The Bogleheads' Guide to Investing

Taylor Larimore, Mel Lindauer, Michael LeBoeuf

• Publisher: Wiley
• Year: 2014
• Print ISBN: 9781119847670, 9781118921289
• eBook ISBN: 9781118922361
• Edition: 2
• Topic: Personal Development
• Subtopic: Personal Finance

The irreverent guide to investing, Boglehead style

The Boglehead's Guide to Investing is a DIY handbook that espouses the sage investment wisdom of John C. Bogle. This witty and wonderful book offers contrarian advice that provides the first step on the road to investment success, illustrating how relying on typical "common sense" promoted by Wall Street is destined to leave you poorer. This updated edition includes new information on backdoor Roth IRAs and ETFs as mainstream buy and hold investments, estate taxes and gifting, plus changes to the laws regarding Traditional and Roth IRAs, and 401k and 403b retirement plans. With warnings and principles both precisely accurate and grandly counterintuitive, the Boglehead authors show how beating the market is a zero-sum game.

Investing can be simple, but it's certainly not simplistic. Over the course of twenty years, the followers of John C. Bogle have evolved from a loose association of investors to a major force with the largest and most active non-commercial financial forum on the Internet. The Boglehead's Guide to Investing brings that communication to you with comprehensive guidance to the investment prowess on display at Bogleheads.org. You'll learn how to craft your own investment strategy using the Bogle-proven methods that have worked for thousands of investors, and how to:

• Choose a sound financial lifestyle and diversify your portfolio
• Start early, invest regularly, and know what you're buying
• Preserve your buying power, keeping costs and taxes low
• Throw out the "good" advice promoted by Wall Street that leads to investment failure

Financial markets are essentially closed systems in which one's gain garners another's loss. Investors looking for a roadmap to successfully navigating these choppy waters long-term will find expert guidance, sound advice, and a little irreverent humor in The Boglehead's Guide to Investing.

Part I
Essentials of Successful Investing

Chapter One
Choose a Sound Financial Lifestyle

Drive-in banks were established so most of the cars today could see their real owners.

—E. Joseph Grossman

It’s an old statistic that has held very consistent over time. Take 100 young Americans starting out at age 25. By age 65, one will be rich and four will be financially independent. The remaining 95 will reach the traditional retirement age unable to self-sustain the lifestyle to which they have become accustomed.

Without assistance from government programs such as Social Security, Medicare, and Medicaid, many would literally starve. And if you are harboring dreams of the government providing you with a full and prosperous retirement, it’s time to wake up. Although the government won’t let you starve, it’s not committed to making your golden years golden. That’s up to you. A lifestyle totally based on government handouts has always been uncomfortable at best.

With 76 million baby boomers in or nearing retirement, it could get a whole lot worse.

We live in the richest country in world history. Our wealth is enormous and growing. Yet only 5 percent of us manage to become financially independent by age 65. Why is this? More often than not, the answer lies in what we choose to do with the money that comes into our lives.

WHAT’S YOUR FINANCIAL LIFESTYLE?

Although you might not be aware of it, you have chosen the financial lifestyle that you currently live. For purposes of simplicity, let’s look at three common financial lifestyles lived by three different couples. As you read about each lifestyle, you will likely be reminded of people you know. But the most important question is, “Which financial lifestyle is closest to yours?”

The Borrowers

“Forget about tomorrow, let’s live for today.” That’s the creed of Bill and Betty Borrower. It’s a financial lifestyle literally built on a house of cards—credit cards. To the Borrowers, paying cash for almost anything is unheard of. They drive the newest and best cars, wear the latest high-fashion jewelry and clothing, and live in a great big house, all financed by enormous debts. The big house was purchased with little or no money down and the balance is financed with an interest-only, variable-rate mortgage. Similarly, the cars are leased or financed to the max with hefty car loans. And anything that can be charged to credit cards is charged to credit cards. To the Borrowers, credit cards are one terrific deal—almost like free money. Just pay the credit card companies only 2 percent of the balance due each month—forever. It’s one of the first lessons they learned in college.

Bill and Betty are dying to take that luxury cruise that their friends the Braggarts took and rave about. Unfortunately, the price is light-years past their credit card limits. However, there is a ready source of financing nearby. As fate would have it, Bill and Betty’s home has appreciated substantially. So they simply take out a home-equity loan and go cruising. Better yet, since the interest on the loan is tax deductible, part of the money spent to take the cruise is courtesy of Uncle Sam. Isn’t America great?

Unless the Borrowers make drastic changes, their financial future is headed over a cliff. Not only are they failing to build wealth, they’re building negative wealth, better known as debt. A job loss here, an accident or illness there, and the Borrowers’ high living is history. Cars are repossessed. The mortgage is foreclosed, and they are forced out of their home. They declare bankruptcy, and many of their prized possessions are auctioned off to pay creditors. Friends and neighbors are totally shocked, and remark, “They appeared to be doing so well.” (In Texas, this syndrome is known as “big hat, no cattle.”) Bill and Betty declare themselves victims of bad luck. The reality is that they robbed tomorrow to pay for today.

The Consumers

Fortunately, most Americans are more responsible than the Borrowers. Instead, their financial lifestyle more closely parallels that of Chad and Cathy Consumer. While the Borrowers spend with a credit card mentality, the Consumers spend with a paycheck mentality. Instead of borrowing to the max, Chad and Cathy spend to the max based on their combined net incomes. They look at their take-home pay, see how much it is, and then go out and buy as much stuff as they can afford. After all, isn’t that why they work?

Like most Americans, Chad and Cathy can’t afford to pay cash for major purchases such as a home, a new car, or that big-screen HDTV like the one their neighbors have. When it comes to making a major purchase, the buying decision usually boils down to finding the answer to the magic question:

Can we afford the monthly payments?

They never stop to consider how much they’re adding to the cost of the purchase or how long they will be paying for it. Details like that just don’t interest them. If they can swing the payments, they’re buying the goods. Their financial lifestyle is all about earning to spend.

Chad and Cathy have heard about Roth IRAs, where they can accumulate money tax-free for retirement. And both of their employers have 401(k) plans in which the employer provides a company match of any money that they are willing to save and invest on a tax-deferred basis. However, they pass up the offers of free money and the opportunity to build wealth tax-free. Of course, they would like to save. Unfortunately, there are too many things they need right now: ...

Table of contents

• Cover
• Table of Contents
• Acknowledgments
• Foreword
• Introduction
• Part I: Essentials of Successful Investing
• Part II: Follow-Through Strategies to Keep You on Target
• Appendices
• About the Authors
• Index
• End User License Agreement