The Bogleheads Investment Philosophy

The ideas of this philosophy, or methodology, of investment come from John Bogle (hence the name), the founder of Vanguard.

Vanguard is a U.S. investment company with around 2 trillion dollars in assets.

The company offers mutual funds among other financial products, and was the first company to offer them to individual investors.

Jack bogle

Returning to the philosophy, the Bogleheads follow a series of investment principles that have proven over time to produce risk adjusted returns much higher than those obtained by the average investor.

Other advantages are that they are designed to bring the until then complicated world of investing to everyone, requiring no technical knowledge nor spend much time .

The main goal is to achieve financial freedom ( of which I spoke here), which is simply to obtain enough returns from our investment to live just from them.

Bogleheads investment philosophy

These are the principles on which the Bogleheads’ philosophy is based :

1. Develop a workable plan

This principle can be summarized as live below your means.

You need to save a large part of your income to achieve financial freedom. Spend less than you earn, it’s very simple.

No debt, no credit cards nor mortgages. If you have them, maximize the amount you can pay to finish as soon as possible and avoid paying more interests.

It helps to keep records of all your expenses and incomes, and to be able to know instantly about your financial situation. (I’ll talk about how I achieve this in a future post)

If you do not save enough, no matter how good is your investment approach, you will not get enough money.

2. Invest early and often

The earlier in life you start investing the better, do not postpone it. Don’t do the “I’m not old enough to worry about this”…

The explanation for this is compound interest. Compound interest is the return you get after several years when the interests of each year have been piling into your account and are applied on themselves. (Actually, instead of years it is periods of investment, I did it for simplicity)

The best way to understand it is with an example :
We have $1000 and we invest them in a fund with a return of 10% the first year.

1st year result: $1100.
(1000 * (1 + 0.1))

The second year the return is also 10%, but it** is no longer calculated on the initial amount** of 100, but the total of 110 we got from adding the interest earned in the first year.

2nd year result: $1,210.
(1100 * (1 + 0.1)) or (1000 * (1 + 0.1) ^ 2)

After 30 years of getting the same return, our $100 will have become …$17,449!

30th year result: $17,449.
(1000 * ( 1 + 0.1 ) ^ 30)

Young early

In this chart we can see how Leandra (gray), who invests $2,000 a year from age 25 to 60, gets a much higher profit than Kevin, who invests more than double, $5,000, but from the age of 40.

Leandra invested a total of $70,000 (35 years * $2,000/year) and has more than $350,000 with 60 years.

Kevin spends a total of $100,000 (20 years * $5,000/year) and has about $250,000. A huge difference.

Inflation and other things should be deducted but eitherway it is clearly impressive how money grows thanks to compound interest.

That is why is so important to invest sooner and more frequently, if you work as an employee and your employer offers matching what you invest in a 401(k) or IRA, accept it (as a general rule) and maximize the allowable amount. It is the easiest return you will get. (In later points I’ll discuss this in more detail)

3. Never assume too much or too little risk

The main instruments of investment in financial markets are stocks and bonds.

Actions are “parts” of a company that it makes available to the general public to get funds. Thus taking shares in a company you will both share the same fate, if the company is successful, stocks will (should) go up, and if it fails, down. Also if the company shares benefits (dividends), you’ll get your part.

Shares are usually the most cost-effective instruments since they usually follow the trend of the economy to grow but from time to time they fall. For example recently in 2008, the entire stock market fell an average of 50%.

So their volatility and therefore their risk is high. The capitalist system in which we live will always suffer major crises, but also large increases, continued growth is unsustainable.

Bonds are “promises” to return the borrowed money in a certain amount of time. They are typically less profitable than stocks but also less volatile.

So, when building your portfolio you have to decide the proportion dedicated to bonds and to shares.

This is subjective. It depends on your risk aversion, the less you like risk, the bigger the proportion of bonds will be.

It is logical to assume that you will tend to like risk the younger you are because you have more years ahead to offset declines that the market may suffer. When being older you have more money to protect and if you get caught in a bad market crash, your portfolio can be badly damaged.

It is by this reasoning that John Bogle recommends to use as starting point your age as the bonds proportion, so if you are 32, 32% of your portfolio will be invested in bonds and the remaining 68% in stocks, and from there go up or down depending on your risk aversion.

4. Diversify


Instead of buying individual stocks or bonds, the Bogleheads invest in index funds containing hundreds of stocks or bonds.

Most recommended funds contain all or nearly all shares of the market they are replicating and there are funds that replicate the entire global market (Investing in Total Markets) .

All this will make you to receive the average return of all investors. Although that does not sound good, it is actually good because most investors do worse than average, largely due to the high fees of the managed funds.

