How to Invest Like a Boglehead [10 Investment Principles]

Today I'll be discussing the 10 investment principles the Bogleheads use in order to become financially independent.

So what is a Boglehead? A Boglehead is a group of people who follow the advice of Jack Bogle, the founder of Vanguard, which is one of the largest investment companies in the world. They have a very active following on their website bogleheads.org and there is even a book called the Bogleheads' Guide to Investing, which I highly suggest reading.

Their investment philosophy is broken down into 10 different principles.

1. Develop a Workable Plan

It's no secret that we are terrible at saving money. The data shows that out of 100 people, 1 will retire rich, 4 will be financially independent, and 95 won't be able to self-sustain their own retirement and will rely on the Government for assistance. Being a Boglehead requires planning, commitment, patience, and long-term thinking.

So how do you become one of those top 5 people?

First you need to understand what type of person you are.

• The first person is the Borrower. Their motto is "Forget about tomorrow, let's live for today." They like to drive the newest expensive cars and live in a big house all purchased with a large loan. They live with a credit card mentality and frequently max out their credit cards to keep up with the latest trends. They live in debt and are one job loss or medical issue away from it all crashing down.
• The second person is the Consumer. They look at their take-home pay and ask "Can we afford the monthly payments?" and then go and buy as much as they can afford; this is called a Paycheck mentality. Their lifestyle is all about earning to spend. While this is slightly better than being a Borrower since they're not putting everything on credit, they are also still not saving any money.
• The last person is the Keeper. Their motto is: "Debt is deadly and earning to spend gets you nowhere. The people who reach financial freedom focus on accumulating wealth over-time". They therefore live with a net-worth mentality. They pay themselves first and then buy the things they want. This is the type of person who is able to retire successfully and whom you want to become.

Now before you can invest like a Boglehead, you must first accomplish a few important steps:

1. The first is to create your budget or as I like to say your conscious spending plan

The reason you need to create your budget first is that you need to understand where your money is going so that you can plan out where you're going to get the money to invest.

Most people don't realize where their money goes each month and therefore don't understand what type of financial position they are in. If you realize you're a borrower or a consumer and you want to become a keeper, then you will have to make some big changes about where your money is going if you want any of this to work for you.

If you aren't willing to change your spending habits, then there is almost no hope that you will be able to retire financially free.

2. You must graduate from paycheck mentality to net-worth mentality.

A common misconception I hear is that you must make a lot of money in order to be able to invest. And that is simply not true. It's not about how much you make, it's about how much you save.

Investing even a small amount each month can add up to a large sum in the long-term.

Lastly, don't compare yourself to other people who show off their newest purchases that were most likely purchased on credit. You must pay yourself first before you buy anything else.

3. You need to pay off high interest debt first

A lot of credit card debt carries interest rates in the double-digit percentages, which makes paying it off the highest, tax-free, risk-free return you can get. Focus on paying off your high interest debt first before you start investing.

Lastly, you should definitely establish an emergency fund. Having an emergency fund allows you to be able to pay for any unexpected circumstances that might hit you. Like a car repair, medical bill, or job loss. Six months is a good baseline to have.

2. Invest Early and Often

The amount of time your money is being invested in the stock market is one of the most important factors of how much money you will have when you retire. This is driven by the concept of compound interest, where you earn interest on the interest you've already accumulated.

In this example, Joe puts in $3,000 a year starting at the age of 25 for 10 years and then stops and lets his money compound until the age of 60. Susan starts investing $3,000 a year starting at the age of 35 until she turns 60. Surprisingly, Joe will end up with a larger ending balance than Susan even though Susan put in more money.

Joe put in $30,000 and ends up with a balance of almost $350K while Susan contributes more than double what Joe put in, she ends up with a lower balance because her money was in the market for less time than Joe. That is why it is so important to start as early as you can.

So how much should you invest each year? If you are looking to retire financially independent, then it is generally recommended to invest about 20% of your income. If you want to retire early or leave a large inheritance to your family, then you would want to invest even more.

The people who successfully invest 20% or more of their income pay themselves first before they spend any money on unnecessary things. Every dollar you don't spend is another dollar you can invest. It's recommended that you arrange automatic deposits from your bank account into your investment accounts so that you don't even have to think about doing it.

3. Never Bear Too Much or Too Little Risk

The stock market as we know can go up or it can go down. Having the right balance of risk and return is important. The way we do this is through an asset allocation of stocks and bonds. Stocks carry a higher chance of return with a higher risk and bonds carry a lower chance of return with a lower risk.

So, what percentage of stocks and bonds should you have? That question is hotly debated among different investors.

Jack Bogle said, "as we age, we usually have (1) more wealth to protect, (2) less time to recoup severe losses, (3) greater need for income (4) increased nervousness as markets jump around. All of these factors suggest more bonds as we age."

