The Bogleheads’ Guide to Investing: Chapters 1 – 8

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.

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.

Tomorrow, we’ll continue evaluating this book.

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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4 thoughts on “The Bogleheads’ Guide to Investing: Chapters 1 – 8

  1. Duane says:

    On the sixth part I’m puzzled about the calculation. A 7% return on 2.2 million would be over 140k per year. It isn’t clear if the 50k refers to gross or net income. Can you clarify things?

  2. Paula says:

    50K/year seems incredibly low 30 years from now. I realize that you won’t have a mortgage, but I’m assuming that health care costs for my husband and I will easily take the place of the mortgage.

  3. Trent says:

    That’s $50K in today’s dollars – much more in 30 years.

  4. eR0CK says:

    Ironically, I also just finished Chapter 8.

    I think it’s a great book and great for beginners. I haven’t got much use out of it thus far, but it’s interesting nonetheless.

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