Sunday, May 31, 2009
Personal MBA Update: The Bogleheads Guide To Investing by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf - I present you with yet another update along my Personal MBA journey. If you haven't read about the Personal MBA you can check it out here. I finished The Bogleheads Guide To Investing the other day and I must say it was pretty good. A lot of investing books are either get rich quick shock value investing scams or they are so boring and mind numbing that you fall asleep throughout the whole book without learning much of anything. This book provided a wealth of knowledge surrounding what I call "mindless investing" while still remaining viable from an entertainment standpoint. It is mindless in the sense in that they don't teach you be a day trader using intricate default credit option swaps or something. They preach low cost diversified mutual fund/bond fund investing based around a long term buy and hold strategy.
For those who don't know Mr. Bogle is the founder of Vanguard, the company that largely ushered in the new era of investor class through low cost passively managed index funds and online services. It's not often that investment books advise the majority of people to invest in index funds and total market index funds, especially when the company can profit from other investor behaviors like constant buying and selling and investing in actively managed funds with high expense ratios. It definitely says something about what Mr. Bogle and Vanguard stands for. The book preaches financial literacy and prudent do it yourself investing that is well advised for the majority of people out there.
I would definitely recommend the book to anyone who is interested in investing. I have read a lot of investing books and I still took away a lot from this book while touching up on the basics, and I think the novice investor would get a look at the broad topic that is investing as well. Here are the notes that I took while reading this book:
- Our financial markets are essentially closed systems in which an advantage garnered by a given investor comes at the disadvantage of other investors in the same market. As a group we investors are inevitably average, so beating the market is a zero sum game. After deducting investment costs its a losers game.
-Understanding that contrarian wisdom is the first step toward investment success
- "Choose a sound financial lifestyle. Start early and invest regularly. Know what you're buying. Preserve your buying power. Keep costs and taxes low. Diversify your portfolio."
- "In reality there is perhaps no one of our natural passions so hard to subdue as pride. Disguise it, struggle with it, beat it down, stifle it, mortify it as much as one pleases, it is still alive, and will every now and then peep out and show itself: you will see it perhaps often in my history; for even if I could conceive that I had completely overcome it; I should probably be proud of my humility." - John Bogle
- "Do not value money any more nor any less than its worth; it is a good servant but a bad master." Alexander Dumas
- "Drive in banks were established so most of the cars today could see their real owners." - E. Joseph Grossman
- Take 100 young Americans starting at age 25. By 65 one will be rich and four will be financially independent. The remaining 95 will reach the traditional retirement age unable to self sustain the lifestyle to which they have become accustomed.
- What is your financial lifestyle? The borrowers, the consumers, and the keepers
- 1. Graduate from the paycheck mentality to the net worth mentality 2. Pay off credit card and high interest debt 3. Establish an emergency fund
- Its not how much you make its how much you keep
- "Adding time to investing is like adding fertilizer to a garden: it makes everything grow." - Meg Green
- Late Actor George Raft explained how he blew about $10M this way: "Part of the money went to gambling, part for horses, and part for women. The rest I spent foolishly." All good wealth builders have one thing in common: they spend less than they earn.
- Nothing decreases your future net worth more than a new car every few years
- "When a man with experience meets a man with money, the man with the money gets the experience, and the man with experience gets the money"
- "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." - Warren Buffett
- Treasury issues are exempt from state and local taxes
1. Find a bond fund that matches your investment time horizon 2. Don't time interest rate hikes 3. Match your risk tolerance
- Bond vs Bond fund page 37
- "Ive found that when the markets going down and you buy funds wisely, at some point in the future you will be happy. You wont get there by reading, 'Now is the time to buy'." - Peter Lynch
- 10 advantages to investing in mutual funds: 1. Diversification 2. Professional Management 3. Low Minimums 4. No loads or commissions 5. Liquidity 6. Automatic reinvestment 7. Convenience 8. Customer service 9. Communications and record keeping 10. Variety
- ETFs basically mutual funds that trade like stocks on an exchange and are priced continuously throughout the day. Not good for buy and holders due to the brokerage costs
- "Control your destiny or someone else will." - Jack Welch
- Inflation stats on page 49 and table on page 51
- TIPS have real rate and rate adjusted for inflation 1.2+3=4.2 or 1.2+4=5.2% adjusted twice annually IRS taxes both rates
- Lower the tax bracket the higher the return - place in a tax deferred account
- I bonds are already tax deferred and TIPS aren't
- "You don't really need to begin saving for retirement before you reach 60. At that point simply save 250% of your income each year and you'll be able to retire comfortably at 70." - Jonathan Pond
- Factors for retirement:
1. The amount we save 2. Our current age 3. The age at which we plan to retire 4. How many years we will expect to live 5. Whether we plan to leave an estate 6. The expected rate of return 7. The rate of inflation 8. Whether we expect an inheritance 9. Other sources of income in retirement
- "There is a crucially important difference about playing the game of investing compared to virtually any other activity. Most of us have no chance of being as good as the average in any pursuit where others practice and hone their skills for many many hours. But we can be as good as the average investor in the stock market with no practice at all." - Jeremy Siegel Professor of Finance at U of Penn Wharton School
- Index funds beat 80% of all actively managed funds for one simple reason: rock bottom costs
- Page 81-86 quotes
- "The most fundamental decision of investing is the allocation of your assets: How much should you own in stocks? How much should you own in bonds? How much should you own in cash reserve?" - Jack Bogle
- Efficient market theory and modern portfolio theory
- Asset Allocation has greater impact on financial performance than anything Studies on page 92-93
- 1. What are your goals? 2. What is your time frame? 3. What is your risk tolerance? 4. What is your personal finance situation?
