Have you ever heard of Bogleheads Investment Philosophy? It was named after Jack Bogle, the founder of Vanguard. (1)
Bogleheads Investment Philosophy follows simple investment principles such as keeping your cost low and holding three ETFs:
- U.S. Stocks
- U.S. Bonds
- International Stocks
Rather than trying to pick the specific stocks or sectors of the market that may outperform in the future, Bogleheads invest in 3 categories.
Why? Because of the low correlation between U.S. stocks, U.S. bonds, and international stocks, you’ll have more chances to minimize damages of economic crisis. For example, bonds do not produce the same expected high returns that stocks do, but they are much less volatile. (not many up and down)
Bogleheads invest is easy to understand and implement but works well, so it is highly recommended for lazy people. “Lazy” in here means that the investor can maintain the same asset allocation for an extended period of time and still expect rewards.
In this post, you’ll learn Bogleheads Investment Philosophy and why it’s good for busy adults as well as investment beginners.
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First, why ETFs?
ETFs allow you to create a maximum diversification portfolio at a low cost.
ETFs are like frozen mixed vegetables at the supermarket. You’ll get carbohydrates, fiber, vitamins, and minerals all in one bag. Buying ETFs mean you’ll invest widely diversified stocks in every sector.
Usually, Hedge Fund managed these ETFs, so you’ll need to pay for transaction fees. Check “expense ratio” before you invest in any ETFs. Choose ETFs with a low expense ratio.
I know, nobody likes paying transaction fees, but you can expect to produce risk-adjusted returns far greater than those achieved by the average investor.
The beauty of ETFs is anyone with a small amount of effort can be a successful investor without the complicated processes.
Benefit of Bogleheads Investment
Owning stocks doesn’t mean you always get returns. With the collapse of Lehman Brothers in 2008, the stock market fell 50% from its previous highs. 50% loss is huge. Many investors learned how risky stocks can be.
This is why a diversification portfolio is a necessary element of asset allocation.
A diversification portfolio can’t expect a high return as you wish, but minimize the risk of extreme loss.
The Rule of 72 is a simple way to find out how long an investment will take to double given a fixed annual rate of interest. (2) By dividing 72 by the annual rate of return, you can estimate how many years it will take for the initial investment to be double.
Let’s use this Rule of 72 and calculate the expected return of Boglehead investment.
If the expected yield of a Boglehead investment is 3%:
- 72 / 3 = 24
- You can expect to make $20,000 in 24 years by investing $10,000
- No additional investment is required, just leave it for 24 years
If the expected yield of a Boglehead investment is 5%:
- 72 / 5 = 14.4
- You can expect to make $20,000 in 14.4 years by investing $10,000
- Again, no additional investment is required, just leave it for 14.4 years
This is real passive income!
How to decide stock ratio?
John Bogle advises that “as we age, we usually have more wealth to protect, less time to recoup severe losses, greater need for income, and perhaps an increased nervousness as markets jump around. All four of these factors suggest more bonds as we age.” (3) He also suggested that 45 or older should have 45% of high-quality bonds in their portfolio.
Although your stock ratio should depend on your financial situation and goal, these are typical considerations:
- Your age
- Personal risk tolerance
- Expectation of return
In general, more U.S or/and international stocks ratio means high-risk high return, more bonds mean low-risk low return.
How much money do you need for retirement? How long are you going to have salary income? What is your plan B? If the stock market crashes, do you have an emergency fund or assets to survive the hardship?
Ask yourself and build a stock portfolio.
For instance, an aggressive portfolio will be 64% U.S. stocks, 16% international stocks, and 20% bonds.
The moderate portfolio will be 34% U.S. stocks, 33% international stocks, and 33% bonds.
The conservative portfolio will be 14% U.S. stocks, 6% international stocks, and 80% bonds.
Example of Bogleheads Investment portfolio
Here is an example of the Bogleheads Investment portfolio:
- U.S. Stocks – Vanguard Total Stock Market ETF (VTI)
- U.S. Bonds – Vanguard Total Bond Market ETF (BND)
- International Stocks – Vanguard Total International Stock ETF (VXUS)
Maybe someone noticed that it’s all Vanguard. Ok, I’m NOT a Vanguard affiliate. I just chose Vanguard ETFs because of their low expense ratio.
Vanguard Total Stock Market ETF (VTI) holds 3908 U.S. stocks and seeks to track the performance of the CRSP US Total Market Index. These 3908 U.S. stocks include big tech companies like Amazon but also mid to small size companies. Fund total net assets are $1.3 trillion. The expense ratio is 0.03% so far. This ETF is a high-risk high return.
Vanguard Total Bond Market ETF (BND) holds 10138 Intermediate-Term bonds. It provides broad exposure to the taxable investment-grade U.S. dollar-denominated bond market, excluding inflation-protected and tax-exempt bonds. Fund total net assets are $312.4 billion. The expense ratio is 0.035% so far. This ETF is a low-risk low return.
Vanguard Total International Stock ETF (VXUS) holds 7526 international stocks. Fund total net assets are $404.8 billion. The expense ratio is 0.08% so far. This ETF is a high-risk high return.
When you pick ETFs, don’t forget to check the fund’s total net assets. If the ETFs are not making any money, it’s not healthy.
Good healthy ETFs are going up little by little.
- Beginner’s Guide: How to Start Investing in Stocks
- How to Sign Up for a Fidelity Brokerage Account
- How to Buy a Stock at Fidelity
- How to Create a Monthly Dividend Portfolio
- Dividend Aristocrats List for 2021
What do you think about Bogleheads style investment? Does this portfolio seem overly simplistic? Although Bogleheads investing may seem super simple, it is based on decades of research showing that investing in the whole market consistently outperforms many of the alternatives.
However, Bogleheads style investment is just one of the strategies. This is not right or wrong.
Each person should have their own retirement plan that fits an individual’s lifestyle. Before starting investing, plan first! Mandara chart is really effective way to make a plan. People usually use it for business, but I think this is good for personal finance too.
- Bogleheads investment philosophy. (2021, March 10). Bogleheads. https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy
- Making Sense of the Rule of 72. (2021, July 8). Investopedia. https://www.investopedia.com/ask/answers/what-is-the-rule-72/
- Davis, Joseph, Ph.D. and Piquet, Daniel, Recessions and balanced portfolio returns, October, 2011, Vanguard Institutional
- Three-fund portfolio. (2021, December 6). Bogleheads. https://www.bogleheads.org/wiki/Three-fund_portfolio