Bogleheads: Individual Equities Or Not?

Bogleheads is a community of investors who follow the investment philosophy of Vanguard founder John Bogle. Bogleheads emphasise the importance of regular saving, broad diversification, and sticking to an investment plan regardless of market conditions. While Bogleheads typically invest in index funds, some do invest in individual equities.

Bogleheads advocate for a simple investment strategy that anyone can follow. They recommend investing in a small number of low-cost, well-diversified index funds that approximate the whole market. This guarantees average returns and eliminates the risk of trying to pick individual stocks or sectors that might outperform.

However, some Bogleheads believe that investing a small portion of one's portfolio in individual stocks can be a fun and rewarding strategy. They argue that if one is willing to accept the risk of losing it all, investing in individual stocks can be a harmless hobby.

Ultimately, the decision to invest in individual equities depends on one's risk tolerance, investment goals, and personal preferences. Bogleheads who choose to invest in individual stocks typically keep these holdings to a small percentage of their overall portfolio to minimise risk.

Bogleheads' investment philosophy

The Bogleheads investment philosophy is inspired by Vanguard founder and investor advocate John Bogle. The philosophy emphasizes the following:

• Starting early and living below your means: Bogleheads should try to spend less than they earn, which means having money left over at the end of the month. This is achieved by establishing a household budget that distinguishes between needs and wants.
• Regular saving: Bogleheads should save a significant portion of their income each month to ensure a comfortable retirement.
• Broad diversification: Bogleheads should avoid trying to pick specific securities or sectors of the market that may outperform in the future. Instead, they should invest in funds that are widely diversified or approximate the whole market.
• Simplicity: Bogleheads should keep their investment strategies simple, as simplicity is the master key to financial success.
• Sticking to an investment plan: Bogleheads should avoid trying to time the market and stick to their investment plan regardless of market conditions.

Bogleheads follow a few simple investment principles that have historically produced risk-adjusted returns greater than those of the average investor. These principles are based on Nobel prize-winning research on Modern Portfolio Theory and the Capital Asset Pricing Model. They include:

• Living below your means: Spend less than you earn and establish a household budget.
• Developing a workable plan: Establish a sound financial lifestyle and create a financial plan that includes savings for retirement.
• Never bearing too much or too little risk: Understand your risk tolerance and create an asset allocation that includes both stocks and bonds to reduce volatility.
• Investing early and often: Start saving early and regularly to take advantage of compound interest.
• Investing with simplicity: Keep your investment strategy simple and invest in a small number of diversified funds.
• Using index funds where possible: Invest in low-cost index funds to buy into the whole stock market.
• Never trying to time the market: Don't try to predict the market, create a good plan, and stick to it.
• Staying the course: Stick closely to your investment plan, even during market downturns.

Bogleheads' approach to risk

Bogleheads is a community of investors who follow the investment philosophy of Vanguard's founder, John Bogle. The Bogleheads approach to risk is nuanced and tailored to individual circumstances. Here is an overview of their philosophy on risk:

