Bogleheads® 2022 Conference – Bogleheads University - Principle 2: Invest Early and Often
00:00:00.000 | (audience applauding)
00:00:03.160 | All right, our next speaker is gonna be Christine Benz.
00:00:09.900 | She is a member of the Boglehead's board of directors.
00:00:12.780 | She is the director of personal finance,
00:00:14.740 | a columnist and podcaster for a renowned
00:00:17.260 | and highly respected website that I will not mention here.
00:00:20.860 | She was previously the director
00:00:22.740 | of mutual fund analysis there though,
00:00:24.420 | supervising 35 mutual fund analysts.
00:00:26.820 | She is the author of two investing books.
00:00:28.900 | She is an avid cook.
00:00:29.980 | She's a political junkie
00:00:31.220 | and a long-suffering Chicago Cubs fan.
00:00:33.780 | She is also the only keynote speaker
00:00:36.260 | I've ever had at my conference that did not take the money.
00:00:38.620 | It was all donated 100% to charity.
00:00:41.300 | Christine Benz.
00:00:42.280 | (audience applauding)
00:00:45.440 | This is so great to see all of you here.
00:00:52.100 | I am so excited to have the Boglehead's conference
00:00:54.700 | in my hometown of Chicago.
00:00:57.340 | As we were planning it, I was like,
00:00:58.740 | well, something central, gee, where could that be?
00:01:01.660 | So it's really great to see you all here.
00:01:04.920 | I've just been excited about this conference
00:01:08.420 | for several years now as we've had a few false starts
00:01:11.420 | with COVID and it's just exciting
00:01:13.540 | to see it come to fruition.
00:01:15.120 | I'm gonna start with a little bit of a Chicago joke,
00:01:18.300 | which is that you may know one of the things
00:01:22.060 | that you hear in Chicago is to vote early and often.
00:01:25.100 | It's an old sort of admonition
00:01:28.540 | and it's been variously attributed to Al Capone
00:01:31.900 | or I think one of the former mayors, Richard Daley.
00:01:35.220 | We don't know who said it,
00:01:36.200 | but we're not known for great governance here in Chicago
00:01:40.620 | and we're not known for great governance in Illinois.
00:01:43.740 | But that segues nicely into the topic that I was given,
00:01:47.060 | which is invest early and often.
00:01:49.220 | And that's a better practice.
00:01:50.860 | That's good governance for your financial plan.
00:01:53.300 | So I'll talk a little bit about both aspects of this,
00:01:56.940 | getting started early, as well as the often part.
00:02:00.820 | The getting started early part is pretty uncontroversial.
00:02:04.740 | I'm sure we've all seen the slides
00:02:06.620 | that show the value of even a small sum,
00:02:09.580 | getting started early.
00:02:11.460 | The second part is interestingly
00:02:15.180 | a little bit more controversial.
00:02:17.340 | This idea of dollar cost averaging,
00:02:19.620 | investing at regular intervals versus a lump sum.
00:02:23.500 | And so we'll examine that issue.
00:02:26.180 | I come down on the side of dollar cost averaging
00:02:29.260 | simply because that's how most of us
00:02:31.100 | have our money to invest, right?
00:02:32.780 | We have our salaries, we take a piece of them
00:02:35.300 | and we invest them.
00:02:36.960 | It's a little difficult to persuade your employer
00:02:39.600 | to prepay you your salary for the next 10 years.
00:02:43.660 | You simply have your funds to invest
00:02:46.260 | at regular intervals over your investing career.
00:02:49.780 | So Jack Bogle said this well,
00:02:52.340 | this idea of investing early and often.
00:02:54.540 | He said, "Investing is a virtuous habit
00:02:57.100 | "best started as soon as possible."
00:02:59.620 | Very succinct, very Jack Bogle.
00:03:02.500 | He was always so eloquent in talking about
00:03:04.900 | what we should do in our financial lives
00:03:07.340 | and with our portfolios.
00:03:09.180 | So successful investors heed Jack Bogle's great advice
00:03:12.840 | in a couple of ways.
00:03:14.300 | One is to start investing early,
00:03:16.620 | even if it means starting small.
00:03:18.880 | That's why I always evangelize about people with children
00:03:22.780 | who have some sort of earnings,
00:03:25.060 | even if it's mowing lawns or being a lifeguard
00:03:28.700 | or whatever it is,
00:03:29.780 | as long as they have any earnings whatsoever,
00:03:33.060 | they can make a contribution
00:03:34.540 | to some type of a financial account in their own name,
00:03:37.600 | like a Roth IRA, for example.
