Bogleheads guide to investing summary
No index front running. When traders know in advance that an index manager must sell a stock because it no longer meets the index specifications, it can lower the price of the stock to be sold and raises the price of the stock before it is to be bought. No fund manager risk. No individual stock risk. Individual stock picking is dangerous due to how difficult it is to find a winning stock.
No overlap. The more funds in a portfolio, the greater the chance of funds and securities overlap. No sector risk. Market sector risk is the risk you face when investing in individual sector funds such as financials, healthcare, real estate, energy, utilities, gold, and technology. No style drift. Style categories vary. Stocks range from a large-cap value less risky , small-cap growth more risky , value funds, blend funds, etc.
Bonds range from short-term high-quality bonds less risky to long-term low-quality bonds more risky. Total market index funds include ALL investment styles within the three broad categories U. The primary goal of the index fund is to track its benchmark index as closely as possible. Above-average return. Index funds have higher returns than managed funds. Simplified contributions and withdrawals.
Three fund portfolios make it easy to contribute to and efficient to maintain. The benefit of consistency. Index funds offer consistent performance over time. Low turnover. Turnover costs hidden from investors include commissions, spreads, impact and administrative costs. Higher turnover and bad market timing lead to lower annual returns for actively managed fund investors. Low costs.
Investments expenses include expense ratios, management fees, sales charges, etc. Diversification leads to lower risk. The investor is still exposed to the high volatility of the overall stock market, but in exchange the investor gets to participate in whatever returns the market is generous enough to give over time.
Bogleheads also like to use low cost index funds to hold international stocks , so they can take advantage of economic growth in other countries. Vanguard Total International Stock Market Fund is one such fund that owns a portion of most international public companies in both the developed and developing worlds. International equity may or may not provide higher growth than US equity over time, and it has historically been even more volatile than domestic stocks.
Minimize costs Watch the video Figure 2. After 30 years, a fund with a 1. Costs matter, and investors need returns compounding for their own benefit, not the benefit of fund companies who skim unnecessary fees off the top. Figure 2. Unfortunately, some k plans do not offer any index funds. In this unfortunate situation, Bogleheads generally look for the largest, most diversified funds with the lowest fees. These "closet index funds" tend to perform relatively like index funds although with higher fees.
If you need to find the "least-bad" funds available in your k , start by looking for the funds with the lowest expense ratios. Minimize taxes Watch the video Perhaps the reason that Bogleheads focus carefully on tax efficiency the impact of taxes on an investment is that no one controls how equity markets might perform in a given year.
Rather than obsessing over the unknowable, you should focus on areas where your decisions can save money: by preserving money for retirement what would otherwise go to Uncle Sam. Only consider taxes after you have configured your total portfolio. The first step is to take full advantage of tax-advantaged accounts such as k s and IRAs. These allow your money to grow, using the magic of compound interest, without a portion being removed every year to pay taxes.
Many investors have large enough tax-advantaged accounts to hold all of their retirement savings, and so never need to worry about tax efficient placement. But for those who also have taxable accounts investments in which you pay taxes the year they are due , look carefully at the tax efficiency of each holding. Some fund types, like total market equity index funds, are extremely tax-efficient, because they produce very low dividends and capital gains. By contrast, bond funds can be extremely tax-inefficient, because the interest they produce every year is taxed at your full marginal tax rate.
So Bogleheads put tax-inefficient funds bonds into tax-advantaged accounts. Other tax-inefficient funds that should usually go in tax-advantaged accounts are REITs , small value funds, and actively managed funds that frequently churn their holdings. If there's not enough room for bonds in tax-advantaged accounts, and you are in a higher tax bracket, holding tax-exempt municipal bond funds in a taxable account may be a good choice.
Bogleheads who hold taxable accounts also often make use of tax loss harvesting , which is a technique to turn market downturns into immediate tax savings. The key thing to remember about tax efficiency is that tax-efficient asset placement matters. The same funds can produce hundreds of thousands of dollars more for your retirement if you place them in a tax efficient manner.
Maintain discipline Watch the video There is a large amount of research showing that typical mutual fund investors actually perform far worse than the mutual funds they invest in because they tend to buy after a fund has done well and tend to sell what they own when it has done poorly. Studies on timing using returns data show no evidence of positive timing. The vast majority of investors earn less than the market due to two common timing mistakes: buying yesterday's top performers, and letting your emotions cause you to attempt to predict the direction of the stock market.
This behavior of buy high, sell low is guaranteed to produce poor results. Instead, Bogleheads create a good plan and then stick with it, which consistently produces good outcomes over the long term. Bogleheads adopt a reasonable investment plan and then stay the course. When index funds were dramatically outperforming all the alternatives in the 's, this advice was easy to follow. But with the crash of , many investors panicked, or at least wavered in their commitment to buy, hold, and rebalance investing.