Jack Bogle has suggested that you should have roughly your age in bonds. So if you are 30 years old, then your portfolio would be roughly 30% bonds and 70% stock.

When you are younger, a higher stock allocation is optimal due to a longer time horizon of when you will need access to your money. The more risk you can handle, the less bonds you need.

4. Diversify

Bogleheads don't put all their money into individual stocks, they prefer to have their money in an index fund that is widely diversified. Doing this means you don't have to pick the winners and losers and will generate a return that matches the market.

They are not concerned with trying to beat the market like most actively managed funds. In fact most actively managed funds tend to underperform index funds over the long-term.

5. Never try to time the market

Bogleheads like to create a good plan and stick with it, which has consistently produced good outcomes over the long-term.

A lot of people get sucked into the idea that they will be able to time the market; however it never ends up working.

Common issues: (1) buying yesterday's top performers, (2) letting your emotions cause you to attempt to predict the direction of the market. Both lead to buying high and selling low, which guarantees poor results.

So instead of trying to time the market, buy and hold your investments for the long-term.

6. Use Index Funds When Possible

As I mentioned earlier, Bogleheads don't put all their money into individual stocks, what they do instead is put their money into index funds. An index fund is simply a basket of companies which tries to match the performance of a particular market index.

For example, a popular index fund of the Bogleheads is the Vanguard Total Stock Market Index. By investing in this fund, you are essentially investing money into all the publicly traded companies in the US. Therefore, there is no better way to properly diversify your portfolio while paying the lowest fees than through an index fund.

7. Keep Costs Low

The added benefit of investing in an index fund is that they generally have the lowest expense ratios. However, you have to be careful because not all index funds are created equally. That is why you need to carefully understand what the expense ratio is of the fund you are investing in.

Bogleheads stay away from money managers and prefer to do it themselves because most money managers will charge fees of 1% or more of your investment balance which will eat away at your investment returns over the long term.

In addition, they also stay away from actively managed funds, which simply means that there is a team of investors that are actively buying and selling different stocks within the fund in order to try to beat the market index. These actively managed funds also charge a bigger expense ratio.

The Vanguard Total Stock Market Index that I mentioned earlier has an extremely low expense ratio of 0.04%. The lower the expense ratio, the better off you will be when you retire, so don't overlook the fees you are paying.

8. Minimize Taxes

Similar to how fees can lower your investment balance, taxes are also a big determinant of how much money you will have when you retire. It is always advisable to take advantage of tax-advantaged accounts such as 401k, 403b, IRA, HSA, etc. that way you will not have to worry too much about taxes on a year-to-year basis.

When your money is in a tax-advantaged account, you are either paying the taxes up-front in a Roth account, or at the end in a traditional account. Therefore, if you were to rebalance your portfolio in a tax-advantaged account, you wouldn't pay taxes on the gains that year. On the other side, are the taxable accounts, these have no tax-advantages and when you sell a fund at a profit, you will have to pay taxes on that.

If all your money is going into a tax-advantaged account, then you are good to go.

However, if you are investing in both tax-advantaged accounts and taxable accounts then you want to make sure you are optimizing where you are putting your funds because there are tax in-efficient funds and tax efficient funds.

• Tax in-efficient funds (bonds, REITS) should go into tax-advantaged accounts so that you don't get hit with a tax bill for the year.
• Tax efficient funds (total stock market index) should go into taxable accounts if you have maxed out your tax-advantaged accounts.

9. Invest with Simplicity

Investing can be complicated with all the investment options available to everyone. Bogleheads like to keep things simple.

Jack Bogle in his book "Little Book of Common Sense Investing" suggests a two fund portfolio of the Total Stock Market and Total Bond Market

On a similar note, the Bogleheads prefer a three-fund portfolio of Total Stock Market, Total Bond Market, and Total International Stock Market.

The idea is that you don't need a complicated portfolio of various index funds. Two to three will do the job.

10. Stay the Course

With all the media distractions this can be the most difficult thing to do. You'll see a TV show telling you to pull your money out of the market or a social media post telling you to invest into a particular stock.

Both are just noise and a good Boglehead investor will ignore this senseless advice and stick to their own plan. So, once you have created a reasonable investment plan; stick with it for the long-term and you will do better than everyone else.

Bogleheads are in this for the long-term and the only time they sell their funds is when they need to rebalance their portfolio in order to get back to their target asset allocation.

So there you have it, 10 investment principles the Bogleheads live by. I hope this has helped you see a different side of investing. Many people have used this investing philosophy to get financially independent and I hope you do too.

*Disclaimer: I am not a financial advisor. The ideas presented in my articles and videos are for entertainment purposes and not to be taken as financial advice.