The Bogleheads' Guide to Investing

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🎯 The Book in 3 Sentences

💡 Key Takeaways

Focus on saving, emergency funds, and clearing debts for a sound financial start.
Start early, save big, diversify wisely, and embrace index investing for long-term wealth.
Strategize asset placement, leverage tax-efficient funds, and employ smart practices for tax savings.
Tailor savings, consider age, retirement goals, and be tax-savvy to secure a comfortable future.
Opt for index funds, prioritize low-cost options, and keep asset allocation aligned with your goals.
Master your emotions, avoid financial noise, and plan for a lasting financial legacy.

✏ Top Quotes

Take 100 young Americans starting out at age 25. By age 65, one will be rich and four will be financially independent. The remaining 95 will reach the traditional retirement age unable to self-sustain the lifestyle to which they have become accustomed.

A wise investor realizes that it’s more important to meet financial goals than to take chances in the hope of becoming richer.

“Everyone is a fool for at least five minutes a day. Wisdom consists of not exceeding the limit.” During those few minutes a day, we highly recommend not making any investment decisions.

📝 Summary + Notes

CHAPTER 1. CHOOSE A SOUND FINANCIAL LIFESTYLE

Income ≠ Wealth. It’s not how much you make, *it’s how much you keep.*
Pay off credit card and high-interest debts.
Establish an emergency fund of 3-12 months of living expenses.

CHAPTER 2. START EARLY AND INVEST REGULARLY

The Rule of 72: To determine how many years it will take an investment to double in value, simply divide 72 by the annual rate of return. For example, an investment that returns 8 percent doubles every 9 years (72/8 = 9).
Save as much as you can. 10%-50% of your income.
Channel at least half of all future take-home pay increases to investing.
Shop for used items.
Low-interest loans to finance the cost of a home, a rental property, education that will boost earning potential, and to start a new business are all examples of good debt.

CHAPTER 3. KNOW WHAT YOU’RE BUYING: PART ONE

Find a bond fund that matches your investment time horizon.
Invest in a fund that matches your desired characteristics with the intention of holding it for at least the fund’s duration or longer.
In the bear market of 2008, while equity fund losses of 30% to 60% were common, Vanguard’s Total Bond Market Index Fund gained 5.05%.

CHAPTER 4. KNOW WHAT YOU’RE BUYING: PART TWO

There exist funds of funds that invest in other mutual funds, normally from the same company, and usually include stock, bond, and money market mutual funds.
The Vanguard LifeStrategy Growth Fund has a fairly aggressive target asset allocation of 80 percent stocks and 20 percent bonds.

CHAPTER 5. PRESERVE YOUR BUYING POWER WITH INFLATION-PROTECTED BONDS

Real return **is the amount we have left after we subtract inflation from our rate of return.
I Bonds and TIPS are inflation-protected options. Hold them long and beware of taxes.

CHAPTER 6. HOW MUCH DO YOU NEED TO SAVE?

Factors to consider:

The amount we save. Obviously, the more we save, the better off we’ll be.
Our current age. This helps to determine how many years we have to save and invest, and how long our retirement investments will be able to work for us.
The age at which we plan to retire.
How many years we’ll have to live off our retirement account, based on our life expectancy.
Whether we plan to leave an estate, or if we simply want to make sure that we don’t run out of money before we run out of breath.
The expected rate of return on our investments.
The rate of inflation over our accumulation period.
Whether we can expect an inheritance prior to retirement.
Our other sources of income in retirement. These would include pensions, Social Security, reverse mortgage, and part-time work.

CHAPTER 7. KEEP IT SIMPLE

Index investing is the way. Advantages:
1. There are no sales commissions.
2. Operating expenses are low.
3. Many index funds are tax efficient.
4. You don’t have to hire a money manager.
5. Index funds are highly diversified and less risky.
6. It doesn’t much matter who manages the fund.
7. Style drift and tracking errors aren’t a problem.

CHAPTER 8. ASSET ALLOCATION

Four elements needed to design an efficient portfolio: your goals, your time frame, your risk tolerance, and your personal financial situation.

