An Interview with a 'Boglehead'

Though not the Robert XXX interviewed, this model is representative of most bogleheads who are computer literate.

Robert XXX, known as Bob, is a “boglehead.” This means he is inspired by the investment philosophy of John (Jack) Bogle and uses it to manage his own money. In a nutshell (from Investopedia) “Jack Bogle's investing philosophy advocates capturing market returns by investing in broad-based index mutual funds that are characterized as no-load, low-cost, low-turnover and passively managed.”

The angular and trim retired Bob, a New York City resident, is not alone. He is one of many followers of Bogle. In fact, there are so many that these admirers formed a club of sorts known collectively as the Bogleheads. The group has an internet presence with help for anyone who wishes to join their ranks.

Recently, Mr. XXX took time to answer some questions via e-mail about his personal experience as a boglehead. My questions are in blue. His responses are below.

What do you see as the advantages of being a Boglehead?

It works!

What strategies do Bogleheads use?

1. Invest early and often. Take advantage of the “magic” of compound interest.

2. Never bear too much or too little risk. Even a young investor should allocate part of his portfolio to bonds. But too much in bonds, even for an elderly investor, may risk not having enough growth to fund ones long term goals.

3. Diversify. By owning mutual funds holding large number of stocks, one reduces risk with no reduction in expected return.

4. Never try to time the market. Many studies have shown this is a “losers” game. Typical mutual fund investors actually perform far worse than the mutual funds they invest in because they tend to buy after a fund has done well and tend to sell what they own when it has done poorly.

5. Use index funds when possible. The average actively managed mutual fund underperforms index funds. Accept what the market gives. Don’t try to beat it.

6. Keep costs low. Studies have shown this is the single best predictor of mutual fund performance. And even a small difference in annual return will have a huge effect on the ending value of a portfolio held 30 or 40 years.

7. Minimize taxes. Take full advantage of tax-advantaged accounts such as a 401(k) or IRA. Take advantage of low income years when one’s tax rate is low, to fund a Roth rather than a traditional retirement account. If one also has a taxable investment account, use it for stock funds, and place assets like bonds and REIT funds in tax-advantaged accounts.

8. Invest with simplicity. Generally one will get about the same return with 3 broadly based funds as with 20. Such a portfolio is easier to keep track of, especially for a surviving spouse.

9. Stay the course. Choose a stock:bond allocation and stick with it. Rebalance to that allocation when necessary. For example, if one has decided upon a 50:50 allocation, but a rising stock market has made it become 60:40, sell stocks and buy bonds. On the flip side, in a stock market collapse such as occurred in 2008-2009, it’s important not to give into panic and sell stocks. Even though it’s psychologically difficult to buy stocks at such a time, one should at least not sell.

A more thorough discussion of these points is at https://www.Bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy

What size portfolio do you think is optimal for the Boglehead methodology? In other words, is it still workable for a high-net-worth portfolio ($20-30 million) or above?

The Boglehead methodology is general enough to make it suitable for any size portfolio. However, it is most beneficial for those whose financial resources barely cover their needs. They can’t afford to make poor investment decisions that people with excess resources can.

Someone who can keep all their bonds in a retirement account generally has no need for tax-exempt bonds. But wealthy people often don’t have room in their retirement accounts for all their bond allocation and must hold some of it in a taxable account. A tax-exempt bond fund is often a good choice for this.

What impact has being a Boglehead made on your life?

It has made me more modest regarding my investment skills. I no longer try to pick individual stocks that will outperform the market because I defer to the intelligence of the market. I just invest the equity portion of my portfolio in broad-based index funds such as the Vanguard Total Stock Market fund and am satisfied to earn the market return. I don’t attempt to select individual corporate or tax-exempt bonds either. Instead I use broad based mutual funds. The only individual bonds I hold are US Treasuries, primarily Treasury Inflation-Protected Securities (TIPS). I’ve postponed taking Social Security until age 70. This all means I have little worry about outliving my assets and little stress over investment matters in general.

My Comment

Clearly the boglehead strategy has worked for Robert XXX. The question is, does this straightforward approach achieve the best results for every portfolio, especially those in the high-net-worth category? This is our next question to pursue.

For more on John Bogle:

Exchange-Traded Funds: Dumb Money?