03.21.23

notes from boglehead's guide to investing

DISCLAIMER: mind that this is not investment advice, simply notes on what I took away from this book. I am not a financial advisor and this information reflects the market at the time of writing. although in theory this is bulletproof and timeless advice, DO YOUR OWN RESEARCH!

TLDR: tracking the entire stock market does consistently better than any human being. track the entire stock market. mitigate risk by owning bond funds and investing in foreign markets as well.

invest regular and early. note rule of 72: to find years to double an investment, divide 72 by the annual rate of return. ex. investment with 8 percent doubles every 9 years (72/8=9).

possibilities to buy:

stocks: you're buying ownership interest in a corporation. worth is determined by how much people are willing to pay for them
bonds: works like an IOU. money in exchange for promise of return on interest given at maturity date. see: t-bills, t-notes, t-bonds, TIPS, U.S. savings bonds. most interesting ones for most people will be i-bonds and bond funds:
- in order to select the best bond fund, match how long you want to be invested in the bond and how risky you need it to be. don't try to time interest rate hikes.
- bonds stabilize your portfolio. Bogle suggests Bonds take up one percentage of your portfolio for each year of age
- for the investment strategy outlined in this book bond fund is much more beneficial than the other methods
mutual funds: pool money from investors to buy securities.
- can be managed in multiple ways, but most funds employ indexing (ex. trying to replicate the return of S&P 500) or active management, with stocks/bonds handpicked by managers. active management rarely (!!!) outperforms indexing
- offer diversification, pro management, low minimums, convenience (automatic reinvestment) along with a few other things that make them optimal for long term investing
- what should be the "investment of choice for most individual investors"
annuities: investment with an insurance wrapper, similar to a bank CD. these seem unwise due to hidden fees and built-in processes that make it difficult to withdraw your money
exchange-traded funds (ETF): like a mutual fund but traded like stocks on an exchange
- cost can be equal or lower to mutual funds
- prices change throughout day like stocks but unlike MFs
- can trade at slight premium

real return: amount left after subtracting inflation from rate of return. this is what should actually be taken into account when evaluating possible financial decisions.

bonds, mentioned earlier, are the best method for combatting inflation.

I-Bonds are made up of two portions, a real rate (what you get above inflation) and an inflation adjustment rate, which is calculated twice anually. both are set by the U.S. Treasury. it's important to be mindful of guaranteed real return vs. taxes. as these have a 30 year lifespan it's recommended to wait until you can ensure good return to cash them out. in order to optimize for real return seek high fixed rates combined with low tax bracktes and longer holding periods.
TIPS: also U.S. Treasury issued but can be bought through third parties like Vanguard as well as from Treasury. TIPS mutual fund is most likely the move for most people.

the difference in return between TIPS and I-Bonds is negligible.

According to Dalbar, Inc. of Boston, from 1993 to 2012, the S&P Index 500 averaged a gain of 8.21 percent per year. However, during that same 20-year period, the average equity fund investor had an average annual gain of only 4.25 percent. Put another way, had the average equity fund investor just bought a low-cost S&P 500 Index fund and held it, he/she would have almost doubled their rate of return.

the stock market is unpredictable at best and erratic at worst in the short term. people that claim to predict stock performance correctly are either lying out of their asses or committing federal crimes. this is why index investing is the best method for ensuring returns.

Index funds outperform approximately 80 percent of all actively managed funds over long periods of time

index funds are cheaper, and with a volatile market that's one of the most important things you can look out for. NEVER buy expensive funds. "cheap is beautiful". however, if you want to buy actively managed funds to increase the possibility of greater returns, it's advised you do it in tax-advantaged accounts like 401ks, Roth IRAs, etc. as they can have great before-tax returns and dismal after-tax due to all the trading done to maintain them.

percentage of bonds in our portfolios should equal our age

with foreign stocks, you're investing in both stocks and their currencies. this is a benefit as you can never be certain your own dollars will hold steady! should the u.s. dollar tank, diversification in foreign markets could save your portfolio. the bogleheads recommend 20-40 percent allocation in foreign stock.

avoid high yield bonds, they are junk. they aren't tax efficient and have high risk, which defeats the purpose of puchasing bonds.

see the following image for info about common etf/mutual fund choices for different brokerages:

the brokerage you use will impact the cost of the assets you're buying. hopefully by now you understand the importance of cost! so it's recommended that you stick to your brokerage specific funds as you could find in the chart (credit at the bottom)

I've decided on the following breakup for both my tax-advantaged and taxable accounts:

60% FSKAX, 20% FXNAX, 20% FTIHX

with the reasons being

I have a fidelity account
mutual funds suited my investment style more than ETFs (and will probably for you as well)
"zero funds", while appealing, lock you into one choice of brokerage. they also have less diversification at the time of writing
mutual funds are more convenient for this style of investing -- through fidelity I can set up automatic investments