Books by the Giants: Bogleheads' Guide to Investing

Hi friends, 

today, I will be talking about a book that I enjoy tremendously (even though I did not learn much) - The Boglehead’s guide to investing. I am sure most of you are curious now. Why does Dion like this book even though he did not learn much from it? (Which was the case in Broke Millennials).

The reason why was cos this book focused a lot more on the quantitative aspect of financial planning, which I really appreciate (It is my belief that when it comes to money/finance, it makes the most CENTS if you measure each DOLLAR). 

The main reason why I resonated with this book was also because of the underlying principle that they have in their financial planning - Frugality, Low-cost, Diversified index funds or ETFs, Built upon years of hard work. All of these are values that I hold dear to my heart and it is also in my personal belief that wealth built on these values is wealth that will last and have a huge impact on the people. 

So, moving onto the introduction of the book. It is written by three of the most respected Bogleheads (people who manage their money based on the principles of John Bogle). They had a collectible investing experience of more than a century and I love their writing style, which was grounded in math and common sense. Reading their book made me felt that I was conversing with someone who understands me and has the same goals as me. 

Hence, for the readers that are like me - driven by values like hard work, frugality and want to take charge of their own finances in a logical manner, WHAT ARE YOU WAITING FOR. This is the book for you!

So moving on to the book. I will be summarising the key principles as well as the key steps that you can take to build up your wealth. 

Principle 1: Your wealth is not based on your paycheck

Networth = Asset - Debt

For each time period (Year or month), when you spend more than your income, your networth would decrease. Vice Versa. 

Principle 2: Investing early

This is what I want you to do. Use the following formula:

Future_Value = (Current_Value)*(1 + 0.08)^n, n = 10,20,30,40,50)

Tell me, can you understand the compounding effects of time? 

Principle 3: Fees add up

This is the results that I got after comparing a 1% fee to an average 3.3% annual fees: 

Principle 4: Know what you are investing in

 

Bonds - Essentially, you would be lending money to the entity (whether is it a corporation, government), where you may be given some interest rate on the loan. Also, if the company is to go bankrupt, you have a high priority compared to stockholders to lay claim to the assets

Bond Funds - Fund that invests in more than one bond - The advantage is that there would be a low probability that all the entities were to go bankrupt at the same time. The disadvantage is that you would have to pay for a management fee cos of it. 

Stocks - This would mean that you are a partial owner of the company, the price of the stock would rise when the company does well, vice versa. 

ETFs/ Index Funds - Buying into one of these would allow you to diversify the same dollar into a larger number of companies compared to stocks. As these instruments are passively managed, their returns would be the market returns.  

Unit Trust/ Actively managed mutual funds - Same as ETFs, but actively managed, with higher fees - hence lower performance.  

Principle 5: The longer you hold onto your portfolio, (longer time horizon) the lower the chance of losing money 

Principle 6: Diversify - Asset classes, location, sector

As we can see from the figure above, it can be observed that the annual best performers vary between the different categories (International, Domestics - US, Small-cap, bonds). What this implies is that we would have a better chance to optimise our returns by just investing in index funds that allows us to capitalise when the specific asset class just happens to perform well for that period.

For max tax-efficiency (not applicable for SG), each type of financial instrument would be suitable for different tax purposes: 

For taxable account - Low turn-over, Low dividends, 

For non-taxable - dividends, bonds, REITs

Investing in tax-deferred account - diversified, Long term 

Steps:

1. Pay off any bad debts or high-interest debt (So that you would not be someone’s compounding interests)
2. Establish an emergency fund (More if your income is not stable, less if you have a stable income). The emergency fund is to increase your holding powers such that you will not have to actualise your loss when there is a market downturn
3. Get insurance against big disasters that you cannot afford to pay out of pocket - Cheapest insurance is self-insurance. TPD, CI, TERM LIFE, DISABILITY INCOME
4. Set up a portfolio with a combination of stocks, bonds. The proportions of the stocks and bonds should change to suit the age and risk tolerance of the individual. An example of a 25 years old can have 20% in bonds, 65% in US stock index funds, and 15% in EM stock index funds. 
5. Rebalance - every 18 months, by directing money into the smaller proportion or to sell the bigger and buy the smaller
6. Ignore the noise, ignore trying to predict the markets, ignore chasing the trends. Control your emotions and actions, keeping to your investment plans

Conclusion:

I really enjoy this book. Mostly because I could really relate to the writers of the books and plus I really agree with the contents of the book. It was really interesting how I came to a similar conclusion as the writers (being influenced by the same origin - John Bogle).

So for all of you who are interested in taking charge of your own finance while going very deep into different financial topics, I would recommend this book.

With that, I hope that you would enjoy this book. It is really interesting for me. 

Till then,
Stay vested, stay frugal my friends.

Dionysius

Sources:

Bogleheads' Guide to Investing

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