more than just simply buying an S&P 500 or Wilshire 5000 fund, even though those funds are well-diversified over hundreds of stocks. Diversification also means holding a sizable portion of your portfolio in small and medium, growth and value stocks, as well as international stocks in both 1st world and emerging markets. Finally, Ch. 16- Having an advisor can be a great source for keeping you sane and taking a lot of the stress of managing your owns investments away, even if you do plenty of research and enjoy investing.

  5. Freud theory says:

    I’m just kind of getting into this stuff, and boy, do I have a lot to learn. I came across this post through a Google search, and I really like the blog all together, so I’ll be digging around a bit :)

  6. A Very impressive Read! My wife and I started a business 6 years ago on many of these concepts of investing. We decided to invest more on ourselves,the business and other financial backings, Still going strong! Thanks SIMPLE DOLLAR for all of your help over the years….!!

    Happy Gilmores…

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