THE BOGLEHEADS' GUIDE TO INVESTING by Taylor Larimore, Mel Lindauer, Michael LeBoeuf, John C. Bogle

• In short, the principles that work in most aspects of our daily lives simply lead to failure in investing.
• Without assistance from government programs such as Social Security, Medicare, and Medicaid, many would literally starve.
• Although you might not be aware of it, you have chosen the financial lifestyle that you currently live.
• “Debt is deadly, and earning to spend gets you nowhere. The people who reach financial freedom focus on accumulating wealth over time.”
• But before we discuss the basics and you begin investing, we strongly recommend that you do the following three things, if you haven’t already done so: Graduate from the paycheck mentality to the net worth mentality. Pay off credit card and high-interest debts. Establish an emergency fund.
• From the time we are old enough to understand, society conditions us to confuse income with wealth.
• Income is how much money you earn in a given period of time. If you earn a million in a year and spend it all, you add nothing to your wealth.
• It’s not how much you make, it’s how much you keep.
• The measure of wealth is net worth: the total dollar amount of the assets you own minus the sum of your debts.
• Make it a habit to calculate your net worth once a year.
• We recommend doing that simply because it’s the highest, risk-free, tax-free return on your money that you can possibly earn. Credit card balances are the most insidious of all.
• there is no federal limit on the interest rate a credit card company can charge.
• Every high-interest debt you don’t pay off is siphoning off dollars from your potential net worth and shifting it to the net worth of lending companies.
• If you’re on the credit card merry-go-round, get off. If the balances are very large and you own your home, consider taking out a home-equity loan to pay off the credit cards. The interest rate will probably be lower and the interest will be tax deductible.
• The final prerequisite to investing is to have a readily accessible source of cash on hand for emergencies.
• How big of an emergency fund you need depends largely on your net worth and job stability.
• For most people, six months’ living expenses is probably adequate.
• Keep your emergency fund in an account that is safe and liquid.
• The Rule of 72 is very simple: To determine how many years it will take an investment to double in value, simply divide 72 by the annual rate of return.
• 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.
• Investing is about buying assets, holding them for long periods of time, and reaping the harvest years later.
• Speculating is similar to gambling.
• When you earn a dollar, try to save a minimum of 20 cents.
• The more you save, the sooner you achieve your financial goals.
• There is no substitute for frugality.
• All good wealth builders have just one thing in common: They spend less than they earn.
• There are two basic ways to find money to invest: You can either earn more money or spend less than you currently earn. We recommend doing both.
• The first rule of saving/investing is to take it off the top of your paycheck.
• There are no magic formulas for acquiring wealth. The earlier you start and the more you invest, the sooner you reach financial freedom.
• Reducing your spending is financially more efficient than earning more money.
• If you make a habit of buying some items used, it’s possible to pay less than half the new price for many of them. Adopting that habit can be better than doubling your salary.
• The habit of buying a new car every few years has the potential to decrease your future net worth more than any other buying habit, including credit card debt.
• The way to lower your cost of driving is to buy a good used car and pay cash for it.
• Lowering the cost of driving over the course of a lifetime can literally be the difference between retiring a millionaire and retiring broke.
• Moving to a smaller home reduces your property taxes, mortgage payment, utility bills, and cost of maintenance.
• Creating additional sources of income is an excellent way to find money to invest.
• In addition to providing investment income, side incomes make us less vulnerable to layoffs, downsizings, office politics, and obnoxious bosses.
• Just as it makes sound economic sense to diversify your investments, it makes sense to diversify your sources of income.
• The secret of any successful business lies in fulfilling unmet needs and wants. Find a need and fill it. Find a problem and solve it. Find a hurt and heal it.
• We’re somewhat biased, of course, and feel that mutual fund investing is the best route for most investors in most situations.
• Stocks represent an ownership interest in a corporation.
• When you purchase individual bonds at initial issue, you’re actually lending a specific amount of your money to the bond issuer.
• So, in reality, a bond is nothing more than an IOU or promissory note that pays interest from time to time (usually semiannually) until maturity.
• Treasury issues are considered the safest bond investments, since they’re backed by the full faith and credit of the U.S. government.
