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There are thousands of websites with investment advice, and seemingly almost as many philosophies. From high-risk to low, penny stocks to blue chips, the investment market can seem like a completely daunting world – far too complex for people just trying to figure out where to put their money and how to best manage it.
A highly popular investment strategy is named after the founder of investment giant Vanguard Group, John “Jack” Bogle, who created the world’s first retail index mutual fund in 1976. Bogle’s style involves some basic principles that historically have shown to produce overall higher returns than traditional investment strategies. His followers, who call themselves “Bogleheads,” run a financial forum and website at Bogleheads.org where members share investment tips and help others learn the Bogleheads investing style.
What is Boglehead Investing?
Bogleheads follow the simple principles espoused by John Bogle; rather than focusing just on the question “Where should I invest?” the Bogleheads look to establish a more holistic approach to investing, including all aspects of one’s financial lifestyle. According to this philosophy, that approach leads to more overall financial health – and the better-performing investment portfolio is just a part of it all.
So what makes Boglehead investing so successful? Let’s dig into the principles themselves.
Develop a Workable Plan
To follow the Boglehead plan, first you need to establish a sound budget. There’s no point in putting money into the stock market if you’re carrying large amounts of credit card debt, for instance. Make a plan to pay those balances off first; the snowball method is highly effective and can help you get your balances down fast – as long as you stop adding to them.
Another part of setting up that workable plan is making a schedule for retirement planning. According to Bogleheads, you need to recognize the need to save for retirement by regularly setting aside a portion of your income.
If you’re paying down debt and saving for retirement, where will the money come from to invest? That question leads to the biggest, most critical part of developing that realistic plan: living below your means. As the Boglehead site explains, “there is no substitute for spending less than you earn.” If you’re spending everything you bring in – or more – each month, you’ll never get out of debt, and a well-performing portfolio won’t make much of a difference to your financial health.
Invest Early and Often
Once you’ve cut out your credit card debt, started living below your means, and established a solid savings pattern, you’re ready to start investing. Bogleheads say that 20% of your income is a good number, but depending on when you plan to retire you might need to save more. They recommend setting up an automatic deduction from your paycheck; you will get used to not having it, and you won’t be tempted to short yourself by skipping manual deposits to your savings.
Never Bear Too Much or Too Little Risk
Some new investors put all of their money into risky stocks; others put everything into lower-risk prospects like government bonds. Bogle himself says you should buy approximately your own age in bonds; if you’re starting early at age 25, for instance, then about 25% of your investment portfolio should be in bonds, and the rest in stock.
Bogle’s maxim works because at 25, any losses incurred by stock prices falling would be recouped and exceeded over the course of your portfolio’s life. If you’re at age 45, then you want more of your portfolio out of the higher-risk stocks, and in something more stable.
Buy Low-Cost, Diversified Funds
This strategy dovetails with the next Boglehead principle – Diversify. In other words, don’t just buy stock in any company, or buy into a market sector. According to Bogle, it’s best to buy low-cost diversified index funds. You won’t see the fast returns you might see on a riskier gamble or specific company’s stock, but you will also miss out on the higher fees required for actively managing the high-risk investments, and you’ll do better overall.
Allocate Funds in a Tax-Efficient Way
Bogleheads are big believers in 401(k) plans and IRA accounts because they’re a great way to save for retirement and watch your money grow without seeing those profits dipped into by taxes. Bogleheads tend to put their bonds into tax-advantage accounts. The key is to ensure the highest tax efficiency and lowest tax bill.
Stay the Course
Aside from getting your finances in order initially, this can be the hardest part of the Boglehead strategy. Many investors feel glued to the market news, wondering whether they need to buy, sell, or whether they even need to pay attention. With Bogleheads, it’s imperative that you set your investment plan, and then leave it alone except to rebalance once per year. No matter what the market does during that year, Bogleheads let their portfolios ride out the storm – and their long-term gains show it’s a solid move.
What Are the Benefits of Boglehead Investing?
While Boglehead investing might seem too simplistic, it’s that exact trait that makes it so effective. Investors don’t need to follow the markets on a daily basis, keep checking their balances on their mobile devices, or worry about whether their chosen stocks are falling drastically. In a Boglehead portfolio, everything is set up, and then left alone. Each year, you’ll spend part of a day rebalancing if necessary, but otherwise it’ll be fine.
The hands-off approach that Boglehead investing recommends makes it an ideal candidate for a robo-advisor. Robo-advisors are perfect for investors who don’t want to actively manage their money; after setting up the robo-advisor with the types of funds and risk you’d like to assume (or avoid), the algorithm will continue to manage your funds throughout the year without necessary input. Each year, you can take a closer look at your plan, see what needs changing, and adjust accordingly. The robo-advisor will pick it back up from there. In the end, Boglehead investing might not be the most exciting way to invest, but it’s been proven successful so far.
Author: Jeff Gitlen