The Small Investor Book Club Reviews Bogleheads’ Guide to Investing – Professional Money Managers


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 Small Investor Book Club Reviews Bogleheads’ Guide to Investing


 A couple of months ago I started The Small Investor Book Club, where we would read a book together and offer our thoughts in a later post.  For our second book I asked folks to read The Bogleheads’ Guide to Investing.  I’ve always been a big fan of Jeffery Bogle, founder of Vanguard funds, and this was a great book expressing his philosophy.
 

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.

Dealing with Market Crashes


Let’s face it – the market has been doing great lately.  We’ve seen virtually everything go up during the last ten months or so, ever since the election.  Talk of tax cuts should add further fuel to the fire, since less money being diverted out of the economy means more money for investment and spending.

But eventually, this party will come to an end.  Indeed, many economists and pundits have been talking about the frothy nature of the market and saying that maybe it is time to move towards the exits.  I would say that this is good advice for some, but not for everybody.  It is good advice if you need the money within a year or two, or maybe even a few years, but it is not good advice if you don’t need the money for twenty years.

You see, markets that have plenty of people trading, which the stock markets do, will instantly price in all news, expectations, and insights.  If people knew that the markets were about to decline, they would be selling now, which means that prices would be going lower already.  The fact that there are plenty of people willing to come forward and buy shares at current prices says that people have seen all of the news out there and decided that current prices are reasonable.  Sure, bad news may come out tomorrow and cause stock prices to fall, but the market might continue to climb for another year or two.   If you’re sitting there on the sidelines with a pile of cash, you’ll be losing money to inflation, missing out on dividends, and perhaps missing out on a 20-40% gain in share prices before the fall happens.

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So why should people who need the money in a few years sell?  The reason is that when big drops do occur, it typically requires 2-5 years for the markets to recover back to where they were before the drop.  The average amount of time required, looking at all periods since 1926, is 3.3 years.  That means if a big drop happened today, it might take 3, four, or even 5 years before share prices returned to where they were before the crash.  In really bad times, like the Great Depression, it might take 10-15 years.  If you really need the money within 5-10 years, and the consequences of not having all of the money would be dire, sell.  If you could get by with half and you have 5-10 years, it might make sense to hold on.

If you really need the money within 5-10 years, and the consequences of not having all of the money would be dire, sell.  If you could get by with half and you have 5-10 years, it might make sense to hold on.  If you need the money next year, your chances are about 60/40 that your account will be higher by then.

So what should you do if the market crashes and you don’t need the money for a long time?

1.  Don’t panic.  As the Hitchhiker’s Guide to the galaxy says, don’t panic.  Panicky people do stupid things, like selling in the middle of a decline.  The best thing you can do during a market decline is to just relax and stick to your investment plan.

2.  Do nothing.  A market crash is a bit like skidding on the ice.  The best thing you can do is to take your feet off the peddles and let yourself coast to a stop.  I usually just stop following stocks for a while, maybe checking account balances about once a month or two, and maybe looking for some stocks on which to take a loss as a tax deduction if it is around the end of the year.  Otherwise, I just wait for a recovery.

3. Buy more.  Instead of looking at a market crash as a bad thing, when you’re many years out from needing the money, it can actually be a great thing to see prices decline.  Typically stocks go down well below their fair value when everybody’s selling, so a market crash is a great opportunity to load up on cheap shares.  Some of the best returns you’ll ever see come the year or two after a major market decline.  If you can raise some money to allow you to scoop up some shares, basically everything will be on sale.  Realize, however, that there may be a few downturns before the market finally straightens out and head up again, so don’t be discouraged if your shares decline after you make your first purchase or two.  You’ll probably not buy at the bottom.

New to investing? Want to learn how to use investing to supercharge your road to financial freedom?  Get the book: SmallIvy Book of Investing: Book1: Investing to Grow Wealthy

Have a question?  Please leave it in a comment.  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.

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