• Never Bear Too Much or Too Little Risk: Bogleheads emphasise the importance of knowing your risk tolerance, which is your ability to stick to an investment plan through market volatility. They suggest asking yourself if you would sell during a bear market to assess your risk tolerance honestly.
• Balancing Risk and Return: Bogleheads believe that risk and return are directly related. To achieve decent returns, investors need to own stocks, which offer the potential for good returns but also carry higher risk. To manage this risk, Bogleheads advocate for a mix of stocks and bonds, with the latter being less volatile.
• Asset Allocation: The key question is "How much in bonds?" Bogleheads consider factors such as ability, willingness, and need to take risk when determining asset allocation. They suggest that younger investors can handle more risk and thus allocate more to stocks, while older investors may need to increase their bond allocation as they have less time to recoup losses.
• Age in Bonds: John Bogle recommends a "rule of thumb" of holding your age in bonds. For example, if you are 45, 45% of your portfolio could be in high-quality bonds. However, this is just a starting point and should be adjusted based on individual circumstances.
• Risk Tolerance Assessment: Bogleheads suggest assessing risk tolerance by considering attitude towards risk, investment time horizon, and other factors like net worth and stability of income. They offer various tools and frameworks to help investors determine their risk tolerance, including questionnaires and a bear market scenario exercise.
• Emotional and Psychological Aspects: Bogleheads emphasise the emotional and psychological aspects of risk tolerance. They suggest considering how you would react during a bear market, such as whether you could sleep well at night with your current asset allocation.
• Avoid Overestimating Risk Tolerance: Bogleheads caution against overestimating your risk tolerance. They advise investing conservatively until you have experienced a bear market to truly understand your risk tolerance.
• Simple and Diversified Portfolios: Bogleheads promote simplicity and broad diversification in their portfolios. They recommend low-cost index funds that track the whole stock market, rather than trying to pick individual stocks or time the market. This approach provides broad diversification at a low cost.
• Practical Considerations: While the Bogleheads philosophy is sound, critics argue that it may be impractical for some people. Saving enough money to implement the strategy can be challenging, and few people build wealth by following this approach. Additionally, the community is criticised for paying insufficient attention to asset class correlations, which can impact returns and risks.

Bogleheads' approach to asset allocation

Bogleheads is a term used to refer to a group of investors who follow the investment philosophy of Vanguard's founder, John Bogle. Bogleheads emphasise starting early, living below one's means, regular saving, broad diversification, simplicity, and sticking to an investment plan regardless of market conditions.

The Bogleheads approach to asset allocation involves dividing an investment portfolio among different asset classes, typically stocks, bonds, and cash. The specific mix of assets in a portfolio is a personal choice and depends on factors such as an individual's risk tolerance, investment time horizon, and financial capacity.

• Living below your means: Bogleheads emphasise the importance of spending less than you earn and saving for the future. This may involve creating a household budget and distinguishing between needs and wants.
• Developing a workable plan: Bogleheads suggest starting with a sound financial lifestyle, including a sensible household budget that covers necessary expenses, discretionary spending, and savings for retirement.
• Understanding risk: Bogleheads believe that investors should carefully consider their risk tolerance and create an asset allocation that matches their ability, willingness, and need to take risk. John Bogle recommended having "roughly your age in bonds", suggesting that older investors should have a higher allocation of bonds in their portfolio to reduce risk.
• Investing in stocks and bonds: Bogleheads acknowledge that stocks provide the potential for higher returns but come with volatility and risk. On the other hand, bonds offer lower returns but are less volatile. A mix of stocks and bonds can provide a balance between growth and risk.
• Simplicity: Bogleheads favour a simple investment approach, often using a "three-fund portfolio" that includes a U.S. total stock market index fund, a total international stock market index fund, and a U.S. total bond market index fund. This type of portfolio provides broad diversification at a low cost.
• Using index funds: Bogleheads typically invest in low-cost index funds or exchange-traded funds (ETFs) to buy the whole stock market or a specific segment, such as international stocks. This approach provides diversification and avoids the high fees associated with actively managed funds.
• Tax efficiency: Bogleheads consider the tax efficiency of their investments, placing tax-inefficient funds, such as bonds, into tax-advantaged accounts. They also use strategies like tax loss harvesting to minimise taxes.
• Not timing the market: Bogleheads focus on creating a good investment plan and sticking to it, rather than trying to time the market. They avoid making emotional decisions based on short-term market fluctuations.
• Rebalancing: Bogleheads periodically rebalance their portfolios to maintain their targeted asset allocation. This may involve adding new contributions to under-allocated asset classes or transferring funds from over-allocated classes.

In summary, the Bogleheads approach to asset allocation emphasises a long-term perspective, broad diversification, low costs, and a disciplined approach to investing. By following these principles, Bogleheads aim to achieve successful investment outcomes while minimising risk and complexity.

Bogleheads' approach to portfolio construction

The Bogleheads approach to portfolio construction is based on a few simple investment principles that have historically produced risk-adjusted returns better than the average investor. These principles are easy to understand and implement and are based on Nobel prize-winning research on Modern Portfolio Theory and the Capital Asset Pricing Model.

