p.91
Random Walk – “A drunk standing in the middle of the road whose future movements can only be guessed.”
Efficient markets and random walk are obscenities on Wall Street, where investors are constantly told that Wall Street’s superior knowledge can make it easy to beat the market (for a fee). Nearly all the academic community disagrees, but without advertising dollars their research results are generally unknown by the investing public.
p.98
Jack Bogle’s rough guide is that bonds should equal our age
p.100
Bulls make money, bears make money, but hogs get slaughtered.
p.101
We recommend limiting international investments to a maximum of 20 percent of a global equity portfolio.
p.104
Young Investor’s Allocation
55% – Domestic large-cap stocks
25% – Domestic mid/small-cap stocks
20% – Intermediate-term bonds
Middle-Aged Investor’s Allocation
30% – Large-cap domestic stock fund
15% – Small/mid-cap funds
10% – International Funds
05% – REITs
20% – Intermediate-term bond fund
20% – Inflation Protected Securities
Early Retirement
30% – Diversified domestic stocks
10% – Diversified international stocks
30% – Intermediate-term bonds
30% – Inflation protected securities
Late Retirement
20% – Diversified domestic stocks
40% – Short or Intermediate-term bonds
40% – Inflation protected securities
“Asset allocation is critically important; but cost is critically important too – All other factors pale into insignificance.” -Jack Bogle
p.106
“Your portfolio mix of asset classes will be far more important in determining its performance than will be your selection of individual securities or mutual funds.” – John Merrill
p.111
Types of Mutual Fund Fees
Purchase Fees
Exchange Fees
Account Fees
Redemption Fees
Management Fees
12b-1 Fees
Other Expenses
p.116
The expense ratio is the only reliable predictor of future mutual fund performance.
p.126
Portfolio Tax Management Strategies
Keep turnover low
Use only tax-efficient funds in taxable accounts
Avoid short-term gains
Buy fund shares after the distribution date
Sell fund shares before the distribution date
Sell profitable shares after the new year
Harvest tax losses
p.138
Traditional IRA
Your income is too high for a Roth
You expect your income in retirement to be less than it is now
You expect your future tax rate to be lower
You need the tax deduction now
Traditional IRAs may provide better protection from creditors
Roth IRA
You expect your future tax rate to be higher
Roth IRA savings are worth more. The reason is that the Roth IRA contains after-tax dollars, which are more valuable than the pretax dollars in a regular IRA
You want access to your funds. Roth IRAs incur no penalty on early withdrawal of contributions
Withdrawals are not reportable income; therefore, they do not affect Social Security payments or increase adjusted gross income
No Required Minimum Distribution (RMD) at age 70 1/2. This allows continued growth for the benefit of heirs
Eligible contributions can be made at any age, unlike traditional IRAs where contributions must stop at age 70 1/2
Heirs pay no income tax on proceeds, as they do with traditional IRAs
p.144
“The Efficient Frontier” by William Bernstein.
p.154
Morningstar Mutual Funds is, by far, the best source for mutual fund information… So should we buy funds based on (their) star ratings?… Over the past decade Morningstar’s five-star equity funds have earned an average 5.7 percent against a 10.3 percent for the Wilshire 5000.
p.155
“Neither of the ratings systems, nor the alternative ratings systems, are able to successfully predict winning funds.” – Matthew Morey
Don’t rely completely on Morningstar
Vanguard did a study of past performance for institutional investors. It found that of the top 20 US equity funds during the 10-year period through 1993, only one stayed in the top 100 subsequent 210 year period.
p.156
Not only does mutual fund performance fail to persist, but… asset class performance also fails to persist beyond a few years.
Of the 50 top performing funds in 2000, not a single one appeared on the top 50 list in either 1999 or 1998
Market timing – “A strategy based on predicting short-term price changes in securities, which is virtually impossible to do.” – The Motley Fool
p.163
Bogleheads held a contest on market prediction, to show how hard it was to time the market
p.166
“There is simply no way under the sun to forecast a fund’s future returns based on its past record.” -Jack Bogle
“For the 20 years from 190 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade.” – William Bernstein
“Buying funds based purely on their past performance is one of the stupidest things an investor can do.” -Jason Zweig
p.171-172
College savings options
Personal savings
Custodial accounts (UGMA & UTMA)
U.S. Savings Bonds
Coverdell Educational Savings Accountvs (Education IRAs)
529 Qualified Tuition Plans (QTP), including education savings accounts and prepaid tuition plans
IRA withdrawals
Some additional funding options available to you
p.184
“the terms financial professional and financial planner are meaningless. Many so-called financial professionals are really financial salespeople.”
It’s better to get your advice from a CPA instead
p.212
“Just because you’re paranoid doesn’t mean they aren’t out to get you.” On the noise
“There are only two ways to outperform the stock market: By choosing superior investments and/or through superior market timing. The research conclusively shows that the ability to do either with any degree of consistency is so rare that it might as well be chalked up to chance.”
p.214
In order to fill all the space and time, the investment media churn out massive amounts of what has become know as investment pornography. Unlike valuable information, investment pornography is designed to hold your attention, get you excited about beating the market, and get you to buy products or information with the hope of getting rich. When you stop and think about it, calling it investment pornography is actually somewhat flattering. Real pornographers deliver what they promise. Investment pornographers are more like the hooker who takes the customer’s money, sits on the side of the bed telling him how good it’s going to be, and then leaves. It may be exciting, but its ultimately unfulfilling.
p.217
Three types of investment experts
1. Those who don’t know what the market will do and know they don’t know
2. Those who don’t know what the market will do but believe they know
3. Those who don’t know what the market will do and get paid to pretend they know
p.226
Despite the statistical impossibility, at least 70 percent of Americans believe they are above average. The vast majority of us think we are above average drivers, above average intelligence, above average in appearance, and so on. Our need to believe in ourselves and feel in control of our future serves a very important and useful purpose. It gives us the courage to try and achieve successes in life that we might not otherwise attempt and achieve.
p.227
Mensa is an exclusive society whose membership is restricted to persons scoring in the top 2 percent on IQ tests. During a 15 year period when the S&P 500 had average annual returns of 15.3 percent, the Mensa Investment Club’s performance averaged returns of only 2.5 percent.
The stock market is a very expensive place to learn that neither you nor anyone else is endowed with the gift of investment prophecy.
p.233
Escape emotional traps
Recency bias
Overconfidence
Loss aversion
Paralysis by analysis
The endowment effect
Mental accounting
Anchoring
Financial negligence
p.272
Last suit you wear doesn’t need pockets
1. Choose a Sound Financial Lifestyle
2. Start Early and Invest Regularly
3. Know what your Buying: Part One
4. Know what you’re Buying: Part Two
5. Perserve your buying Power with Inflation-Protected Bonds
6. How Much do you Need to Save?
7. Keep it Simple
8. Asset Allocation
9. Costs Matter
10. Taxes: Part One
11. Taxes: Part Two
12. Diversification
13. Performance Chasing and Market Timing are Hazardous to Your Wealth
14. Savvy Ways to Invest for College
15. How to Manage a Windfall Successfully
16. Do you Need an Advisor?
17. Track your Progress and Rebalance when Necessary
18. Tune out the Noise
19. Mastering Your Investment Means Mastering Your Emotions
20. Making Your Money Last Longer than you do
21. Protect your assets by being well insured
22. Passing it on when you pass on
23. You can do it
