The Bogleheads’ Guide to Investing: Chapters 9 – 16

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 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.

Tomorrow, I’ll look at the final chapters of the book, which focus on follow-through strategies.

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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One thought on “The Bogleheads’ Guide to Investing: Chapters 9 – 16

  1. Shadox says:

    Very good post, however, an S&P 500 index is not sufficiently diversified. By definition it only invests in large cap stocks, and only in U.S. stocks at that. The Total Market Index Fund, which attempts to match the Wilshire 5000 is far more diversified, but it still heavily skewed towards large cap stocks. It is probably a good idea to invest in a small cap index (such as the Russell 2000) to off-set this large cap bias.

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