I am a long time fan of Vanguard Group investing and Mr. Jack Bogle (pioneer of low cost index fund investing!). Before Vanguard, investing was mainly reserved for a small handful of the population. But with low cost index funds we could all take part in owning a small slice of growing markets and great companies. In a way it was like a democratization of investing.
I recently had the pleasure of reading The Bogleheads’ Guide to Investing by Larimore, Landauer and LeBoeuf. Great overview of the Vanguard approach. For me, these tactics and practices make up the majority of investing actions. It’s a back to basics, no frills straightforward approach to investing that I believe can help almost anyone build wealth.
Overall I think this is an excellent book for many reasons. One big one is that here at The Money Vikings one of our goals is to simplify and demystify investing and wealth building. Wealth building is not only for the top 5% of the world’s population.
Steady Income, etc.
In other words, if you have a steady job, moderate income, debt in check, then a person can build wealth one brick at a time. This book makes it clear that we tend to just assume doctors, lawyers, CEO’s, movie stars are rich because they make high incomes, but this is not true. People that are truly wealthy come from many different professions and income levels. It is just that they have developed a series of habits, practices and mindsets that have made them wealthy over many years of effort.
Will you choose to be wealthy?
The book starts with an eye opening statistic: Out of 100 Americans age 25, by 65 years of age one will be very wealthy, 4 will be financially independent (FIRE) AND the other 95 people will live off social security. At least they will live off what is left of social security at that point. Why are these numbers so low in the worlds most robust economy? Will you do what is required to be one of the top 5, or let’s expand the statistic to be the top 10, 15, 20. It does not need to be stuck at 5!
Here are some of the key takeaways:
Live a sound financial lifestyle. Pay off debts, establish an emergency fund, get spending under control. Learn how to live below our means in order to achieve financial freedom.
Start saving early and invest regularly. The earlier we start, the longer we can benefit from the power of compounding. Stick to a few low cost exchange traded funds or mutual funds that capture a variety of companies. (VDADX, VGT, etc.)
Know about the various investment choices available to us: stocks, bonds, mutual funds, index funds, exchange traded funds, etc. For most people, it is best to invest in some combo of stock and bond index funds.
Figure out about how much you may need for retirement so you can track your progress. I would use our FIRE guide as a starting point.
Indexing via low cost mutual funds is a strategy that will most likely outperform the vast majority of strategies.
Asset allocation plan is based on your personal situation, goals, time, and willingness and comfort level with risk.
Expenses of funds is important and should be kept low.
Tune out the noise of daily news events.
We need to master our emotions to become better investors.
Here are some selected highlights and gems from the book if you do not have time to read it:
3 Types of People
The book explains there are 3 types of people:
Borrowers: Huge amounts of debt to fuel a lifestyle and buy needless stuff out of their means.
Consumers: Modest savings, but mostly spending everything they earn.
Keepers: These people pay themselves first, meaning they immediately stash some percentage of their income into savings and investing vehicles before spending the rest.
3 things to do before investing:
Money Vikings are huge fans of first things first when it comes to investing. In other words, we talk about options trading and analyze single stocks, but that is a small percentage of our portfolios and activities. That is 5% of our activity because the fundamentals have to be strong before going into risky territory like stock picking. The Bogleheads suggest the following 3 things before doing any investing in an S&P 500 Index:
ONE: Graduate from the paycheck mentality to the net worth mentality
We talk a lot about measuring net worth each year here at TMV. This is a key gauge and indicator to see if you are actually building wealth each year, staying stagnant or going into a hole.
TWO: Pay off credit card debts and high interest debts
The important thing here is to focus on the stage of debt you are in and tackle it with all your might! Tackle the highest interest card first! Getting the debt reduced and under control is an amazing feeling, that once you have it you will never want to go back no matter how tempting the shiny object before you.
THREE: Establish an emergency fund
An emergency fund is really about allowing investments the time they need to grow and compound on each other. If we are raiding our investments every couple of years because something fell apart, then we are not allowing the money the benefit of time!
Good VS. Bad Debt
Not all debt is bad. Low interest loans to finance the cost of a home, rental property, education that will boost earning potential, or start a small business are vital. Many acquisitions of great assets that you can grow over time would not be possible without access to credit and reasonable loans.
The book does a great job of describing the most common investment vehicles that most of us use in some form or another to build wealth. It would be nice if our high school education system had a class that introduced these concepts to students at a young age. I do not remember my high school ever once mentioning what a stock or index fund was? But I can tell you the 4 phases of cellular division: prophase, metaphase, anaphase, telephase…That was helpful!
SEE RELATED: MY SLEEP AT NIGHT PORTFOLIO
Keep It Simple
In other words, do not try to beat the market or predict the future. Just build a sound, simple, low cost portfolio and dollar cost average to add to it over the years. I have my own sleep at night portfolio based on the Ray Dalio all weather portfolio. Only difference for me personally is that I substitute gold for real estate. I could never understand the gold thing to be honest. People spend a fortune in resources and time to pull this shiny rock out of the ground and then sell it to people. A company stock or real estate at least adds real value to human lives each and every day.
