Publisher: John Wiley & Sons (2006)
Page count: 256 pages
As you have no doubt guessed from the title, this is a book on investments and personal finance. It is named after the founder of The Vanguard Group, John Bogle, one of the pioneers behind the creation of low-cost index funds. The Bogleheads, as they call themselves, are avid fans of this particular style of investments, essentially the idea that you should save a given amount every month into an index fund (or set of index funds) and then simply forget about those funds until it is time to rebalance your portfolio again. The rationale being that if you follow the stock market news and watch your portfolio obsessively, you are far more likely to let yourself be influenced by market fluctuations, hype, “experts” predicting the next big winner/loser, and so forth, so that you in many instances end up buying high and selling low. Instead, if you only look at your portfolio at pre-determined intervals in order to rebalance it (i.e. changing how much you allocate towards equity funds vs. bond funds, etc. according to a weighting regime), you will instead automatically redirect your funds towards the underperforming asset class (since you will be relatively overweighted in the other asset classes) and thus end up buying more of the underperforming asset class when it is cheaper, relatively speaking.
Next, the Bogleheads discuss whether you should invest in active or passive funds. Active funds are funds in which a portfolio manager, for a (sometimes exorbitant) fee, will try to outperform the market by picking what he or she thinks are the future winners on the stock exchange. Passive funds, also known as index funds, are far cheaper as they simply copy a given index such as the S&P500 by buying the stocks of the index proportionally to the weightings of the constituents in that index. The Bogleheads do not deny that successful active funds exist – by definition if someone loses a lot, someone else won as the markets are a zero-sum game. What they do question, though, is whether it is realistic to think that you can pick the future winning funds when empirical studies have shown time and again that past performance is no indication of future success. Consequently, the Bogleheads suggest that you focus on the one thing you can influence, and that is cost: index funds are typically sold at rock-bottom prices of 0.2% or less. In comparison, active funds often cost 2% or more once you add up all the fees. The difference may not sound like much, but given the amazing power of compounded interest it can make a world of difference. Thus, while investing in index funds means you won’t beat the market – ever – you won’t lose more than the market did, either, and more of your money will be invested in your portfolio as opposed to going towards the portfolio manager’s salary or bonus.
Somewhat simplified, these two concepts summarise the main ideas of the book. The Bogleheads then go on to apply these concepts to different scenarios such as saving for college, saving for retirement, and so on.
So what did I think of it? Well, mostly I liked it. Working in the financial sector myself (though not on Wall Street I hasten to add!) and having been through the curriculum for level I and II of the CFA program, there were no major revelations for me in this book. I also found the book a little outdated in that some of the examples use interest rates that are wholly unrealistic in today’s financial crisis environment. Moreover, a newer book would no doubt also reflect the lessons of those who lost their life’s savings in the stock market crashes we have seen in the past five years as a timely warning of the many risks of the stock markets. The book could therefore do with some updating.
That said, I would still recommend this book wholeheartedly because I think the concepts of it are timeless and valid even in today’s turbulent markets. It is moreover a good introduction to investments aimed at Average Joe written in an entertaining and irreverent style that makes it surprisingly easy to read even if you have no background in economics or finance. Lastly, in my opinion it is unfair to say that this book paints an overly rosy picture of low-cost equity index funds as the panacea of personal finance investments, particularly when you are rapidly approaching your retirement. The few reviewers who claim this neglect the Bogleheads’ message on the importance of rebalancing your portfolio: when you are young, you can afford the greater risk associated with investing in the stock market because the expected returns in the long run more than compensate you for this added risk. This is particularly true in today’s low interest rate environment – if you just leave your money in the bank at close to 0% interest rates, inflation will over time reduce your purchasing power so that you are in fact steadily losing money over time without the up-side potential of the equity market. However, as you grow older, the Bogleheads recommend directing an increasing part of your monthly savings towards safer asset classes such as fixed income where returns are lower but less risky, and coupons provide a predictable income stream. In my view, therefore, this book provides sound investment principles regardless of whether you are 25 or 65.