• An easy way to visualize the relationship between interest rates and bond prices is to picture a seesaw with interest rates on one side and bond prices on the opposite side. When one goes up, the other goes down, and vice versa.
• It’s important that you don’t invest in a fund with a duration that’s longer than your time horizon.
• It’s important to understand that bonds and bond funds have a low correlation (they don’t always move in the same direction at the same time) to stocks, so bonds can be a stabilizing force for a portion of your portfolio.
• Mr. Bogle suggests that owning your age in bonds is a good starting point.
• Mutual funds pool money from lots of investors to buy securities.
• As an investor in a mutual fund, you actually own a small fractional interest in the underlying pool of securities purchased by the managers of your mutual fund.
• The mutual fund prospectus is the single best way to find out about the objectives, costs, past performance figures, and other important information about any mutual fund you’re considering investing in.
• We feel strongly that they should be the investment of choice for most individual investors.
• Annuities are an investment with an insurance wrapper.
• An immediate annuity is a contract between you and an insurance company. In exchange for a sum of money from you, the insurance company will promise to pay you a specific amount of money, on a regular basis, for the remainder of your lifetime.
• Exchange-traded funds (ETFs) are basically mutual funds that trade like stocks on an exchange.
• Perhaps one of the biggest benefits of owning ETFs is the low cost. ETF expenses can be as low, or even lower, than many mutual funds that track the same index.
• There are some downsides to ETFs. First, you have to use a broker each time you buy and sell, and that usually means you’ll be charged a commission for each transaction.
• As a result, ETFs are not suited for investors who make a number of smaller purchases, such as with dollar-cost averaging, since they’d have to pay a commission on each purchase.
• It’s important to note that Vanguard offers their low-cost ETFs commission-free, eliminating the previously mentioned downside associated with having to pay commissions to buy and sell ETFs.
• Inflation is like a silent thief in the night that comes, sight unseen, and steals our valuables.
• So what’s really important is not the dollar amount, but rather its purchasing power, or what it will buy.
• It’s much better to have saved a bit too much, rather than not enough.
• Although there are no absolute guarantees with RTM, usually asset classes that have outperformed for a period of time are likely to underperform for another period of time.
• While most won’t publicly admit it, the vast majority of stockbrokers, mutual fund managers, sellers of investment products, and money managers don’t earn their keep.
• The reason why so many common life principles don’t apply to the world of investing is very simple: The short-run performance of the stock market is random, unpredictable, and for most people, nerve-racking.
• Although long-term returns are fairly consistent, short-term returns are much more volatile.
• 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!
• Index funds outperform approximately 80 percent of all actively managed funds over long periods of time. They do so for one simple reason: rock-bottom costs.
• Actively managed funds typically have a yearly expense ratio of 1 to 2 percent.
• Just a 1 percent difference in expenses makes an 18 percent difference in returns when compounded over 20 years.
• diversification is the key to reducing investment risk.
• When it comes to index funds, who’s managing the fund is a nonissue.
• Due to their simplicity, low cost, and ease of manageability, investing in index funds is an excellent choice for nearly every investor.
• Do not buy load index funds with high annual expense ratios.
• Only consider investing in no-load funds with annual expense ratios of 0.5 percent or less, the cheaper the better.
• we believe that the vast majority of investors will be better off buying index mutual funds rather than ETFs.
• As you may suspect, as Bogleheads we are partial to Vanguard due to its rock-bottom costs. However, there are other reputable firms that offer no-load, low-cost index funds.
• Other reputable firms you may want to consider are Fidelity, T. Rowe Price, USAA, and Charles Schwab.
• Another important point to keep in mind: It’s common for actively managed funds to have great before-tax returns and not-so-great after-tax returns, due to the trading that goes on in actively managing the funds.
• Your most important portfolio decision can be summed up in just two words: asset allocation.
• EMT can be described as “an investment theory that states that it is impossible to ‘beat the market’ because existing share prices already incorporate and reflect all relevant information.”
• Efficient markets and random walk are obscenities on Wall Street, where investors are constantly told that Wall Street’s superior knowledge can make it easy to beat the market (for a fee). Nearly all the academic community disagrees, but without advertising dollars their research results are generally unknown by the investing public.
