Do you need a professional money manager?  Chapter sixteen of The Bogleheads’ Guide to Investing does a great job covering this question.  A couple of months ago I asked folks to read The Bogleheads’ Guide to Investing with me so that we could discuss it.  This was really a good book, deserving of many posts.  Today I wanted to talk about the discussion of professional money management provided in the book.

 

The Bogleheads’ Guide to Investing

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

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.

Investing Regularly

  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

 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.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

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.

 

The Bogleheads’ Guide to Investing

Really, there were a lot of great ideas in this book and I would recommend anyone who wants to get involved in investing give it a read.  In fact, there were so many great ideas that I’ll spend a few posts going over the high points.

For those who don’t know, Jeffery Bogle was the founder of Vanguard funds and a strong believer in index funds.  Index funds are mutual funds that try to buy stocks to track certain segments of the market, rather than trying to pick stocks and beat the market.  A central idea in The Bogleheads’ Guide is that you cannot beat the market (or at least it is so unlikely that it is effectively impossible), so you would be better off just buying index funds and trying to match the markets.

The  The Bogleheads’ Guide to Investing is not written by Bogle (except for the foreword), but instead by a group of Boiggleheads – people who follow the Bogle philosophy to investing and regularly share ideas on the Boglehead forum, an online chat area.  You can find a link to this forum on the sidebar of this blog.  Central ideas that they present are:

1.  Start early and Invest regularly.
2. Keep costs low, and index funds are a good way to do that.
3. Figure out how much you’ll allocate to different segments of the market (bonds, stocks, international, etc…).
4. Stick to your plan through good markets and bad.
5. Ignore the noise from the commentators, on-air analysts, and other “investing porn.”
6. Periodically rebalance your accounts to match your plan, and adjust your plan as you age.

Looking at the first point, they show the effects of compounding.  Starting with a quote from Meg Green, a certified financial planner in Florida, “Adding time to investing is like adding fertilizer to a garden: It makes everything grow,” they go on to show why you should start investing early and the effect of compounding on your returns.  One example is a Vanguard investor who invested regularly since the mid-1970’s and amassed a portfolio worth over $1.25M, but never made an income of more than $25,000 per year!  (kind of shoots holes in the idea that you need to make a big income to become wealthy.)

They then provide a table showing how much you would need to save by a certain age to amass $1M by the time you were 65, assuming you earn 8% annualized per year.  At age 15, you only need $21 thousand.  At age 45, you would need $214 thousand.  At age 55, it is $463 thousand.

One neat thing about such a table is that you can use it to determine where you should be at different ages.  For example, I think that to retire comfortably today, you really need about $2M.  Looking at the table, which is the amount needed to have $1M at retirement age, you can just double the amounts to know how much you’ll need to have at a given age to have $2M at retirement.  So if you’re 45 and don’t have about $450 thousand or more in assets invested in things that go up in value, not including your home, you need to get to work.  If you’re just starting out today, you’ll need about $4M when you’re ready to retire due to inflation, so hopefully you’ll have about $900 thousand invested by the time you’re 45.  You would also know that you’re on the right track if you amass a couple hundred thousand dollars by the time you’re 30, but that would be difficult for most people, between having a lower-income, needing to buy a house, and paying off student loans.

The rest of the chapter talks about ways that you can save and find extra income for investing when you’re young and don’t make a lot.  (Really, it is unfortunate that we make the least amount of money when it is the most important time to invest.)   The SmallIvy Book of Investing (see sidebar or The SmallIvy Books page from the link above) goes into this topic in much greater detail if you want still more ideas.

We’ll go through some of these other points in future posts.  If you haven’t done so already, be sure to buy a copy of The Bogleheads’ Guide to Investing and share your thoughts.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

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.