BONDS VS STOCK INDEX FUND ALLOCATIONS
There are great descriptions of the different kinds of bonds. In general, bonds are meant for managing and lowering risk. Mr. Bogle’s rough guide is that bonds should equal a person’s age. This theoretically lowers your risk as you get older. The reason for this is that a young person has a lot of time to ride out the ups and downs of the stock market. An older person does not have the luxury of more time for market cycles, their money needs to last and stay more stable. For example a 30 year old would be 30% bonds and 70% stock index funds. A 90 year old on the other hand would be 90% bonds and only 10% stock funds. The 90 year old cannot afford a big drop in stocks.
DO YOU NEED AN “ADVISOR” OR “BROKER”?
Full disclosure, I am not in general a fan of high priced “helpers” when it comes to investing. A person would probably do just fine in properly balanced Vanguard Index funds and diligently adding to them throughout their 30 years of working. And I am very suspicious of advisors that are not “fiduciaries” meaning they must legally align their interests with yours. Many brokers and advisors on the other hand make money whether you buy, sell, make or lose money. They are incentivized for you to take action, when in many cases none may be required or necessary. The Bogelheads authors share my suspicion of high priced advisors. Listen, if you find someone that works for you, that is trust worthy, has your best interests at heart and is not “churning” you (over selling and buying to make a commission), then go for it. But be choosy, it is like dating or having a relationship, be choosy, you deserve to have someone that respects you and your hard earned money. You went to work each day for that money!
HOW TO SUCCEED IN RETIREMENT
They describe a couple simple principles to keep in mind to make your money last once you do retire. First, get your fixed expenses as low as possible. Pre retirement is not the time for a big expensive mortgage, new car payment, credit card debts, etc.
For those of us who are the average middle class investor today, we probably do not know what a debt we owe Vanguard and the founder Mr. Jack Bogle. I have tremendous respect for Mr. Bogle and his straightforward investing advice backed up by research and common sense. Just “Jack” as he liked to be called past away last year at the age of 89. As an average investor, I really enjoy reading about him and have benefited over the years from Vanguard’s low cost investment products.
Vanguard was founded in 1975 by Jack and he changed the retail investing landscape forever and opened up investment opportunities for millions of ordinary folks. My understanding is that prior to this investing was mainly the activity of the rich and privileged. People like me from middle class backgrounds did not have access to low cost index investing.
For decades Jack has been spreading the word about the importance and power of low cost index fund investing and finding the right asset allocation for your age. To this day, most Vanguard funds charge investors less than .2% per year in fees. I am a big fan of Bogle’s philosophy and who he is as a person. People that follow him call themselves Bogleheads. He is obviously very wealthy now but has flown first class only once, when he could get an upgrade for only $50. He said it was great but does not plan on spending more than he has to on a flight. That is the kind of guy I want managing my money.
Jack Bogle did well for himself. The founder and retired CEO of The Vanguard Group created the very first index fund in 1976. Still he said, “I really can’t stand spending money on myself,” he told Reuters in 2012 “I don’t like going into stores, I don’t like the whole process of buying things.” His frugality comes from his upbringing. “My father’s money vanished in the Great Depression, and he had trouble keeping a job,” said Bogle, who started working at age 10, delivering papers. “I learned you work for what you get.” Again, I like the culture he has created at Vanguard and the ethos of frugality and straight talk about investing.
Here are a couple snapshots of some of the largest index funds at Vanguard:
1. Vanguard 500 Index Fund
Largest holdings (represents 24% of holdings out of 500 stocks): Apple, Microsoft, Amazon, Alphabet, Facebook, Berkshire Hathaway, Chase, Johnson & Johnson, Exxon Mobil, Bank of America.
2. Vanguard U.S. Growth Fund
Largest holdings (represents 35% of holdings out of 155 stocks): Microsoft, Alphabet (Google), Amazon, Mastercard, Visa, Paypal, United Health Group, Apple Inc., Facebook, Biogen.
3. Vanguard Growth Index Fund
Largest holdings (represents 34% of holdings out of 300) Apple, Amazon, Alphabet, Facebook, Visa, Home Depot, Mastercard, Boeing, Comcast, Disney…
For most investors, including me, the best investment strategy is to invest in some combination of these index funds with the majority of assets. Over time, the exposure to value producing assets and low fees can compound into mighty returns. This can help grow a persons money and beat the ravages of inflation over time. The reality is that 95% of us are bad at stock picking or just don’t want to do it, we want to live our lives. Therefore low cost index fund investing removes the stress but allows someone the advantage of investing.
About 10 years ago Warren Buffett famously made a friendly bet that a low cost index fund with low expenses would roundly beat actively managed funds with higher costs. He was right and the low cost Index fund beat the people that got up everyday and tried to time the market. Simply put, if it works for Jack and Warren, then it works for me.
As always, this is not investment advice and one needs to consult their own fiduciary financial professional about their unique situation.