• Stocks are usually unsuitable for short time frames (less than five years).
• Knowing your risk tolerance is a very important aspect of investing, and one that the academics have studied extensively. Their experiments prove that most investors are more fearful of a loss than they are happy with a gain.
• Jack Bogle’s rough guide is that bonds should equal our age.
• Don’t worry about exact percentages. Ten percent more or less of an asset class will not make a significant difference in your portfolio performance.
• The only certainty in investing is that past performance will not repeat.
• It’s important for maximum diversification that our stock allocation contain various subcategories.
• U.S. stocks represent about half the value of world stocks, with foreign stocks representing the other half.
• We believe that investors will benefit from an international stock allocation of 20 percent to 40 percent of their equity allocation.
• Bonds are primarily for safety. Stocks are primarily for higher return (and risk).
• A Young Investor Using Vanguard Funds Total Stock Market Index Fund 80% Total Bond Market Index Fund 20%
• A Middle-Aged Investor Using Vanguard Funds Total Stock Market Index Fund 45% Total International 10% REIT 5% Total Bond Market Index Fund 20% Inflation-Protected Securities 20%
• Every dollar we pay in commissions, fees, expenses, and so on is one dollar less that we receive from our investment. For this reason, it’s critical that we keep our investment costs as low as possible.
• A significant disadvantage of a front-end load is that the load reduces the amount of money actually invested.
• Deferred sales charges are often called back-end loads.
• We recommend that mutual fund investors avoid load funds.
• No-load funds do not charge a commission or sales load. However, all funds (load and no-load) have expenses. To help meet these expenses, funds charge certain fees.
• A capital gain occurs when a stock or bond is sold for a profit. This profit is the difference between the purchase cost of stock or bond shares and their sale price when redeemed (sold). If the stock or bond share is sold below its purchase cost, the difference is a capital loss.
• One of the easiest and most effective ways to cut mutual fund taxes significantly is to hold mutual funds for more than 12 months.
• Buy-and-hold is a very effective strategy in taxable accounts.
• We think the best way for most investors to minimize taxes is to take advantage of IRS tax-favored retirement plans specifically designed to encourage people to save for their retirement (401(k), 403(b), IRA, etc.).
• One of the big problems with many 401(k) plans is their high cost.
• The rule is simple: Place your most tax-inefficient funds into your tax-deferred accounts, then put what’s left into your taxable account.
• In order to diversify your portfolio, you want to try to find investments that don’t always move in the same direction at the same time.
• Index funds, by their very nature, are seldom top performers over short periods of time. More importantly, index funds are almost never bottom performers.
• It’s a simple fact of life: More education usually means higher earnings over a lifetime.
• What really seems to matter most when it comes to expected lifetime earnings is going to college and graduating with a well-chosen major.
• As with all other aspects of investing, the earlier you start saving for your children’s college education, the better chance you have of reaching your goals.
• The 529 education savings plans are offered by every state, and each comes with its own set of rules.
• How people spend their time is a good indication of what they value most.
• The most important secret to preserving a windfall is to not touch it until the emotions subside and you come up with a sound plan for putting the money to work.
• Many people squander windfalls simply because they overestimate what the money is capable of buying.
• A windfall left to compound can have an enormous, positive impact on one’s life.
• Many so-called financial professionals are really financial salespeople.
• There is no foolproof “one-size-fits-all” system for rebalancing your portfolio. Each investor must choose a rebalancing method that’s right for them.
• Rebalancing controls risk.
• The most common method of rebalancing is based on time. The typical time frame is either quarterly, semiannually, or annually.
• A simple solution may be to consider owning a fund of funds that meets your desired asset allocation requirements, such as one of the LifeStrategy or Target Retirement series from Vanguard that automatically handles the rebalancing chore for you.
• Make a plan, pick a rebalance trigger, and stick with it; you’ll be better off for it.
• There are only two ways to outperform the stock market: By choosing superior investments and/or through superior market timing. The research conclusively shows that the ability to do either with any degree of consistency is so rare that it might as well be chalked up to chance.
• In a world where 80 percent of the investment pros fail to beat the market, they collectively spend enormous sums of money trying to convince you that they can.
