Sunday, December 9, 2007

Boglehead investing

I am a "Boglehead."

Generally, a "Boglehead" is one who invests in accordance with Modern Portfolio Theory (MPT), using predominantly Vanguard index mutual funds, as espoused by John Bogle. In some contexts, though, a "Boglehead" is a participant in the Vanguard Diehards (aka "Bogleheads") forum.

That's a lot of mumbo-jumbo, but the gist of Boglehead-style investing is to:
  • live below your means and set aside money every month to invest
  • commit to a risk/reward level based upon your need for growth and ability to withstand market volatility
  • translate your desired risk/reward level into an asset allocation, which is a breakdown of what kinds of assets you should hold. For example, "30% US stocks, 30% non-US stocks, 10% real estate, and 30% bonds."
  • hold a small number (usualy 3-7) of low cost index funds, in proportions consistent with your asset allocation
  • "stay the course:" stick to your plan regardless of what the markets are doing
  • occasionally (e.g. once a year) rebalance the mutual funds so they don't move too far away from your intended allocation
I like this method because:
  • Academic research says it works well; I'm an academic researcher, so I take this to heart.
  • It requires very little ongoing time or effort. After the initial effort of deciding on an allocation and opening the accounts, all your decisions and legwork are finished. You can set up future investments as automated transfers, at which point the only work is an hour or so every year to rebalance the funds.
  • There are few decisions to make, so I don't wind up second guessing myself and regretting "mistakes," as I would with a more active approach.
  • I can do 100% of this over the internet.
I could go on and on about this stuff, but I think it's been covered thoroughly in blog-space. The aptly named Boglehead's Guide to Investing is an excellent primer on all things Boglehead. If you don't mind wading through forum posts, you can get a lot of the same information in raw form by reading the forum's Reference Library area. Vanguard's Plain Talk series also covers the same ground.

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