Friday, November 13, 2015

Meeting of the Bogleheads

I became a Boglehead about five years ago when I read the book Boglehead Guide to Investing. It was definitely an epiphany kind of experience. I had always known that there was something more to investing that I was missing. After all, stories of Wallstreet managers getting rich are numerous and stories of suburb investors aren't. The Boglehead Guide to Investing explained why Wallstreet was getting rich and also showed that we as investors didn't have to help them if we wanted to keep the money ourselves. I did want to keep the money myself and so I have over these last five years.

For those who haven't read my past posts on this subject, a brief recap is as follows. I began my investing career as most do by investing in my companies 401k plans. They always did okay during great times and spectacularly bad during bad times. They never seemed to do as well as the market. Then I realized that the big factor was the limiting number of funds that I had to choose from, many of which were heavily weighted in very volatile categories like Real Estate or Technology. I then hired a financial adviser whom I had to pay extra money off the top to manage my retirement accounts. He balanced my funds so that they weren't so volatile during volatile times but as before, they just never seemed to grow as fast as the market was growing in good times but kept pace with the market when it was plunging. This just didn't seem right to me.

That is why I started searching for the answer which I found in John Bogles argument. There are two main reasons why my retirement investments didn't go up as much as the market. The biggest reason was because I was relying on fund managers and financial advisers to predict the future of the market and that is statistically impossible. In any given year, 80% of them do worse than the market. But what about the 20% that do? Bogle then laid out the second reason which is that hidden and non-hidden management fees eat up the investment return making those Wallstreet cats rich. Of those 20% who beat the market in returns, 75% of them don't if you deduct out all the management fees. So of the original 100% he studied, only 5% of all investment managers beat the market that year. Now if you compare the 5% who did year to year for performance, exactly 0% of all investment managers beat the market over the long term. So if the numbers are completely stacked against you and you are definitely going to lose, what do you do?

John Bogle's solution is to invest in unmanaged total market index funds that mirror the market performance. By doing so, I no longer pay some 3.5 to 5% of all my investment money to manage it using financial advisers or 401k plan managers. These people are not cut from the loop but mutual funds still have managers in Wallstreet (the fellows getting rich) that take up to another 5% in what are referred to as "hidden" fees to actively manage those funds. Index funds don't require active management since they just follow the market so the hidden fees can be reduced from that 5% down to ,05%.

So by investing my money by myself into unmanaged index funds, I went from paying 3.5% of all my retirement funds to have someone invest them plus another .75% to 1.5% on a yearly basis of everything I make to just investing them myself and paying 0.05% of everything I make on a yearly basis to pay someone in Wallstreet to keep the funds mirroring the market.

For the last five years, the investments I have been doing myself have mirrored the market exactly in returns and have beaten my financial adviser by 2 to 3% every year. At that rate, by the time I plan on using those funds, they will be double what they would have been if I had continued to stay with my financial adviser. That's a lot of money that I'm not leaving on the table for someone else.

All this is a prelude to a meeting that took place a week ago when I drove to a nearby urban center to meet with other like minded individuals who refer to themselves as Bogleheads. Thanks to some publicity of late on PBS and NPR about all the stuff above, the movement is starting to catch fire. The turnout at the event I drove to was the largest in their history. Although I find lots of information online and in books on the subject, it is still nice to meet other people face to face who have seen the light and realized that they can make themselves rich instead of Wallstreet. Besides being Bogleheads, all of us wished that we had followed this idea back when we first started investing for our retirements so that we would be that much further ahead. It cracked me up when a college student there said the same thing!

We had a fine lunch and a lot of fun talking about investing for our retirements. Since my "local" chapter (two hour drive) holds a meeting twice a year, I will most likely try to attend more of those meetings to connect with others who are like me. Perhaps though what I would really like to do is try to start up a truly local chapter here in my own town and start passing on what I have learned to others. I think it would be a lot of fun.

3 comments:

Kelly said...

Is Vanguard (sp?) an unmanaged fund? There was a time when I enjoyed playing Index Options, but I don't have the time or inclination to stay on top of something like that these days.

Interesting reading. I'll have to look at his stuff a little more closely.

Vince said...

I was reading someplace yo can get a trading licence in Canada if you open a bank a/c there. Something that would be a sight easier for you. Then you could bypass even those fees.

Ed said...

Kelly - Vanguard sells all kinds of funds, but their specialty are low cost index funds. They are managed funds but not what you call actively managed. They don't buy and sell in an attempt to beat the market as most manage funds do. Rather their only goal is to mirror a particular segment. In my case, much of mine is in an index funds that seeks to mirror the S & P 500 Index. The manager of that fund buys stock from the companies that the S&P 500 tracks in proper proportions. Since it doesn't take a rocket scientist to do that, it is why the yearly management fee is 0.05% rather than the upwards of 5% you see in other managed funds.

Vince - I'm not familiar with Canada's stock market but I'm guessing even their index mutual funds have at least some sort of small fee. Otherwise, someone is looking over it for free and not getting paid and I'm sure even in Canada, that isn't happening. Currently, that is the only fee I'm paying because I'm investing the rest myself. Vanguard charges me nothing to set up an account. In fact, because I have enough money invested with them, they will give me free investing advise anytime I call them up. I haven't taken them up on it yet because my investing strategy is extremely simply even for the average person of intelligence.