The Bogleheads' Guide to Investing

by Mel Lindauer

Instead of hiring an expert,

When is hiring expert worth it? How to choose an expert?

just invest in index funds and forget about it!

Sounds like a sound strategy

investor who keeps his or her costs low will earn a higher return than one who does not.

Index funds don’t have sales commissions, very low operating costs, a lot of the are tax efficient(?), no need for financial advisor

load funds

Mutual funds that have a sale commissions that goes to the broker, or investment advisor.

Let’s assume someone puts $10,000 in a mutual fund, leaves it there 20 years, and gets an average annual return of 10 percent. If the fund had an expense ratio of 1.5 percent, the fund is worth $49,725 at the end of 20 years. However if the fund had an expense ratio of 0.5 percent, it would be worth $60,858 at the end of 20 years.

Just a 1 percent difference in expenses makes an 18 percent difference in returns when compounded over 20 years.

10k invested with 10 return. 46k return in 20 years for a fund with 1.5% operational costs and 68k for a fund with 0.5% operational costs

Greg Baer and Gary Gensler,

They found that for the 10-year period ending December 31, 2001, the standard deviation (a measure of risk) for actively managed funds was 19.4 percent, compared to 16.2 percent for the more diversified total stock market index.

Index fund are safer compared to actively managed funds.

Inasmuch as index funds are designed to replicate a particular segment of the market, such as large-cap growth or small-cap value, there is no possibility of the funds drifting into another category.

How does this happen in the backend?

Due to their higher costs, most active fund managers have to outperform their respective index by an average of 2 percent per year

Historically this is very hard to replicate.

However, if you know nothing about investing, spend minimal time on your investments, and buy index funds, you have a 100 percent chance of being a B investor. In a world where most investors get a D or worse, B is beautiful.

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.

See return rates on 1.5 vs 0.5 operational costs

index mutual funds and exchange-traded funds, also known as ETFs.

Types of index funds.

For that reason, we recommend keeping any actively managed funds in tax-deferred or tax-free accounts, such as 401(k)s, SEPs, Keoghs, or Roth IRAs.

Have index fund in personal and low cost mutual funds in tax deferred accounts(retirement)

bulk, or all, of your investments in index funds.

Actively managed funds have higher risk but potentially more return

we begin by asking ourselves two questions: “What investments should we select?” and “What percentage should we allocate to each investment?”

Questions to ask when planning asset allocation

“an investment theory that states that it is impossible to ‘beat the market’ because existing share prices already incorporate and reflect all relevant information.”

What is EMT(efficient market theory)? Theory was created in 1900 by French mathematician Louis Bachelier

“Can Stock Market Forecasters Forecast?”

It is doubtful - Alfred Crawls 1933.

He concluded that stock prices are very efficient and that it’s extremely difficult to pick winning stocks after factoring in the costs of transaction fees.

random walk

In investment it means how unpredictable the stock market is, like predicting drunk person's next move, you can only guess. The term was created by the book “a random walk down Wall Street”

Harry Markowitz is credited with being the father of Modern Portfolio Theory (MPT).

volatile noncorrelated securities could result in a portfolio with lower volatility and possibly higher return.

H. Markowitz contribution

What Are Your Goals?

What Is Your Time Frame?

What Is Your Risk Tolerance?

“Will I sell during the next bear market?”

Question to ask yourself when estimating your risk tolerance.

One of the chief advantages of an asset allocation plan is that it imposes a discipline that will help you to resist the temptation to sell funds in underperforming asset classes and to resist chasing the current “hot” fund.

Asset allocation reduces impulsiveness during bad or good days. By providing a framework.

What Is Your Personal Financial Situation?

“Never buy anything whose price you can’t follow in the newspapers—and you shouldn’t buy anything too complex to explain to the average 12-year-old.”

bonds should equal our age.

Appendix IV.

Fill out the questionnaire

The only certainty in investing is that past performance will not repeat.

Correlations with past trends are useless.

Real Estate Investment Trusts (REITs) are a special type of stock. REIT funds often behave differently than other stock funds. This characteristic of noncorrelation can make them a worthwhile addition to larger portfolios. We suggest that REIT funds not exceed 10 percent of your equity allocation.

We believe that investors will benefit from an international stock allocation of 20 percent to 40 percent of their equity allocation.

Discuss with Chichi about this

We also suggest a broad-based, diversified bond fund such as Vanguard’s Total Bond Market Index Fund.

Bonds are primarily for safety.

Taxable high-yield bonds are among the most tax-inefficient of all securities.

High-yield bond funds often have higher returns (and risk)

High-yield bond funds are more closely correlated to stocks.

Treasury Inflation-Protected Securities

Consider adding TIPS(Treasury inflation protected securities) bonds when you portfolio gets bigger(what is bigger?). To add more security and protection. There are 2 types of Vanguard TIPS bonds for this. VIPSX(intermediate-term) and VTAPX(short-term). VIPSX has 3000 minimum requirement and it has higher return and more risk vs VTAPX has 10000 minimum with less return but lower risk.

Comparison of Annual Returns for VBMFX and VIPSX

Table that illustrates the index fund vs TIPS bonds fund return year by year from 2001-2013

PORTFOLIO GUIDELINES

Portfolio guidelines: We are probably middle aged investors. Not on vanguard, at least my accounts are not in vanguard.

Next time you see a list of returns for front-loaded mutual funds, it’s helpful to know that the returns you are looking at are almost always overstated because they do not factor in the front-end load.

Does your fund dashboard show your pre-load as your balance?

12b-1

Mutual fund fees related to operation, managing fees etc

Turnover refers to the amount of buying and selling activity that’s done by the fund manager in a given year.

Important to read in the prospectuse, and find out what is the turnover rate

Whenever possible, we will use index funds with their low cost and low turnover. ETFs and low cost, low-turnover, managed funds may also be considered.

Investing is about probabilities—and the probability is good that by using low-cost mutual funds, we will outperform the majority of other investors.

The expense ratio is the only reliable predictor of future mutual fund performance.

Expense ratios are written in the prospectuses