CHAPTER 9. COSTS MATTER

Mutual funds can charge fees such as:
- purchase: costs associated with a fund purchase.
- exchange: a fee when a shareholder exchanges from one fund to another within the same group of funds.
- account: for the maintenance of their accounts.
- redemption: when they redeem (sell) their shares.
- management: fees paid from fund assets to the fund’s investment advisor or affiliate for portfolio management.
- 12b-1: to cover distribution expenses and sometimes shareholder service expenses.
- custodial expenses, legal expenses, accounting expenses, transfer agent expenses, and other administrative expenses.
Other fees:
- Transaction Costs: A mutual fund incurs a cost every time it buys or sells a security.
- Brokerage Commissions
- Soft-Dollar Arrangements: The broker, in addition to receiving a commission for buying and selling securities at the best price, receives a commission for providing added benefits to the fund manager.
- Spread Cost: In addition to the broker’s commission, every time a security is bought or sold there is a hidden spread that is the difference between the market bid and ask prices.
- Market Impact Costs: Because they buy and sell with big money, they buy with “market” order and not “limit”. So they change the price.

CHAPTER 10. TAXES: PART ONE

Place stocks in taxable account and bonds in non-taxable accounts.
Capital gains that are hold less than 12 months are taxed as ordinal income.
Capital gains that are hold more than 12 months are taxed 15%.
For maximum tax efficiency in taxable accounts, you should do the following:
- Favor funds with low dividends.
- Favor funds with “qualified” dividends.
- Favor funds with low turnover.
- Favor tax-efficient index funds and tax-managed funds.

Tax-managed funds **reduce or eliminate shareholder taxes by using a variety of tax-reduction techniques:

Low turnover. Many tax-managed funds use an index-oriented approach to take advantage of indexing’s inherent advantages of low cost (higher return) and low turnover (fewer capital gains).
Use HIFO (highest-in, first-out) accounting. Tax-sensitive fund managers sell highest cost shares first, thereby keeping capital gains, which are passed through to shareholders, to a minimum.
Tax-loss harvesting. This is a strategy in which the manager sells losing stocks to accumulate tax losses, which can later be used to offset capital gains from winning stocks.
Selecting low-dividend paying stocks. Dividends are first used to pay fund expenses, and then the balance is passed on to shareholders, resulting in taxes that have to be paid at tax time. Selecting stocks with few or no dividends will minimize annual shareholder taxes.
Holding securities for long-term gains. Short-term gains on the sale of securities held 12 months or less are taxed at about double long-term gains. A tax-sensitive manager will try to hold securities longer than one year.
Use redemption fees. Tax-managed funds frequently require redemption fees in order to discourage shareholders from selling profitable shares, resulting in capital gains and unnecessary trading costs.

You can use many of the same tax-reducing techniques that are used by tax-aware mutual fund managers when managing your own personal portfolio.

Keep turnover low. We know that buying and selling funds in a taxable account generates capital gains taxes. Therefore, we will try to buy funds that can be held “forever.”
Use only tax-efficient funds in taxable accounts. We will try to use only tax-efficient funds in our taxable account(s). This usually means low-turnover index and/or tax-managed funds.
Avoid short-term gains. We know that short-term gains are taxed at about twice the rate of long-term gains. Therefore, we will try to hold profitable shares for more than 12 months before selling.
Buy fund shares after the distribution date. Mutual funds pay taxable distributions at least annually. If we buy a fund shortly before a distribution date, we will have to pay taxes on the distribution. If we wait until after the distribution date, the value of our purchase will still be the same (assuming no market change), but we will avoid the tax on the distribution.
Sell fund shares before the distribution date. There may be a small advantage in selling before the distribution date.
Sell profitable shares after the new year. If shares are sold in December, the tax will be due with that year’s return. By simply waiting until January to sell, the tax will be reported a year later. There’s usually no sense in paying taxes any earlier than we have to.
Harvest tax losses. This is the practice of selling losing securities in taxable accounts for the purpose of obtaining tax losses to reduce current and future income taxes.