- "Never buy anything whose price you cant follow in the newspapers - and you shouldn't buy anything that is too complex to explain to the average 12 year old." - Jane Bryant Quinn
- "Bulls make money, bears make money, but hogs get slaughtered"
- Quotes on pages 105-107
- "The shortest route to top quartile performance is to be in the bottom quartile of expenses." - Jack Bogle
- 1926-2004 stocks returned 10.4% - 3.3% avg cost and its 7.1% nearly a third lost to expenses
- Page 117-118 quotes
- "The profound impact of taxes on fund returns is a subject too long ignored." - Jack Bogle
- Keep turnover low, use tax efficient funds in taxable accounts, avoid short term gains, buy shares after the distribution date, sell before the date, harvest losses
- "Of all the expenses investors pay taxes have the potential for taking the biggest bite out of total returns." - The Vanguard Group
- Invest in 401K to match amount, Roth to max, 401k to max, additional funds to tax efficient funds
- "Diversification is a protection against ignorance" - Warren Buffett
- Correlation for any two investments range from +1 to -1
- Over the past decade Morningstars five star equity funds have earned an average 5.7% against a 10.3$ return for the Wilshire 5000.
- Since the 1960's the average return of the top 20 mutual funds in each decade was less than the market index return in the next decade
- If you think timing the stock market is difficult timing the bond market is impossible. Of 14 bond timing systems tracked for the last five years only one beat a simple buy and hold strategy
- Wall st and financial media have a symbiotic relationship - The media wants readers viewers listeners and most of all Wall St's advertising dollars. Wall St also wants readers viewers listeners and most of all your dollars. Unfortunately these dollars come straight out of your investment returns.
- Pg 166-7 quotes
- "Economists report that a college education adds many thousands of dollars to a mans lifetime income -which he then spends sending his son to college." - Bill Vaughan
- Windfalls of money: Deposit the money in a safe account for at least 6 months, set a realistic estimate of what it can buy, make a wish list, get professional help
- "I helped put two children through Harvard-my brokers children." - Michael LeBoeuf
- "When someone buys or sells an investment the broker makes money and the brokerage house makes money, and two out of three ain't bad."
- Fee only advisers are the best they use a percentage of AUM assets under management
- "Foolproof systems don't take into account the ingenuity of fools." - Gene Brown
- Rebalancing is the act of bringing our portfolio back to our target asset allocation after market forces or life events have changed the percentage of our various asset classes
- use expansion bands to determine the need to rebalance +-5% example
- Rebalance in tax deferred accounts first because there is no tax consequence
- In 1980 only 6% owned mutual funds and today over half do. This increase has created an increase in the amount of noise out there
- There are only two ways to outperform the market: 1. Choosing superior investments 2. superior market timing
- Research shows the ability to do either consistently is so rare that it may as well be chalked up to chance
- Create simple diversified asset allocation plan, invest a part of each paycheck in no load index funds, rebalance when necessary and stay the course
- Investment pornography refers to excess advice and information but it is actually somewhat flattering. Real pornographers deliver what they promise!
- "I'd compare stock pickers to astrologers but I don't want to badmouth astrologers." - Eugene Fama
- There has never been a 15 year period when stocks lost money. That is all you need to know.
- 1. All forecasting is noise 2. Listen to the helpers ignore the hustlers 3. Be a skeptic and do your homework
- Investment experts fall in 3 categories:
1. Those who don't know what the market will do and know they don't know
2. Those who don't know what the market will do but they believe they do
3. Those who don't know what the market will do and get paid to pretend they know
- "Rich people plan for three generations. Poor people plan for Saturday night." - Gloria Steinem