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6 September 2017 Financial Analysts Journal Book Review

The Bogleheads’ Guide to Investing (a review)

  1. Murad J. Antia, CFA
This book, which introduces novice investors to Vanguard Group founder John Bogle’s approach to passive investing, is one investment guide that does not intimidate readers into thinking that investing is so complicated they need professional help. On the contrary, it encourages laypeople to oversee their own investments.

Bogleheads—investors who have adopted Vanguard Group founder John Bogle’s investing philosophy—have morphed from a loose association into a formal group organized around a website that attracts more than 50,000 visits daily. This second edition of The Bogleheads’ Guide to Investing introduces investors to the Boglehead approach to passive investing. Authors Taylor Larimore, Mel Lindauer, and Michael LeBoeuf are all well over 70 years of age, are financially set, and have no hidden agenda. They do not work for Vanguard or any other company, nor do they earn commissions from selling investment products. Furthermore, they would be content if readers borrowed the book from a friend or the library instead of purchasing it.

The Bogleheads’ Guide to Investing covers a wide range of topics, including insurance, behavioral economics, modern portfolio theory, and tips on saving money. Analytical tools (e.g., bond duration) are explained conceptually and without the use of formulas. Although novice investors, for whom the book is intended, might not comprehend all the material presented, that is probably in line with the authors’ intent. They would deem their mission accomplished if readers got the gist of the book and joined the band of Bogleheads. The core of their message is that it pays to be an inactive investor (“lazy” is the word they use), that it is possible to match the market averages with little effort or practice, and that, paradoxically, “average” performance is better than average in a world where most investors get a grade of D or worse.

To buttress their viewpoint, Larimore, Lindauer, and LeBoeuf cite empirical studies that show that the majority of active managers underperform passive managers, that market timing is fraught with peril, that forecasts of investment strategists and newsletters are not worth the paper they are printed on, and that expenses are the only reliable predictor of performance. Chapter 18, “Tune out the ‘Noise,’” implores investors to ignore the barrage of investment sales pitches because their promises are fictitious at best and financially disastrous at worst.

The authors emphasize the need to start saving and investing early, adopt an age-appropriate asset allocation, index, and diversify adequately while minimizing fees and taxes. They recommend using online calculators to determine the amount of savings needed to retire comfortably and to demonstrate the corrosive effect of high fees on wealth building. One chapter is devoted to inflation-protected bonds and the negative effect of taxes on real returns. During periods of high inflation, they report, investors in high-margin tax brackets can end up with less spending power than when they began investing.

Larimore, Lindauer, and LeBoeuf do not agree with Bogle’s position that overseas investments are not needed for a well-diversified portfolio. They contend that investors would benefit from allocating 20%–40% of their equity holdings to international stocks but do not specify the appropriate breakdown between developed and emerging markets. The sweet spot for investing over the next decade could well be emerging-market equities, which currently have lower valuations and higher growth prospects than those of developed markets.1 Moreover, developed economies—such as Japan, the European countries, and the United States—have slow-growing and older labor forces, which limits economic growth. In contrast, the median age in emerging markets is 30, which implies better economic growth prospects.

The chapter on behavioral economics does an admirable job of explaining the detrimental effect of unchecked emotions on building wealth. Although a time-proven investment process is fairly simple and straightforward, staying faithful to the process can be a daunting task, especially for overconfident investors who believe they are endowed with the gift of investment prophecy. The authors should also have recommended that investors not monitor their portfolios too frequently, which can lead to excessive trading or rebalancing during bouts of market volatility. This advice would be especially true for a retired investor who has built a substantial nest egg. The prospect of losing 30% on a $1 million portfolio would be far more emotionally challenging than it would be for a younger investor with a $100,000 portfolio.

This second edition suffers a bit from outdated numbers in its simulations. For example, a simulation in the book shows an investor’s wealth doubling every nine years, assuming an annual return of 8%. At current stock market valuations and interest rates, it would be difficult for a balanced portfolio to earn an 8% return in the future. Later in the book, the authors present estimated returns for different asset classes, provided by the investment management firm Portfolio Solutions. Small-company value stocks are the only asset class forecasted to earn 8%, which means that a balanced portfolio would necessarily earn less. Such contradictory information might confuse the reader—or worse, instill unrealistic expectations. At one point, the authors argue that investors would benefit from an international stock allocation of 20%–40% of their equity holdings, but later, they state that investors would benefit from having 20% of their equities invested in foreign stocks. Again, such inconsistencies can confuse the novice investor.

The Bogleheads’ Guide to Investing does not cover new ground, nor does it attempt to. It does, however, serve as a useful introduction for novice investors, many of whom are afraid to oversee their own investments. The declining availability of defined benefit plans suggests that an increasing number of workers will be responsible for investing and accumulating sufficient wealth for a comfortable retirement. Part of the wealth accumulation process, as the authors make clear, is to avoid paying exorbitant fees to active managers who are not earning their keep.

This is one investment book that does not intimidate readers into thinking that investing is so complicated they need professional help. On the contrary, together with support from such websites as, The Bogleheads’ Guide to Investing encourages laypeople to oversee their own investments. And it seems that investors are getting the message. In 2014, they poured a record $216 billion into Vanguard funds,2 because, as Bogle has said, Vanguard funds give investors a “fair shake” for their money. Kudos to the authors for their public service.


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