The Bogleheads' Guide to Investing

by Taylor Larimore, Mel Lindauer, Michael LeBoeuf • Read on June 27, 2021

Text in black are quotes; text in green are my notes. I sometimes write in Spanish.

We can't emphasize it enough: Read the fund's prospectus and understand what you're investing in! #
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. Rather, these investors should stick with low-cost, open-end index mutual funds. #
There is a crucially important difference about playing the game of investing compared to virtually any other activity. Most of us have no chance of being as good as the average in any pursuit where others practice and hone skills for many, many hours. But we can be as good as the average investor in the stock market with no practice at all. ad boo Insind lup -Jeremy Siegel, Professor of Finance, Wharton School, University of Pennsylvania, and author of Stocks for the Long Run #
Through education and experience, most of us come to learn and practice certain life principles that serve us well. For example: #
Don't settle for average. Strive to be the best. #
Listen to your gut. What you feel in your heart is usually right. #
If you don't know how to do something, ask. Talk to an expert or hire one and let the expert handle it. That will save you a lot of time and frustration. #
You get what you pay for. Good help isn't cheap and cheap help isn't m poos If there's a crisis, take action! Do something to fix it. #
History repeats itself. The best predictor of future performance is past performance. #
The fastest way to get rich in the stock market is to own 08 the next Microsoft. The fastest way to lose all your money is to own the next Enron. Identifying them in advance is impossible. #
Well, guess what? Applying these principles to investing is destined leave you poorer. As an investor, you can be well above average by settling for slightly less than the index returns. Listening to your gut is the worst thing you can do. Although it sometimes pays to hire an expert, you may get less than you pay for. Trying to fix a perceived investment crisis by taking action is usually a recipe for poor returns. And using yesterday's results to pick tomorrow's high-performing investments or investment pros another losing strategy. Investing has a whole new set of rules, and if we are to be successful, we need to play by these new rules. #
Our brief review of the history of investment research serves two database of 420 balanced It 77 of the purposes. First, it will help you design an efficient (low-risk/highreturn) portfolio. Second, it will give you the knowledge and conviction needed to stay the course. Now, let's start designing our personal asset allocation plan. #
1. What are your goals? #
2. What is your time frame? #
3. What is your risk tolerance? #
4. What is your personal financial situation? #
Imagine that you are in a severe bear market and that you have been watching your hard-earned savings steadily erode for a week, a month, a year, or even longer. You are discouraged. Gloom and doom has set in all around. You have no idea how much further your investments will decline. Should you sell now, or hope that the market its stomach stops churning descent?. #
Experts on television proclaim that the market is going to go down further. Writers of newspaper and magazine articles confirm that the worst is yet to come. Your friends are selling their stocks, and they advise you to do the same. Your family, happy when you were making money, begins to lose faith in your investing plan. They also urge you to sell before it's too late. This is what a bad bear market is like. Ask yourself, What would I do? Would I lose faith and sell, or would I be disciplined enough to stay the course? #
Jerry Tweddell and Jack Pierce, authors of Winning with Index Mutual Funds: "Don't assume that because you pay more, you get more." #
Unlike just about any other business, it's backward on Wall Street: #
The more you pay for services, the lower your returns are likely to be. #
Their experiments prove that most investors are more fearful of a loss than they are happy with a gain. #
Imagine that you are in a severe bear market and that you have been watching your hard-earned savings steadily erode for a week, a month, a year, or even longer. You are discouraged. Gloom and doom has set in all around you. You have no idea how much further your investments will decline. Should risk nour no. #
sell now, or hope that the market stops its churning descent?. #
Vanguard's online questionnaire and suggested asset allocations in Appendix IV. #
Using these three tools and your own experience, you should be able to decide what a suitable stock/bond/cash allocation for your personal long-term asset allocation plan is. This is the most important portfolio decision you will make. #
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. Investing is a soft science. It's not engineering, where past performance repeats itself exactly. The only certainty in investing is that past performance will not repeat. #
Tax rates for short-term and long-term capital gains are not the same. #
It's very important for tax-savvy investors to understand the difference Short-term capital gains are taxed as ordinary income at the shareowner's highest marginal income tax rate, while long-term capital gains enjoy a maximum tax rate of 15 percent-approximately half. #
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-andhold is a very effective strategy in taxable accounts. #
Wall Street can't stand buy-and-hold strategies because brokers need trading activity to make money. For this reason, you can expect to be continually seduced by Wall Street's billion-dollar marketing machine. #
Economists report that a college education adds of dollars to a man's lifetime income-which he then spends sending his son to college. #
When it comes to your financial future, remaining an uninformed consumer simply isn't an acceptable option. And, perhaps by the time you've finished reading this book (and a few others) and discover that investing isn't rocket science, you may just decide that you can handle the task, and that you, too, will become a DIY investor. #
Rebalancing may also improve your returns, since asset classes have bad a tendency to revert to the mean (RTM) over time. By rebalancing, you're selling a portion of your winning asset classes before they revert to the mean (drop in price) and you're buying more of your underperforming asset classes when their prices are lower, before they revert to the mean (increase in value). So, you're selling high and buying low. If you believe in RTM, rebalancing could increase your returns. Jack Bogle believes in RTM, and we do, too. #
To quote University of Chicago professor Eugene Fama, one of the giants of modern portfolio theory: "I'd compare stock pickers to astrologers, but I don't want to badmouth astrologers." #
We have more than 200 years of U.S. stock market history, and the only long-term trend was up. Here's what recent history tells us: If you bought a market portfolio of stocks and reinvested the dividends, your odds of losing money in any one particular year were 32 percent. #
Your odds of losing money over any 5-year period dropped to 13 percent, and for any 10-year period the odds of losing money fell to only 2 percent. There has never been a 15-year period when stocks lost money. #
That's all you need to know. #
Just because an investment book is a national bestseller doesn't mean it's a source of good information. It just means the book has been heavily promoted. Look at the author's credentials. See what the book is promising. Charles J. Givens wrote several huge money bestsellers, including Wealth Without Risk. Shortly before dying, Givens declared bankruptcy. #
We can only assume that he saw the wealth but not the risk. Robert Allen's multimillion-copy bestseller, Nothing Down, teaches readers how to buy real estate with no money down. He, too, went bankrupt, and had the IRS on his back. If it's possible to get rich buying real estate with no money down, why did he go broke? #
When it comes to investing, there's a world of difference between good, sound information and information that sounds good. Your financial future depends on knowing the difference. #
From of hands-on experience, they understand that people usually buy emotionally and justify with logic. #
Consequently, many people once burned by a stock market loss vow to never invest in it again. As Mark Twain said, "A cat who sirs on a hot stove will never sit on a hot stove again, but he will probably overly timid never sit on a cold one either." #
For example, when you get an income tax refund, do you think of it as found money and a nice windfall with which to reward yourself? If you do, you're practicing mental accounting. #
Begin by writing down your major financial goals on one sheet of paper with dates when you will need the money. Need money for college? #
How much and when? Need money for a new home? How much and when? Need money for retirement? How much and when? Good planning begins by setting financial goals and target dates. #