What Should I Be Doing with My Investments?

Jack Bogle For the Win

Jack Bogle, the legendary investing pioneer who founded Vanguard and the first index mutual fund back in 1975, wrote the classic book, The Little Book of Common Sense Investing: The Only Way To Guarantee Your Fair Share of Market Returns, which spawned generations of loyal followers, self-proclaimed Bogleheads (who in turn spawned one of the most informational financial chat forums I’ve ever encountered).


Bogle’s book stressed common sense investing and took the financial industry to task for providing no value to investors but instead alluring them with high returns (which he proves - via simple math - are rarely sustained for long-term periods) and bleeding them dry in fees and hidden costs.


Consider what the chief investment officer of the Yale University Endowment Fund said, “A miniscule 4 percent of funds produce market-beating after-tax results with a scant 0.6 percent (annual) margin of gain. The 96 percent of funds that fail to meet or beat the Vanguard 500 Index Fund lose by a wealth-destroying margin of 4.8 percent per annum.”

What Is Common Sense Investing

Bogle stated that all anyone needed to invest in was three low-cost index funds: a US Total Market Fund (for example, ticker: VTSAX), an International Total Market Fund (for example, ticker: VTIAX), and a US Total Market bond fund (for example, ticker: VBTLX). That’s it. Three. You have millions of dollars to invest? Three funds. You have thousands of dollars to invest? Three funds. Bogle said it should be the same for everyone.


(The tickers provided are mutual funds that I personally invest in through Vanguard. I prefer mutual funds over exchange traded funds mainly because you can invest exact dollar amounts into mutual funds, and it’s easier to rebalance your portfolio. Please see the Bogleheads Wiki page on Mutual Funds vs. ETFs - Overall, there’s no clear winner, it’s really just your preference.)


If you would rather invest in ETFs, my main examples would be: iShares US Total Market Fund (ticker: ITOT), iShares International Total Market Fund (ticker: IXUS), and iShares US Total Market Bond Fund (ticker: AGG). You can purchase these through almost any online brokerage (like Fidelity, Charles Schwab, TD Ameritrade, etc). I have an account at Fidelity which does not change commissions on these ETFs.) Additionally, if your 401k provider does not have these specific options, there are likely low-cost index funds that are very similar.


One of the most important attributes of these index funds is they cost next to nothing compared to traditional financial advising. The three Vanguard funds (US Total Stock, International Stock, and US Bond) cost 0.04%, 0.11%, 0.05%, per year, respectively. So if you invested $10,000 total ($6,500/$2,500/$1,000, respectively), you’d be paying next to nothing: $5.85 a year in fees (or 0.06%)!


A recent Wall Street Journal article ("Six Questions to Ask A Financial Adviser About Fees") posted this graphic of the average fees charged by a financial advisor:

The Wall Street Journal Price of Advice
Source: Wall Street Journal

Now let’s say your $10,000 is invested by a financial advisor, and you are charged 1.75% plus the cost of these three low-cost index funds (and I’m being generous because usually you’ll be in higher cost investments). You’ll now be paying 2.3% per year ($230 + $5.85 = $235.85), or 40 times more than what you paid on your own! As the years go on, this discrepancy in fees will put a ton of money in your advisor’s hand and leaving you with much less. As Bogle says, it’s simple arithmetic.


All that being said, financial advisors can provide value to people, particularly pro athletes, who do not have the time to learn the many concepts of investing and prudent money management (like budgeting, insurance, estate and retirement planning). The devil lies in the details: finding the right advisor who doesn’t overcharge you and solely acts in your best interest.


But if you invest a little bit of time in educating yourself and understand that over time you cannot beat the average index returns, you can do this!

Only Invest in Three Funds???

You may think to yourself that three funds sounds risky, but you need to understand this isn’t like investing in three individual companies. Each fund’s goal is to provide investment to the entire U.S. or international public market. By holding one fund, you are invested in an incredibly diversified basket of companies. Vanguard’s US Total Market Fund is invested in 3,646 companies, it’s International Fund is invested in 6,298 companies, and the US Total Bond Fund is invested in 8,397 bonds.


These investments are “market-capitalization weighted,” which sounds like a mouthful, but means that each fund holds a higher percentage of bigger companies like Google and Apple than smaller companies. This makes sense because these huge companies have much more revenue and earnings to share with us than the smaller companies.


Take a look at the Top 10 Holdings for Vanguard’s US Total Stock Market Index:

Vanguard Total Stock Market Index Fund Top 10 Holdings
Source: Vanguard

Even though the top ten largest holdings equal 18.1% of total investment in this fund, if the biggest company - Apple - goes bankrupt and is worth $0 tomorrow (keeping this simple and not including the MASSIVE effect this would actually have on the global economy) - the fund would only los 3% of value. Crazy, right? That’s the beauty of diversification in an index fund.

Stocks and Bonds, Oh My!

What isn’t the same for everyone is your asset allocation amongst the three funds - what percentages do you invest in each? This is the one question that only YOU can answer. It depends on your risk tolerance, time horizon, and very importantly, your emotional ability to deal with the swings of the market and stay the course of your asset allocation.


Generally, the more risk you can handle, the less you need in the bond fund. Jack Bogle’s rule of thumb was your percentage in the bond fund should be your age. Others will say your age minus 10 is the percentage of bond funds.


There is no one answer for asset allocation, but you must be comfortable with your allocation so that you will not overreact in the event of a market crash or downturn. Your emotions are easily one of the biggest factors that will determine your performance over time. As business savant Charlie Munger says, “Don’t just do something, stand there,” or as his partner in crime, Warren Buffet says, “returns decrease as motion increases.”


Using myself as an example for asset allocation, I am a bit more risky than the average investor so I only have 15% in bonds and then 25% in the Total International Stock Market Fund and 60% in the US Total Stock Market Fund. I have been through the 2008 crash with my investments, and I am confident I will not panic and sell investments in the event of a crash; instead, I hope to have some available cash to invest.

Buy and Hold

Outside of periodic rebalancing (rebalancing once a year is easiest) to maintain your asset allocation, you should have a long-term holding period (at least 10 years) for your investments until your retirement or you reach the goal your investments were made towards.

Don't Forget Your Emergency Fund

Before you invest money into the market, ensure that you have an emergency fund to access in case of emergencies, drastic life changes, job loss, and any other unforeseen event. A conservative rule of thumb is to have 9-12 months of all expenses in savings. Additionally, do not put money in to the market if you can’t handle a 50% drop in value of your investments. It’s happened before, and it will happen again.

The World Needs More Bogles

It’s amazing how an idealistic man driven by common sense and the interests of all people can create a movement that has changed the lives of millions. He - and his Bogleheads - are the heroes of the common investor, the messengers of common sense.


Bogle’s entire worldview is summed up in a quote he provides in his book from the late journalist Michael Kelly:


“The driving dream (of the idealist) is that if he could only explain things to enough people,  carefully enough, thoroughly enough, thoughtfully enough - why, eventually everyone would see, and then everything would be fixed.”