Bogleheads realize that in exchange for the high returns that stocks produce over time, the equity markets are enormously volatile. After big drops, it can be very difficult to continue to follow your pre-set plan. Even during normal markets there are always distractions, such as attractive new asset classes that have recently outperformed, or fancy alternative investment vehicles, such as hedge funds.
Bogleheads strive not to be distracted, and strive not to waver. Create an asset allocation that includes bonds to reduce the volatility caused by the stock part of your portfolio, then rebalance when needed. This balanced approach will help you to stay the course.
MARSHALL BOOKMAKERS BETTING
Keep costs and taxes low. Diversify your stock portfolio Investors who follow these simple tenets will earn their fair share of whatever returns the financial markets are kind enough to deliver in the years ahead. Choose A Sound Financial Lifestyle The answer to becoming financially independent lies in what we choose to do with the money that comes into our lives. Start Early and Invest Regularly For most people the most difficult part of the process is acquiring the habit of saving.
Clear that one hurdle, and the rest is easy. Start to save early and invest regularly. Know What You Are Buying Know more about the various investment choices available to us, such as stocks, bonds, and mutual funds. Mutual fund investing is the best route for most investors in most situations. Notice we did not say all investors or all the time! Keep It Simple Here is the crux of the index investing 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!
Due to their simplicity, low cost and ease of manageability, investing in index funds is an excellent choice for nearly every investor. In school, it usually takes a lot of work to earn an A, less work to earn a B, and so on.
In investing, if you spend lots of time and effort studying the market, or pay someone to manage your investments, you have less than a 20 percent chance of being an A investor. However, if you know nothing about investing, spend minimal time on your investments, and buy index funds, you have a percent chance of being a B investor. In a world where most investors get a D or worse, B is beautiful. By placing your money in actively managed, low-cost funds, there is the possibility of getting greater returns.
Asset Allocation Your most important portfolio decision can be summed up in just two words: asset allocation. Asset allocation is the process of dividing our investments among different kinds of asset classes baskets to minimize our risk, and also to maximize our return for what the academics call an efficient portfolio.
An asset allocation plan is based on your personal circumstances, goals, time horizon, and need and willingness to take risk. Risk and higher expected returns go hand in hand. Make your investment plan as simple as possible. Costs Matter Do costs matter?
You bet they do! Most investors have little idea of the many kinds of costs, disclosed and undisclosed, that are associated with investing. We are talking about advisory fees, brokerage commissions, customer fees, legal fees, marketing expenditures, sales loads, securities processing expenses, and transaction costs. Book summary first edition The first two chapters discuss getting your personal finances in order - paying off credit card and other high interest debt, establishing an emergency fund , living frugally with a focus on saving, not borrowing and consuming, "paying yourself first", and using the power of compounding to increase your net worth over time.
The next three chapters get into the basics of stocks and bonds , mutual funds , ETFs , and annuities. Chapter 6 tackles the difficult question of how much you need to save for retirement. They discuss factors such as the age of retirement, life expectancy and the length of retirement, estimated inflation and future returns, and also any expected inheritances and desire to leave an estate.
They also cover the basics of retirement calculators, with a few examples. They do so for one simple reason: rock-bottom costs. In a random market, we don't know what future returns will be. However, we do know that an investor who keeps his or her costs low will earn a higher return than one who does not.
That's the indexer's edge. It then describes setting a goal and investing timeframe and determining your risk-tolerance. The authors then tackle the subject of what percentage of your portfolio should be stocks vs. There are suggested portfolios for both young and middle aged investors, and for both early and late retirees.
Chapter 10 explains the tax implications of stock and bond funds: dividends, long and short-term capital gains, and the effect of turnover on taxes. The also discuss hidden costs of k plans. The chapter ends with a discussion of asset location placement of funds within either taxable or tax-advantaged accounts , with stock and bond classes listed in order of tax-efficiency.
Chapter 12 discusses diversification, promoting whole market funds, and provides an extensive list of correlations between Vanguard funds. Chapter 13 is an account of why market timing of stocks, bonds, and interest rates, and performance chasing of hot funds is fruitless.
Chapter 17 starts with a lengthy discussion on rebalancing your portfolio to reduce risk, and doing so in a tax-efficient manner. Practical examples are given Chapter 18, which goes in-depth on "tuning out the noise" of much of the financial media. Included is television, internet, newsletters, radio shows, seminars and books, which they label "financial porn. The authors discuss strategies to avoid these traps.
Chapters 20 through 22 discuss retirement: when to take social security , what is a safe withdrawal rate, given longevity and health, market returns, inflation, etc.
Bogleheads guide to investing summary forex manual trading systems
The Bogleheads' Guide To Investing (Summary)
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