• If you have read this far, you know that effective investing can be incredibly simple: Create a simple, diversified asset allocation plan. Invest a part of each paycheck in low-cost, no-load index funds according to your plan. Check your investments periodically, rebalance when necessary, then stay the course.
• You can simplify it even more by buying a single fund of funds that will take care of the allocating and rebalancing for you. Do this for a lengthy period of time and you will outperform about 80 percent of investment professionals.
• Study after study has found that trying to forecast the direction of the economy or the stock market in the short-run is largely an exercise in futility.
• All forecasting is 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
• There’s always a conflict of interest when purchasing investment products and investment advice from the same source.
• Publishers are far more interested in book selling than truth telling.
• The best antidote to noise is knowledge based on empirical research done by competent, unbiased parties who don’t have an interest in selling investment products and services.
• Emotions are extremely important because we all live at the feelings level. Better to be happy and poor than miserable and rich.
• We are the sum of our choices, and most choices are made emotionally.
• The paradox of money is while most people are very emotional about acquiring it, behaving emotionally about money is a recipe for losing it.
• The two very primitive emotions of greed and fear drive many investors as individuals and the stock market in general.
• Despite the statistical impossibility, at least 70 percent of Americans believe they are above average.
• The problem is that taking bold action to solve investment problems usually creates worse problems.
• The more choices people are given, the harder it becomes to choose one.
• Employees pass up billions every year in free money offered by their employer’s matching retirement plans simply because they won’t decide which investment course to take.
• Being human, we feel the need to conform and have an innate tendency to follow the crowd.
• procrastination is the biggest detriment to financial success.
• The surest way to lose money is to pay no attention to it.
• Good planning begins by setting financial goals and target dates.
• Pay off your credit card and high-interest debts and stay out of debt. Formulate a simple, sound, asset allocation plan and stick to it. Systematically save and invest a part of each paycheck in accordance with the asset allocation plan.
• The earlier you start, the richer you become. Invest most or all of your money in index funds. Keep your costs of investing and taxes low. Don’t try to time the market. Tune out the noise, rebalance your portfolio when necessary, and stick with your plan. By doing those things, you will intelligently manage risk.
• Once you have enough money, you can spend your time being excited and passionate about any blessed thing you want.
• Fourth, don’t expect to be perfectly sane and rational all the time about investing. We are all emotional creatures, and sometimes our emotions get the best of us. If you make a poor, emotional investment decision, resolve to learn from it and not repeat it. That’s all you can do.
• Every day you don’t invest is a day less you’ll have the power of compounding working for you.
• Investing is one area where acting on emotions is likely to lead you down the path to financial ruin.
• Retirement is not the time to have an enormous mortgage, expensive car payments, credit card debts, or the like.
• Working part-time keeps you productive, makes you feel like you are a contributing member of society, and keeps you mentally sharp.
• Most of the credible studies of 30-year portfolio survival rates conclude that you can withdraw from 4 to 6 percent of the portfolio value per year with a good chance of not exhausting the portfolio, depending on your portfolio’s asset allocation.
• In summary, the most important key to making your money last is to be financially flexible, particularly in the early years.
• Keep your fixed expenses low and have a viable way to earn extra income if needed.
• Just one bad uninsured mishap can financially ruin you or your family forever. Carrying proper coverage is a must.
• To be a successful investor requires being a good risk manager.
• Managing risk means having a plan to cover the downside.
• Never fail to buy insurance because the odds of something happening are small.
• If the odds of a flood are small, the price of insurance will be cheap.
• Insuring against specific disasters is usually a waste of money.
• You can greatly reduce or eliminate common insurance mistakes by following three simple rules: Only insure against the big catastrophes and disasters that you can’t afford to pay for out of pocket. The cheapest insurance is self-insurance. Carry the largest possible deductibles you can afford. The larger the deductible, the more you are self-insuring and the cheaper the premium will be. Only buy coverage from the best-rated insurance companies. You need insurance companies you can depend on when you need to file a claim.
• The purpose of carrying life insurance is to provide financial support to dependents who would be deprived in the event of a breadwinner’s death.
