Book Review: The Bogleheads’ Guide to Investing - Part 2
By Taylor Larimore, Mel Lindauer, and Michael LeBoeuf
This is part 2 of a multi-post book review of the excellent book, The Bogleheads’ Guide to Investing . If you haven’t already, please check out part 1 now .
What else is good about the book?
Consider taxes
When we left off yesterday, we had just finished talking about how costs were critically important when choosing mutual funds. If you are investing in a taxable account, it is most likely that the biggest expenses you will face are taxes. It is therefore quite important to consider taxes when planning your portfolio. The most important suggestion the authors have is to ensure that your least tax efficient funds are in your tax-advantaged accounts. If you don’t have the luxury of any tax-advantaged accounts, make sure that you are investing in tax-friendly mutual funds.
Why would I want to invest in index funds to only get the market average?
Of course it makes perfect sense that you should strive to get better returns on your investments than the market in general, as provided by index funds. This is one case, however, where common sense is just not correct. In yesterday’s post I listed the reasons the authors give for investing in index funds. Another item the authors would like you to consider is that it is extremely difficult to pick the best mutual funds in advance.
Multiple studies are referenced by the authors showing that the "hot" funds for one-year, five-year, or ten-year periods are very unlikely to be the "hot" funds in the subsequent period. An example presented is from a Vanguard study where they looked at the top 20 US equity funds for the ten-year period ending in 1993. Over the next ten-year period, only one of those top 20 funds were even in the top 100! Remember, you need to pick a fund before it experiences its great growth. It does you no good to have last year’s hot fund if it is performing below average this year.
The authors wrap up Part I of the book with chapters on investing for college, managing a windfall, and a discussion on whether or not you need to hire a financial advisor to manage your money for you.
The importance of rebalancing
Part II of the book starts off with a discussion on rebalancing. The authors present two basic rebalancing strategies:
- Time-based - Rebalance after a certain time period. Most people do this quarterly or yearly. Of note is a Morningstar study mentioned in the book that showed people who rebalance every 18 months get the same benefit and lower costs than those who do it more frequently.
- Expansion bands - Rebalance when your original asset allocation gets skewed by more than a predetermined percentage (say 5%).
Behavioral Economics
There was some fantastic information in this chapter about why smart people make bad investment decisions. I will list the items presented by the authors here but I can’t do into more detail today. I am planning to do a number of posts on these topics, however, as I find them very interesting and important to understand.
- Greed & Fear
- Ego & Overconfidence
- Loss aversion -a loss if felt more than an equal gain
- Paralysis by analysis - spending too much time analyzing a situation and never acting
- The endowment effect - people tend to confuse familiar with safe and overvalue what they already know
- Following the herd
- Mental accounting - treating money differently based on where it comes from – i.e., viewing your tax return as a windfall
- Anchoring - clinging to an old belief or comfortable opinion even if it is wrong
- Financial negligence
The final three chapters stray off of strict investment advice and cover the topics of ensuring you outlive your money, protecting yourself through insurance coverage, and passing on your estate when you die. These contain some useful information and act to round out the book. Again, this book is certainly more than a strictly investment advice book. Though it does not go into terrible detail on these other topics, there is some good "bullet-point" level information in them.
What is not-so-good about the book?
Overall, I really found this to be a useful book but there were some issues with it. First, if you are not into index funds, you are going to have a hard time reading this book. The authors are very pro-index funds and that philosophy is reflected throughout the book. Of course, if that is you, maybe this is a good book for you to read to examine what the authors claim about their strategy and give it a fair look.
Though this book is not strictly about Vanguard, there are references to Vanguard littered throughout it. They do mention other index funds, but they clearly love Vanguard. Of course, what can you expect from a book with this title?
Finally, I didn’t really get the organization of the book. The chapters do not flow logically for me. I know that this is a minor point (and it probably says more about the way my brain works then the authors’ organizational capability) but it can give the feel that the book is disjointed and somewhat scatter-brained.
So what is my recommendation?
I really think this is a useful book for someone who wants to learn the basics of investing. There is a lot of educational information in here about the stock market and especially index funds. Of course, the authors are espousing a certain investment philosophy and I just so happen to agree with that philosophy. Actually, I wasn’t totally sold on the low-cost index fund thing when I first started reading this book. It did a good job of explaining some of the issues that I was confused about in a way that made the index fund strategy more understandable and plausible.
After reading through the book and my notes, I have decided to put this book onto my virtual bookshelf. It really does present a great overview of the low cost mutual fund strategy of investing. I feel it is a valuable read for that reason. I highly recommend that you read this book as I think you might learn a lot from it. Whether you buy or borrow it does not matter, though at over 300 pages, you might have to renew it. For full disclosure purposes, I borrowed it from my local library (twice).
Want to borrow this book? Search your local library
Want your own copy? Buy this book now at Amazon.com
Check out the other books currently on my virtual bookshelf
The Lesser of Two Evils: Determining Which Loan to Pay off First
The other day I was asked a good question: "We are looking to put some extra money towards prepaying one of two loans, so how would you go about determining which one to pay off?" Like most good questions, there is no easy answer. For most debt repayment questions, I would turn to Dave Ramsey’s debt snowball (pay off the loans in order from smallest balance to highest) or a similar technique (pay off the loans in order from highest interest rate to lowest). But this person was asking a slightly different question. Click here to continue reading…
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