Previous Post: Eight and a Half Effective but Somewhat Less than Practical Ways to Save Money
Book Review: The Bogleheads’ Guide to Investing – Part 1
By Taylor Larimore, Mel Lindauer, and Michael LeBoeuf
BFN Book Reviews
Here at BFN, I have been periodically reviewing personal finance books. In each review, I provide a brief overview of the book and the author(s), touch on the good and bad in the book, and give you my personal recommendation for whether you should borrow the book, buy the book, or neither. This is a fairly thick book with a lot of useful information so I am not going to be able to cover it in a single post. This will be Part 1 and Part 2 will follow soon after.
What is this book about?
Don’t be fooled by the title, though this is a book about investing, it contains much more than just investment advice. The authors do spend the bulk of their time discussing and educating the reader on the various aspects of investing. However, they also touch on other related topics such as financial lifestyle, insurance, estate planning, etc.
Who are the authors?
Not only are the authors "Bogleheads," but Taylor Larimore is actually the founder of the Bogleheads. Co-authors Mel Lindauer and Michael LeBoeuf also spend a lot of time reading and responding to posts on the Bogleheads forum hosted at bogleheads.org . At this point, you might be asking, "What is a Boglehead? " (good question!) A Boglehead is a person who shares the investment philoshophy espoused by John Bogle, the founder of The Vanguard Group. In a nutshell, that philosophy is based on investing in a diversified manner with very low cost investments. (yes, that picture on the cover is John Bogle’s head)
What are the best parts of the book?
There is a great deal of useful and interesting information in this book. I really enjoyed reading it. I felt like I learned much about the stock market and especially mutual funds as a result. I’d heard how important mutual fund costs were to a portfolio, but really learned the "why" in this book. I can’t really go into too much detail on all of what they wrote in the book (it is going to take multiple posts as it is!), so I will present the information and you can check out the book if you want a more detailed treatment of each topic.
The authors start out by pointing out why investing is different than the rest of life by claiming that the following statements are NOT true for investing:
-
If you don’t know how to do something, hire an expert
-
You get what you pay for
-
If there’s a crisis, take action!
-
The best predictor of future performance is past performance
These are the investment principles that do work:
-
Choose a sound financial lifestyle – I covered their three financial lifestyles in a recent post.
-
Start early and invest regularly
-
Know what you’re buying
-
Preserve your buying power
-
Keep costs and taxes low
-
Diversify your stock portfolio
-
Diversify your stock risk with a bond portfolio
-
I thought it was a good idea for the authors to spend time discussing the importance of the extra-investing topics. Basically, the fundamental point is that the more you can do to free up money to invest, the more investment success you will have.
Chapters 1 & 2 focus on financial lifestyle and ways to spend less or make more money so you have more to invest. The following few chapters go into detail explaining what some of the common investments types are and how they work. These include various bonds (with an entire chapter on inflation protected bonds), mutual funds, ETFs, annuities, etc.
The investment part of the book starts in chapter 7. The authors, as you might expect, recommend using index funds as the core, if not the entirety, of your portfolio. The authors present the following list of why index funds are a great choice:
-
No sales commissions
-
Low operating expenses
-
A 1% difference makes an 18% difference in returns when compounded over 20 years
-
-
Many index funds are tax efficient
-
You don’t have to hire a money manager
-
Index funds are highly diversified and less risky than individual stocks
-
It doesn’t matter who manages the fund
-
Style drift and tracking errors aren’t a problem
Asset Allocation
Asset allocation is portrayed in this book as the cornerstone of successful investing. Some of the same theory is discussed in another book recently reviewed at BFN, The Intelligent Asset Allocator . The authors reference a 1986 study of pension plans by Brinson, Hood, & Beebower that found the following:
- Allocation between stocks, bonds, and cash determined 93.6% of the variability of the studied pension plans’ returns
- Manager’s attempts to actively manage their fund cost the average fund a 1.1% reduction in return compared to the indexes
Costs Matter
How is it possible that professional money managers actually cost their funds money, you ask? To borrow (and alter) a phrase, "It’s the costs, stupid!" The authors reference another study that found the expense ratio is the only reliable predictor of future mutual fund performance. Also, there are a number of hidden costs that investors never hear about in a mutual funds’ prospectus:
-
Hidden Transaction costs
-
Brokerage commissions
-
Soft dollar arrangements
-
Spread costs
-
Market impact costs
The investing takeaway from these chapters: buy a diversified mix of low-cost index funds in the context of an appropriate asset allocation. (you have to figure out your exact "appropriate" asset allocation yourself though there are some very general guidelines in the book)
That’s enough for one post
Ok, I’m stopping here for this post. I appreciate you sticking around as long as you did – and I’m only half way through the book! Update – please check out part 2 of the review .
If you’re already sold on the book….
Want to borrow this book? Search your local library
Want your own copy? Buy this book now at Amazon.com
Check out the books I’ve chosen for my virtual bookshelf
Related Posts:- BFN Book Review: The Automatic Millionaire...
- Financial Peace University Lesson 9 – Of Mice and Mutual Funds...
Related posts brought to you by Yet Another Related Posts Plugin.
If you found this post informative or entertaining (or both), please subscribe to my RSS feed or subscribe via email to receive future Borrow From None posts.
Thank you for visiting!
Comments
2 Responses to “Book Review: The Bogleheads’ Guide to Investing – Part 1”
Leave a Reply
Subscribe to Borrow From None
Affiliates
-
Social Networking
Links of Interest
What is RSS?
Great review of the book “Bogleheads”, haven’t read it yet, but plan to now.
I like the information you provided on your blog. Great info and incisive as well