Investing like a Boglehead means the fewest investment decisions and the lowest-cost possible approach to investing
I started this blog to help investors create the simplest investing strategies to meet their long-term goals. In my decade working as an investment analyst and over the last several years as a financial writer, the Boglehead investment strategy is easily the simplest I’ve seen.
That makes it one of the most popular strategies for individual investors.
Considering most investment advisors fail to beat their index after accounting for fees and that the average individual investor earns less than 3% on an annual basis because of bad investment decisions, any strategy that takes the guesswork out of investing is one that deserves your attention.
Not only does Boglehead investing offer the easiest approach to investing with just two investment decisions to make, it also is the cheapest way to put your money to work.
What is Boglehead investing? How can you use the strategy to reach your investment goals?
What is a Boglehead?
Boglehead investing is based on the philosophy of John C. Bogle, founder of Vanguard Funds. During his undergraduate studies at Princeton, Bogle researched and found that most mutual funds failed to do any better than if the money had been invested in the broad market S&P index. Even if the fund was able to create a market-beating return, it still usually underperformed the market because of management fees.
After being removed as the CEO of the Wellington Management Company, a mutual fund group, in 1974 for a badly executed merger with another company, Bogle stayed on to form a new fund division later to be called Vanguard.
When, the executives at Wellington prohibited Bogle from providing advisory or fund management services for his new funds, he turned it into an advantage. Bogle started the first passively-managed mutual fund in the S&P 500. Since the fund investments were based strictly on what was in the index, there was very little management needed and fees could be set extremely low compared to other funds.
Few competitors could match the low fees on Vanguard funds and the company has grown to be the largest provider of mutual funds and the second-largest provider of exchange traded funds (ETFs)
Bogle’s core investing beliefs are the some of the same stock market basics you’ll find here on the blog.
- Save regularly for investing. Investing is just as much about how much you put in as it is the returns you earn.
- Invest in low-cost index funds that hold stocks in hundreds of companies to spread your risk instantly across the market.
- Create a diversified portfolio of stocks and bonds, including foreign stocks.
- Don’t sell your investments. You invest to meet your long-term goals so why are you selling investments every few years?
The Bogleheads as an investing group started in 1998 as an online forum to discuss Vanguard, its funds and investment strategy. The Boglehead forum now claims more than 47,000 members and up to four million hits a day.
The problem with the Boglehead forum is that it gets off-track from the original message and basic investing strategy. There are constantly threads on how to pick stocks, when to sell and other strategies trying to beat the market. As a forum of ideas, anyone can post their opinion or
Why Boglehead Investing Makes Sense
Boglehead investing could very well be the best investing strategy I’ve seen for the investor that wants a completely hands-off approach.
Investing and managing your investments as a Boglehead is the simplest type of investing you can choose. You pick a couple of mutual funds or ETFs that give you broad exposure to the market and just keep investing in them for decades.
Since the companies providing these funds just replicate the index, fees are extremely low. You are investing in the entire stock or bond market so you don’t need to pay someone to tell you which stocks to pick.
You don’t have to worry about ‘beating the market’ because you’re investing in the market. The strategy is buy-and-hold forever so you don’t have to worry about when to sell.
About the only investing strategy more hands-off than Boglehead investing would be a robo-advisor like Betterment. Most robo-advisors actually follow the Boglehead strategy very closely, investing in a few passive index funds according to your needs. Investments aren’t sold except to take advantage of tax savings and the funds automatically rebalance as you get older.
Essentially, Betterment does Boglehead investing for you.
Boglehead Asset Allocation
Asset allocation is one of the most basic and critical ideas in investing. Assets are groups of investments that share characteristics like risk and return, i.e. stocks, bonds and real estate are all different types of assets.
Your decision about how much to invest in stocks, bonds and real estate is much more important than the individual stocks or bonds you buy. This asset allocation decision will determine the return you make on investments and how much risk is in your portfolio.
The Boglehead investing strategy includes only stocks and bonds. The precise amount you invest in each will change as you get older and your investing needs change. The official Bogleheads’ recommendation is to have more than 25% but less than 75% of your portfolio in stocks and the rest in bonds.
Bogle himself started the maxim that you can invest, “roughly your age in bonds,” and the rest in stocks. It’s an easy-to-follow rule and surprisingly appropriate in matching most investors’ risk needs with their stock/bond mix.
For example, the young investor at 25 would invest 25% of their money in a bond fund and 75% in stocks. The older investor at 55 would hold 55% of their money in bonds and the rest in stocks.
One of the biggest problems I have with Boglehead investing is that it doesn’t include real estate in the asset allocation. Real estate investing is an excellent opportunity with returns as high as stocks but some protections similar to bonds.
- Since real estate is a ‘real asset’ rather than a financial asset like stocks and bonds, it provides maximum protection against inflation.
- Real estate has different supply and demand factors compared to stocks and bonds so prices don’t rise or fall with the other assets. That smooths your investment returns for a stress-free increase to meet your goals.
- Real estate investment, through real estate investment trusts (REITs), has produced a 7.5% annual return over the last decade versus 8% on stocks and 4.5% on bonds.