5. Use Index Funds when possible

The last point leads to this. There are two types of mutual funds, index funds and managed funds. (You can also invest in index funds through ETFs instead of mutual funds)

An index fund (or passive fund ) is dedicated to replicate an index buying stocks that comprise the index and making minor adjustments to its portfolio. Therefore its performance will be very similar to the index.

On the other hand a managed fund (or active fund) what is does is to buy and sell stocks continuosly based on the decisions of a group of analysts and investors. (In the index funds they also have analysts of course, but less)

The big difference between them is that the cost of an index fund is much smaller than a managed fund (up to 10 times lower, ~ 0.2 % vs ~ 2%). And being the “Bogleheads” strategy a long-term strategy, the difference in costs is very very important .

You might think that the managed funds offer higher returns due to being more active and that maybe it’s worth paying more fees but this is not true, as we can see in these articles in Forbes and Business Insider.

6. Maintain low costs

An extension of what is explained above so you can see how important is to minimize costs.

Annual return fee impact

What you see in the picture is the difference made by an additional 1% commission between 2 indexes, blue index (+1%) and grey index, assuming equal returns.

This difference is $220,000 and would translate into 10 more years living in financial freedom.

Always look for the index fund with less fees and more diversity of stocks/bonds.

7. Minimize taxes

Before we have seen the great difference made by paying more or less commissions over the years. Exactly the same thing happens when paying taxes to the state.

The Bogleheads philosophy is originated in the U.S. and therefore is based on its own laws and systems, so in this point there are several things that differ here in Spain.

The main difference is that there, the mutual funds are taxed year after year, whereas in Spain you only pay taxes when withdrawing capital.

Because of this, the Bogleheads put more impetus on providing money to pension plans (such as 401(k) s and IRAs) that we the Spaniards should put.

This does not mean that they are not good for us, since apart from the match to the amount that the employee contributes that many companies offer, doing it we are decreasing our tax base and therefore paying less taxes each year.

The problem, aside from just being able to withdraw the money after retirement or in very specific cases, is that these plans are underwritten funds, and most of them (all in Spain) not allow you to invest in the index funds mentioned above, so you have to calculate very well all the pros and cons. (This is probably what takes the most time of all the philosophy, and is important to do so)

8. Invest with simplicity

John Bogle said in a speech called “Investing With Simplicity” the following sentence: “Simplicity is the master key to financial success. When there are several solutions for the same problem, choose the simplest.”

The simpler your portfolio is, the better, this will make your analysis easier and the adjusting of the ratio stocks/bonds faster.

That’s why Bogle recommends investing in 2 or 3 different index funds as much.

The most common strategy among his followers Bogleheads is called the “ three fund portfolio“. It consists of investing in a fund that replicates all U.S. companies (eg. U.S. Total stock market index fund ), another that replicates companies around the world (eg. Total International stock market index fund ) and finally one of national bonds (eg. U.S. Total bond market index fund.

9. Stay on course

Pirate at the helm 1

This is the most difficult part of the Bogleheads philosophy, and probably of any other investment method.

Staying the course means to follow the plan no matter what, making only one change a year to maintain the desired ratio of stocks/bonds.

This may sound easy, invest and let it grow not worryng about it, but it is not, is far from easy.

Keep in mind that the returns will not be fixed every year, some years will rise, some will fall, and some will be negative (losing money). What matters is that in the long term, if we stay the course, it will be positive enough to achieve good growth.

Apart from this, we will face trendy new investment instruments from time to time such as the now popular hedge funds, but do not be seduced by those, keep on track!

If you follow the statistics from newspapers or economic websites about investment funds you will probably find managed funds that have tripled or quadrupled your return that year, and you will be tempted to move your money there. Do not,** what matters is the long run**, and those managed fund which earns a very high return, the next year are in negative.

Nobody knows the future and the market is unpredictable, no matter how good are your analysts, they will end up making mistakes and it is not even necessary because the market is irrational.

Make index funds do their job and use your time is more important and satisfying things.

My Bogleheads investment

Personally, my investment is divided in 50% US stocks, 40% European stocks and 10% European bonds.

I am 21 so I am following the common strategy or subtracting 10 to the age to get the proportion of bonds.

The names of the funds are Amundi Fds Eq North America AE- C, Amundi Fds Eq Index Euro AE- C and Amundi Crédit Euro 1-3 P, and the broker used is Renta4, one of the best in terms of security, commissions and ease of use here in Spain.

More information:

Bogleheads wiki

[Book] The Bogleheads’ Guide to Investing

This post was written more than 6 months ago, maybe things have changed or I don't think the same way anymore