Live Below Your Means

This means spending less than you earn and having money left over at the end of the month. It involves establishing a household budget that provides visibility on income and expenses and distinguishing between needs and wants.

Develop a Workable Plan

The first step is to establish a sound financial lifestyle, starting with a sensible household budget that covers necessary expenditures, discretionary items, saving for large items, and retirement. It also involves avoiding bad debt, such as high-interest credit card debt.

Never Bear Too Much or Too Little Risk

It is important to assess your risk tolerance, which is your ability to stick to an investment plan through difficult financial and market conditions. A Boglehead portfolio typically includes both stocks and bonds to balance risk and return. The allocation between stocks and bonds depends on factors such as age, risk tolerance, and financial goals.

Invest Early and Often

Bogleheads emphasise the importance of starting to invest early and saving regularly. They recommend investing a significant portion of income each month, depending on individual circumstances and retirement goals.

Invest with Simplicity

Bogleheads favour a simple portfolio construction approach, often using a three-fund portfolio: a domestic stock "total market" index fund, an international stock "total market" index fund, and a bond "total market" index fund. This provides diversification across over 10,000 worldwide securities and contains every style and cap size.

Use Index Funds Where Possible

Bogleheads generally prefer index funds or exchange-traded funds (ETFs) to actively managed funds due to their lower costs and broader diversification. They recommend investing in total market index funds or ETFs that cover the entire stock or bond market rather than trying to pick individual stocks or sectors.

Never Try to Time the Market

Bogleheads advocate creating a good investment plan and sticking to it through market ups and downs. They avoid market timing and instead focus on long-term performance.

Stay the Course

Bogleheads emphasise the importance of maintaining discipline and sticking to their investment plan, even during market volatility. They typically rebalance their portfolios annually or when their asset allocation deviates from their target.

Bogleheads' approach to portfolio maintenance

The Bogleheads approach to portfolio maintenance is based on a few simple investment principles that have historically produced better risk-adjusted returns than average investors. The approach is inspired by Vanguard founder John Bogle's investment philosophy. Here are the key components of the Bogleheads approach to portfolio maintenance:

• Live Below Your Means: Bogleheads advocate for spending less than you earn and saving the difference. This involves establishing a household budget and distinguishing between needs and wants.
• Develop a Workable Plan: Start by establishing a sound financial lifestyle, including a sensible household budget that covers necessities, discretionary items, savings for large purchases, and retirement.
• Understand Risk Tolerance: Bogleheads recommend owning stocks for long-term growth, balanced with bonds to reduce volatility. The "age in bonds" rule suggests holding a percentage of bonds equal to your age, increasing bond allocation over time.
• Invest Early and Often: Emphasize the importance of starting to invest early and contributing regularly. Take advantage of tax-advantaged accounts like 401(k)s and IRAs.
• Simplicity and Diversification: Bogleheads favour simplicity and broad diversification. They typically invest in a small number of low-cost, widely diversified index funds that track the whole market, rather than trying to pick individual stocks or time the market.
• Asset Allocation and Rebalancing: Determine your asset allocation based on your risk tolerance and investment goals. Periodically rebalance your portfolio to maintain your desired allocation.
• Avoid Market Timing: Bogleheads focus on creating a sound investment plan and sticking to it, rather than trying to time the market. They buy and hold for the long term, ignoring short-term market fluctuations.
• Tax Efficiency: Place tax-inefficient investments, such as bonds and REITs, in tax-advantaged accounts. Use tax-loss harvesting strategies in taxable accounts.
• Emotional Discipline: Recognize how emotions and biases can influence investment decisions. Avoid common behavioural pitfalls, such as chasing performance or reacting to market volatility.

Bogleheads typically maintain a three-fund portfolio, investing in a domestic stock "total market" index fund, an international stock "total market" index fund, and a bond "total market" index fund. This provides broad diversification across fundamental asset classes. They may also extend this to a four-fund portfolio by adding U.S. inflation-indexed bonds or international bonds.

Frequently asked questions