John Boggle and Passive Index Investment

John Boggle, or by his full name John C. (Jack) Boggle, is the founder of the world’s first retail index mutual fund and Vanguard Group company. John Boggle’s investment philosophy is revolutionary, especially for small investors. It is scientifically based, and more importantly, it works. I read The Boggleheads’ Guide to Investing some time ago. I highly recommend it to anyone who is looking for financial freedom. Buy and sell constantly, predict the market’s direction, hedge, etc… Is it necessary to spend so much time on excitement and to invest? Investing isn’t that hard, says John Boggle. Let’s take a closer look at this philosophy.

Saving

This investment philosophy says to cut your coat according to your cloth. And save as much as possible. In particular, if you have ‘bad’ debts such as credit card debt, you need to close these debts first. If you ask how is ‘good’ debt, I can describe it as borrowing for an investment that will provide you with future income.

Invest early

If you close your debts and start saving regularly, you can begin investing. As a general rule, the earlier you start investing, the better. Because the strength of compound return is dependent on time. For example, someone who starts saving $2,000 a month at age 25 will have more wealth at age 60 than someone who starts saving $5,000 a month at age 40.

Don’t risk too much or too little

You have to invest in stocks to grow your savings. Stocks are risky assets. On the other hand, although bonds provide cash flow, they do not promise returns as much as stocks in terms of total return. However, it is less risky. The shares of these two main financial assets in your portfolio determine how much risk you take. High risk means high return. It would be best to create a balanced portfolio so that you can sleep comfortably at night.

Diversify

Do not choose stocks or sectors. Don’t put all your eggs in one basket. In fact, the origin of this investment philosophy is the Modern Portfolio Theory. According to the Modern Portfolio Theory, the risk is divided into systematic and unsystematic.

The theory suggests that unsystematic risk can be eliminated by creating a portfolio or, in plain English, a basket. In other words, if you invest in a single stock, you assume both systematic and non-systematic risks specific to the company. If you create an extensive enough portfolio, even if a firm performs poorly, the return on your portfolio will not be affected much. Thus, a rational investor eliminates unsystematic risk by creating a diversified stock portfolio.

Systematic risk, on the other hand, is a risk that affects the whole market and cannot be eliminated by creating a portfolio. You can eliminate unsystematic risk by passively investing in a fund that tracks the index. In the long run, you’ll also outperform the vast majority of professional fund managers. For detailed information, you may look at this and Efficient Market Hypothesis and Investment posts.

Don’t try to market timing

Don’t try to time the market by predicting which direction the market will go. Scientific studies show that this effort is futile in the long run. The vast majority of those making efforts in this direction invest by looking at the past performance of assets. Or your emotions get involved as you predict the market’s demand. The result is mostly frustration.

Use index mutual funds

For the small investor, buying the entire stock market or an index like the S&P 500 most inexpensively (a passive index mutual fund or ETF) is the best way to invest in the long run. For example, with this method, you can become a partner in all companies listed in the US capital markets in a single transaction.

Keep costs low

We cannot control markets and prices. However, we can minimize the costs with our choices while investing. The high management fees of actively managed funds can be detrimental to investors in the long run.

Minimize taxes

As a payroll captive, taxes are our highest expense item. For investors, tax is a crucial factor in the long run. Because we have the opportunity to pay less tax with the investment decisions we make. Paying fewer taxes means you can spend more in retirement. In the long run, the tax efficiency of your investments makes significant differences in your rate of return and wealth.

Simplify the investment process

You don’t need to invest a lot of different types of assets for good diversification. John Boggle’s recommendation consists of only two funds: the Vanguard Total Stock Market Index Fund and the Total Bond Market Index Fund. At first, you buy all companies traded in all US markets. On the other, you purchase all bonds with low credit risk. Or you can create a ‘lazy’ portfolio with 3 funds: triple the above pair by purchasing a passive index fund that tracks international stocks. The number of portfolio managers who can surpass the performance of such a portfolio in the long run (20 years and above) is staggering worldwide.

Stay on track

We come to the most challenging part. I guess last week, new investors saw that the market volatility was very high. 🙂 If you are going to create and carry a portfolio with a maturity of 20-30 years, be sure that you will see much more severe crises. What will you do when you visit a third or half of your life savings melt away in a fictional situation like this? If you sell it, your loss will be huge. If you hold on, the markets will make up for your loss after a while. Also, since you buy the whole market, you have almost no chance of losing all of your savings with this approach. If something like this happens, money will be your last concern. 🙂 Also, with this investment approach, you can increase the expected rate of return by rebalancing in times of crisis. Therefore, John Boggle advises you not to change your position.

Conclusion

The investment philosophy of John Boggle and the Boggleheads broadly aligns with my investment philosophy. Of course, living in Turkey complicates the situation a little more. Here we have an unstable political system and the resulting macroeconomic problems. This environment has not changed during my lifetime, that is, for 40-odd years. Unfortunately, I don’t think it will change in the following decades. My first solution to this problem was based on a more stable currency, the dollar, in the accumulation and investment process. Therefore, I do not have any TL assets besides my Borsa Istanbul stocks. Second, by investing in overseas markets, I reduced country risk and began to benefit from the growth of the world economy. The nonsense of the politicians in Turkey threatens my savings less now.

Of course, I am going through a learning process. I had to learn by discovering how to invest in overseas markets cost-effectively. Similarly, I tried to minimize my tax expense by learning about Turkish tax legislation. Naturally, my financial independence portfolio has not yet been as simple as the John Boggle style. However, I will simplify my portfolio as the opportunity arises. Finally, as my investment strategy started to mature, my transaction count started to decrease. For me, investment now consists of half an hour and one or two monthly transactions.

That’s it for today. See you in the following article.