CHAPTER 11. TAXES: PART TWO

US specific for 401(k), 403(b), IRA, etc.

CHAPTER 12. DIVERSIFICATION

Diversification offers two distinct benefits to investors:
- it helps reduce risk by avoiding the “all the eggs in one basket” scenario.
- second, you could increase your return at the same time.

CHAPTER 13. PERFORMANCE CHASING AND MARKET TIMING ARE HAZARDOUS TO YOUR WEALTH

Past performance cannot be used to predict future performance.
We can’t predict the market. No newsletters, no financial TV shows, no financial gurus.
The logical alternative to performance chasing and market timing is structuring a long-term asset allocation plan and then staying the course.

CHAPTER 14. SAVVY WAYS TO INVEST FOR COLLEGE

Personal savings.
Custodial accounts (UGMA & UTMA).
U.S. Savings Bonds.
Coverdell Educational Savings Accounts (Education IRAs).
529 Qualified Tuition Plans (QTP), including education savings accounts and prepaid tuition plans.
IRA withdrawals.
Some additional funding options available to you.

CHAPTER 15. HOW TO MANAGE A WINDFALL SUCCESSFULLY

Deposit the money in a safe account for at least six months and leave it alone.
Get a realistic estimate of what the windfall can buy.
Make a wish list.
Get professional help.

CHAPTER 16. DO YOU NEED AN ADVISOR?

Think about your financial objectives and know what type of financial services you need.
Get the names of professionals from friends, neighbors, family, or business colleagues.
Talk with several professionals. Ask each of them about their areas of specialization, professional designations, registrations or licenses, education, work history, investment experience, products and services, and disciplinary history.
Understand how you will pay them for their services.

CHAPTER 17. TRACK YOUR PROGRESS AND REBALANCE WHEN NECESSARY

Rebalancing every 18 months minimizes fees of transactions, requires less time of involvement, and is tax efficient.
To rebalance you can withdraw money for income from the good-performing asset and/or add more funds in the underperforming.

CHAPTER 18. TUNE OUT THE “NOISE”

There are three kinds of investment experts:

Those who don’t know what the market will do and know they don’t know.
Those who don’t know what the market will do but believe they know.
Those who don’t know what the market will do and get paid to pretend they know.

CHAPTER 19. MASTERING YOUR INVESTMENTS MEANS MASTERING YOUR EMOTIONS

Recency bias. Never assume today’s results predict tomorrow’s. It’s a changing world.
Overconfidence. No one can consistently predict short-term movements in the market. This means you and/or the person investing your money.
Loss aversion. Be a risk manager instead of a risk avoider. Believing you are avoiding risk can be a costly illusion.
Paralysis by analysis. Every day you don’t invest is a day less you’ll have the power of compounding working for you. Put together an intelligent investment plan and get started. If you need help, seek out a good financial planner to assist you.
The endowment effect. Just because you own it, or are a part of it, doesn’t automatically mean it’s worth more. Get an objective evaluation. Invest no more than 10% of your portfolio in your employer’s stock.
Anchoring. Holding out until you get your price to sell an investment is playing a fool’s game. So is blindly assuming that your financial person is doing a great job without getting an objective reading of what’s really going on. Get a second opinion.

CHAPTER 20. MAKING YOUR MONEY LAST LONGER THAN YOU DO

Keep fixed expenses low for flexibility.
Have a viable way to earn extra income.
Delay retirement, wait for Social Security, consider annuities.
Prudent portfolio planning: withdraw 4-5% annually.

CHAPTER 21. PROTECT YOUR ASSETS BY BEING WELL-INSURED

Proper insurance coverage is crucial to safeguard against financial setbacks.
Life, health, disability, property, auto, liability, and long-term care insurance are essential.
Avoid common mistakes, insure against significant risks, choose high deductibles, and opt for reputable companies.
Seek professional advice to tailor coverage to your needs.

CHAPTER 22. PASSING IT ON WHEN YOU PASS ON

Secure your assets with a will, living trust, and powers of attorney.
Consider gifting and prepare a letter of instruction.