The first thing the book covers is all of the different designations that you can use without any sort of financial training or education. These included things like Accredited Financial Counselor, Chartered Asset Manager, and Certified Financial Planner. (I’ll confess that this gave me hope, since I am entirely self-taught through experience, so I’m happy that I could hang out my shingle as a “Wealth Management Specialist,” and help people set up an investing plan without needing to do a lot of coursework.) Apparently, the only certifications that mean anything are Chartered Financial Advisor and Certified Financial Planner. The chapter then goes on to describe the types of money managers, along with how to select someone who generally is there to help you as opposed to someone who will just try to sell you the financial products offered by the firm.
One of the other things that you pick up from the book, however, which you will also pick up from this blog, is that it is really easy to learn to invest, particularly in index mutual funds as recommended by the Bogleheads. Basically, it is a just a matter of developing an asset allocation strategy, investing regularly, and then rebalancing once or twice a year. Since financial advisors will charge you a fee to manage your money for you, which gets added to the mutual fund fees, having someone invest your money for you also goes against another Boglehead principle of keeping your expenses low. Let’s look at each of these activities, through the eyes of the Bogleheads.
Asset allocation, as described in Chapter 8, is determining what percentage of your money to put into equities (stocks), and bonds. It also includes deciding how much to put within the subcategories of stocks and bonds, such as large or small stocks, domestic or international bonds, and so on. Basically, when investing for retirement, the younger you are and the more tolerant you are of risk, the greater the percentage of your asset you want in stocks, and your stock investments should be evenly spread between small and large stocks. Between US and international, the Bogleheads say you should have about 80% in US stocks and 20% in international stocks. They then give sample portfolios. For example, a young investor using Vanguard funds could have a portfolio consisting of 80% in Total Stock Market Index Fund and 20% in the Total Bond Market Fund. An investor late in retirement might have 20% in the Total Stock Market Index, 40% in The Short-Term Total Bond Market, and 40% in Inflation-Protected Securities. Simple.
Chapter two talks about the importance of investing regularly. This chapter shows what happen with compounding when you start really early, versus starting later. If you have never seen the effect, I advise you to check out Chapter two for yourself. Hopefully, you’re 20 and not 45 when you do so that you can start investing early.
Rebalancing is the act of periodically shifting money among your funds to keep your investments consistent with your asset allocation plan. This can easily be done in most mutual fund accounts. Many accounts have automatic tools for doing this. The only issue is that if you are not investing within an IRA or other tax-advantaged accounts, you may need to pay some taxes after rebalancing. If this is the case, you may wish instead to direct new investments to funds that have done poorly, such that you are underinvested in these funds, rather than selling portions of winning funds and shifting to losing funds.
If you haven’t done so already, be sure to buy a copy of The Bogleheads’ Guide to Investing and share your thoughts.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.