Editor’s Note: When I started my investing journey four years ago, the first book I ever picked up was the Bogleheads’ Guide to Investing. Looking back, I’d say this book was the absolute best thing that ever happened to me(finance-wise) since it really opened up my eyes to low cost index funds and the basics of investing. In fact, it’s probably the book I recommend the most to anyone just starting out on their investing journey.
I’ve been wanting to review it for a while as part of my new book review series, but since I read it so long ago I didn’t really remember all the important details. Luckily, one of my faithful readers and longtime friend, Erik Sierks, graciously volunteered his time to review the book. Erik is a fellow aerospace engineer and UC San Diego Volleyball Alumnus who is really just getting started on his investing journey. Erik’s been working for a couple years now but he’s been slowly gaining more and more of an interest in personal finance. He was one of the first people I convinced to take advantage of an HSA and based off his review below, it looks like he’s got a great foundation of knowledge to build on going forward.
I’ll be giving away two copies of the book to two lucky readers! If you’d like to be entered to win a copy of the book please leave a comment below. On to the review!
After 15 years of school I have learned a lot of really important skills: I can read and write, add and subtract. I also learned a lot that has been pretty useless (even working full time as an engineer!) like differential calculus and linear algebra. All these skills are supposed to help get me get a job, make money, and become financially independent. So how is it that I, like many other college graduates, made it this far without learning what to do with my money once I start making it?
Unfortunately, there is very little exposure to money management in school. If you are like me, and want to know how to take control of your own financial future, The Bogleheads’ Guide to Investing is a great place to start.
The Bogleheads’ Guide to Investing
What it is: An overview, guidelines, rules of thumb, in layman’s terms: a roadmap to a comfortable financial future.
What you will learn:
- how to achieve financial security/independence
- the power compound interest over time
- the power of saving money and keeping costs low
- why diversification is important
- different asset classes and their pros/cons
- types of investment accounts and their pros/cons
Before you read, it is also important to know what this book is NOT
What it isn’t:
- how to pick stock market “winners”
- guide to market timing
- how to get rich quick
- flashy exciting market secrets
- an attempt to sell you any products/services or convince you to use Vanguard
Know Your Starting Point
The Bogleheads’ Guide begins by asking you to lay out the ground rules for a stable financial future. Take an inventory of your current financial situation. Eliminate high interest credit card debt. Set up an emergency fund. It is important to begin down the road toward your financial goals from a firm starting place. Once you have taken care of the basics, then its time to start thinking about the future.
The Magic of Compounding
I know that many people have the “compound interest” epiphany later in life. But the earlier you have it the better! The combination of compound interest and time are extremely powerful! The Bogleheads’ Guide gives a few great example that everyone should be aware of:
A 20 year old investor contributes $31,000 to a portfolio returning 8% annually. Without ever contributing another dime, their portfolio would be worth $1,000,000 dollars when they retire at age 65! To have the same portfolio value with at age 65 with the same annual return, a 40 year old investor would have to make a 1 time contribution of $146,000, and a 50 year old investor would have to contribute $315,000!
A large 1 time contribution may not seem plausible. How about this:
Investing $600 a month for 30 years assuming 10% returns yields $1.2 Million dollars!
It’s a shame that every college student (or even 5th grader for that matter) doesn’t know that fact. If everyone knew the power of compound interest, I think more people would make an effort to put aside a few bucks a month.Try to pack a lunch and cut back on the Starbucks a little bit. You will thank yourself later!
Investing in the Stock/Bond Market
You probably know that saving money is important. But where should that money be invested? An individual company’s stocks can go up or down radically over the short term, and even the long term. However, the overall market has produced an annualized return of around 8% over the last 200 or so years. Here is another great statistic everyone should know. This is with regards to overall market performance:
“Your odds of losing money in any particular year are 32%. Your odds of losing money over any 5 year period dropped to 13%, and for any 10 year period the odds of losing money fell to only 2 percent. There has never been a 15 year period where stocks lost money.”
Considering this, all an investor really needs to do is get their money into the market and leave it there!
That might still seem easier said than done. How do you know what to invest in? Is it worth it to pay a manager?
The Bogleheads’ Guide gives a great recap of the different asset classes. They discuss several different equity and bond. This was probably the driest section of this book (I’ll admit I skimmed through a fair amount of the Bond classes). However, there is a lot of good information there.
One thing I liked about the Bogleheads’ guide is that they quoted tons of long term academic studies. According to countless studies, around 70-80% of index funds outperform actively managed funds.
Warren Buffet said “I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.”
If Warren Buffet can’t pick stock market winners, what hope is there for the average investor? The funny thing is, when it comes to the stock market it actually pays to be lazy. Invest in low cost mutual funds, and leave your investments alone. Don’t be swayed by talk shows, infomercials, or TV “experts” that claim to know the inside scoop on the next hot stocks. If they really knew what the market was going to do next do you think they’d still be a TV show host? If I knew which stocks were going to have crazy returns, I would invest every dime I had and retire!
Control Your Costs
There are a lot of great low cost index funds out there from companies like Vanguard that offer low cost mutual funds with expense ratios around .2%. No one knows what the market will do next. Portfolio managers will probably charge you a 1-2% fee. That means that they need to achieve returns of at least 1-2% ABOVE the market average to pay off. If 70% of them are underperforming the market, you need to get pretty lucky for your manager to pay off. You can’t control market returns, but you can control your own costs!
The Bogleheads’ Guide also give a great recap of Asset Allocation. A general rule of thumb is to hold your age in bonds.
Ex: a 20 year old holds 80% stocks, 20% bonds, a 30 year old holds 70% stocks 30% bonds. They even give a few examples of potential portfolios for investors of different ages.
The Bogleheads’ guide gets into all the different types of investment accounts, both traditional and tax deferred accounts. They discuss college funds, and estate planning, how to establish a target retirement amount, how much money you can withdraw in retirement, etc. It’s all great stuff to be aware of, but are probably not the most exciting topics for young investors.
Control Your FutureThe
The Bogleheads’ Guide is a great book for anyone who is new to investing. Everyone should have to read this book or something similar to it in school. It is really a shame that our school systems don’t prepare us for our financial futures. Maybe this is why so many American’s end up with massive credit card debts.
When you are ready to have your investing epiphany, pick up a copy of The Bogleheads’ Guide to Investing, or another similar book. There are tons of theories on how/where you should invest, but they will all agree that you need to have money to invest in the first place! That means being smart with the money you have, and living within your means. Be aware of where your money is going, and take control of your financial future now. Years down the road, you will be happy you did!
Readers, what did you think of the Bogleheads’ strategy? Do you have any other similar books you recommend? Don’t forget to leave a comment to be entered to win one of two copies of the book.
(I will receive a small commission if you buy this book from Amazon, thank you for your support!)
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