To include real estate in your portfolio, I would recommend the following asset allocation to stocks, bonds and real estate. The allocation to real estate investments comes out of both stocks and bonds so the portfolio still follows the Boglehead investing strategy closely but gives it extra diversification and returns.
Bogleheads Three Fund Portfolio
One of the most popular concepts in Boglehead investing is the three-fund portfolio. The 3-fund portfolio is the simplest and lowest-cost investing strategy you can find, giving you all the diversification you need with just three investments.
The three-fund portfolio is a mix of U.S. stocks, foreign stocks and bonds of U.S. companies to give you exposure to the entire global stock market and the safety of bonds.
- First make your stock/bond allocation decision, how much of your portfolio you will invest in the two asset classes.
- Your second decision is how much of your stock investment to hold in foreign stocks. This is important because shares of foreign companies won’t rise and fall the same as U.S. stocks which follow the U.S. economy. It’s just another layer of safety for your investments. The current Boglehead recommendation is that you should hold 60% of your stock portfolio in the U.S. index and 40% in the international index.
That’s it, just two investment decisions to make. The three funds you choose in which to invest are broad, market-based funds.
- Vanguard Total Stock Market (VTI) holds more than 3,600 stocks of U.S. companies and charges just 0.04% on an annual basis. That means you pay just $4 in management fees for every $10,000 invested to own the entire U.S. stock market.
- Vanguard Total International Stock (VXUS) holds more than 6,000 stocks of foreign companies and charges a 0.11% management fee. Investments are spread across developed markets as well as faster-growing emerging markets and across all sizes of companies.
- Vanguard Total Bond Market (BND) holds more than 8,000 bonds, issued in the U.S. and with investment-grade credit ratings. Two-thirds of the fund is held in U.S. government bonds with the rest in local government and corporate bonds.
To this three-fund Boglehead portfolio, I would add the Vanguard REIT ETF (VNQ) which holds shares of 158 real estate investment trusts for broad exposure to U.S. real estate. The fund charges a 0.12% annual fee, higher than the other funds but still well under fees charged on other investment funds. Besides solid investment returns and diversification from stocks and bonds, the real estate fund pays a 4.4% dividend which is twice as high as the VTI fund (1.9%) and well over the 2.5% yield on the foreign stocks and bond funds.
The advantages of using this three-fund portfolio strategy encompass the Boglehead concept of investing.
- Diversification – You get instant exposure to thousands of stocks and bonds. That means no single company can drag your portfolio down. You also get safety from stock market crashes and risks to the U.S. economy.
- Very low cost – Even including the real estate fund, you pay an average of just 0.08% annually on each fund. That’s just $8 in fees for every $10,000 invested compared to fees as high as $150 per $10,000 for traditional mutual funds.
- No manager risk in investments – Since you’re investing in the entire stock or bond market, you don’t have to worry about the fund manager picking the wrong investments and losing money.
- Easy to manage and rebalance – It’s difficult to imagine an easier way to invest and with fewer investment decisions. You simply invest regularly across the funds, shifting new investments to put more in one fund when the percentage in others gets higher than your target allocation. There’s no selling or market timing involved.
These four funds I’ve recommended here are only examples of ones you can use to create your own Boglehead portfolio. They are among the lowest-cost available and will give you maximum diversification but you’re free to choose whichever market funds you like.
Understand though that some index funds might not be as diversified as you imagine. For example, the SPDR S&P 500 Fund (SPY) which tracks the major U.S. index only invests in very large U.S. companies. A lot of investors think of the S&P 500 as ‘the market’ but it really only represents large domestic companies and is overweight sectors like technology and financials.
The Best Boglehead Books for Investors
Investing like a Boglehead is easy enough to understand even for beginning investors but there are a few books that will help answer any questions you might have. The best Boglehead books are those written by John Bogle himself or by the founder of the Boglehead group, Taylor Larimore.
The Bogleheads’ Guide to Investing, by Taylor Larimore is a single resource for everything Boglehead from defining your financial future to picking the funds that will get you there. I was surprised to see how much detail could be included in a book about such a simple investment strategy but the authors do a good job of setting up the reasoning behind the Boglehead strategy and then helping you put together your investments. The second edition, updated in 2014, includes more info on Roth IRAs and exchange traded funds as well as an update on some of the laws around estate taxes and retirement plans.
The Bogleheads’ Guide to Retirement Planning, by Taylor Larimore explains the different types of retirement savings accounts and helps you manage them to get the most benefit. The book details withdrawal strategies that will pay living expenses without draining your nest egg as well as offering critical advice on health insurance and estate planning.
The Little Book of Common Sense Investing, by John C. Bogle is Bogle’s own words on how to, “guarantee your fair share of stock market returns,” and is one of the most popular investing books of our time. This book is more strategic than the other two Boglehead books which are more practical in helping you set out your own investment plans. Bogle spends much of the time in his book talking about how he came to the investment strategy and why it works. It’s an excellent read to understand investing and the markets.
Investing like a Boglehead is one of the easiest investment strategies you could choose and a great plan for anyone that wants a stress-free way to meet their goals. The low-cost, hands-off approach to investing takes all the guesswork out of building your retirement portfolio. I would recommend adding real estate investments to the Boglehead asset allocation but it’s difficult to argue with the simplicity and returns you’ll get with the strategy.