• If you need life insurance, buy term insurance. Term insurance is basic pay-as-you-go, no-frills insurance. It’s the cheapest way to go and serves the purpose.
• We don’t believe in mixing investing with insurance. Insurance is for protection and investing is for wealth building. Don’t confuse or mix the two.
• Everyone should save and invest their money and not buy life insurance until the situation requires it.
• Buy the longest period that you can afford and need.
• You can reduce the cost of a health insurance policy by taking the highest deductible and co-payment percentage that you can afford.
• Most people’s greatest financial asset is their future earning power.
• The odds of becoming disabled are far greater than the odds of dying prematurely.
• The two words you need to remember when buying this type of coverage are replacement cost.
• You can reduce the cost of homeowner’s, renter’s, and auto insurance by taking the largest possible deductible you can afford.
• If you find yourself with liquid assets of between $200,000 and $2 million when you reach your mid- to late fifties, give serious consideration to buying long-term care policies for you and your spouse.
• It’s a good idea to purchase long-term care before age 60.
• Even though you may not feel rich, the tax collector may disagree with you.
• The accumulation of assets is a lifelong endeavor, and it’s almost always achieved with some level of personal and family sacrifice along the way.
• You should have a will, even if you have a trust.
• Choose and live a sound financial lifestyle. We need to pay off our credit card debt, establish an emergency fund, get our spending under control, and most importantly, learn how to live below our means, since that’s really the key to financial freedom.
• Start to save early and invest regularly. The earlier we start, the longer we’ll enjoy the powerful benefits of compounding.
• Know more about the various investment choices available to us, such as stocks, bonds, and mutual funds. For most investors, mutual funds offer great diversity in a single investment. Don’t invest in things you don’t understand.
• Figure out approximately how much you might need for your retirement, so you’ll know if you’re on track. You can’t reach your goal if you don’t have a target!
• Indexing via low-cost mutual funds is a strategy that will, over time, most likely outperform the vast majority of strategies. If you decide to own actively managed mutual funds, choose managed funds with low expenses and place them in tax-advantaged accounts.
• An asset allocation plan is based on your personal circumstances, goals, time horizon, and need and willingness to take risks. Risk and higher expected returns go hand in hand. There’s no free lunch. Make your investment plan as simple as possible.
• Costs matter. We can’t control market returns, but we can control the cost of our investments. Commissions, fees, and mutual fund expense ratios can rob you of much of your investment returns. Keep costs as low as possible.
• Taxes can be your biggest expense. Invest in the most tax-efficient way possible. Put tax-inefficient funds in your tax-deferred accounts, and select tax-efficient investments for your taxable account. Remember the importance of diversification. You want some investments that zig while others zag.
• Rebalancing is important. Rebalancing controls risk and may reward you with higher returns. Stick with your chosen rebalancing strategy.
• Market timing and performance chasing are poor investment strategies. They can cause investors to underperform the market and jeopardize financial goals.
• Invest for your children’s education. There are several tax-deferred and tax-free options available.
• Know how to handle a windfall, if you receive an inheritance or get lucky and hit the lottery.
• Answer the question of whether you do or don’t need a financial advisor, and some of the reasons for and against.
• Understand the importance of protecting the future buying power of your assets by investing in such things as inflation-protected securities. Remember, inflation is a silent thief that robs you of future buying power.
• Tune out the noise and do not get distracted by daily news events. Avoid hot investment fads and following the herd as it stampedes toward the cliff’s edge. Believing that “It’s different this time” can cause severe financial damage to your portfolio.
• Protect your assets with the proper types and amounts of insurance. Insurance is for protection. It’s not an investment. Don’t confuse the two.
• We need to master our emotions if we want to be successful investors. Letting your emotions dictate your investment decisions can be hazardous to your wealth.
• Make your money last at least as long as you do. Overly optimistic withdrawal rates may cause you to run out of money before you run out of breath.
• Proper estate planning ensures that assets pass to heirs in a reasonable time and with minimum taxes.
• We can’t stress enough how important it is to establish your own personal financial plan, and then carefully follow that plan. Select low-cost mutual funds, preferably index funds, as the core of your investment portfolio. We feel there’s beauty in simplicity.