00:03:40.060 | And the great benefit of that
00:03:42.620 | is that it doesn't have to be the actual funds
00:03:44.900 | that they earned.
00:03:46.240 | You can actually match them on the funds
00:03:48.580 | that they've earned.
00:03:49.580 | But just get those funds working
00:03:52.560 | and when they eventually need the money in retirement
00:03:55.900 | or whatever the case may be,
00:03:57.620 | they'll have a lot more working for them.
00:04:00.460 | And then investing regularly and systematically
00:04:03.180 | is another way that Bogleheads can take the advice
00:04:06.220 | to invest early and often to heart.
00:04:09.140 | So one of the key reasons to get started early
00:04:13.300 | is that when you break it down,
00:04:15.220 | your investment return,
00:04:16.940 | the amount that you have at the end of your time horizon,
00:04:20.620 | depends on three key factors.
00:04:22.860 | So how much you put in,
00:04:24.240 | that's the major determinant
00:04:26.840 | of how much you have at the end, obviously,
00:04:29.260 | how long you invest,
00:04:30.920 | and the rate of return that you're able to earn.
00:04:34.100 | This is all pretty obvious.
00:04:35.960 | The thing that we might think a little less about
00:04:38.500 | is that that third item
00:04:40.660 | is something that's almost completely outside of our control.
00:04:44.720 | Certainly we have some discretion over what we invest in,
00:04:47.900 | but we just don't know how the market will behave
00:04:50.560 | over our time horizon.
00:04:52.780 | That's why it's so important to focus
00:04:54.760 | on the first couple of things,
00:04:56.980 | how much you put in and how long you invest.
00:05:01.980 | So this is just a simple illustration
00:05:05.340 | of the power of getting started early.
00:05:08.220 | So let's assume that we have Sammy
00:05:09.980 | who is just getting started in her career,
00:05:12.220 | she's 24 years old,
00:05:13.900 | and she finds $200 a month in her budget
00:05:17.220 | to invest in Vanguard's total stock market.
00:05:20.080 | So she makes a good investment selection
00:05:22.620 | and she just sticks with that program.
00:05:25.180 | Now, ideally, she would bump up her contributions
00:05:28.560 | as her salary increases,
00:05:30.020 | but we'll just hold it static
00:05:31.820 | for the purpose of this example.
00:05:33.620 | And she also earns a really nice return
00:05:37.340 | over her 40-year time horizon.
00:05:39.380 | So we're assuming that she wants to retire in her mid-60s.
00:05:42.780 | So she earns an 8% return.
00:05:45.300 | Whether that will prevail over the next 40 years
00:05:48.220 | I think is an open question.
00:05:49.580 | It's arguably a little bit aggressive,
00:05:51.820 | but we're assuming that she earns that 8% return.
00:05:54.380 | If we have another example
00:05:57.380 | of someone who waits even 10 years, Jeremy,
00:06:00.740 | he maybe has taken a little longer
00:06:03.060 | to get his career off the ground.
00:06:04.820 | Maybe he's gone to graduate school,
00:06:06.480 | maybe he's just taken a while to launch his career.
00:06:10.460 | He doesn't start investing until he's 34,
00:06:13.620 | but he is able to find more in his budget to invest.
00:06:17.460 | So he's able to find $400 in contrast with Sammy's $200.
00:06:22.460 | But he has a shorter time horizon
00:06:24.620 | because he got started later.
00:06:26.740 | So assuming he wants to retire in his mid-60s also,
00:06:31.140 | like Sammy, it's interesting when you examine the data,
00:06:35.980 | what you can see is that even though
00:06:37.500 | Sammy's total contribution was substantially less
00:06:41.380 | over her 40-year time horizon,
00:06:45.020 | the fact that she started 10 years before Jeremy,
00:06:48.780 | even though they had the same return,
00:06:51.300 | she came up with substantially more
00:06:54.300 | at her retirement date than did Jeremy
00:06:56.500 | simply because of that foregone five years.
00:06:59.820 | We all know this, we all practice this ideally in our lives.
00:07:04.100 | It's just something if you have young people in their lives
00:07:07.220 | who are getting started in their careers,
00:07:09.620 | it's so important to talk to them
00:07:11.740 | about the value of trying to peel something
00:07:14.700 | out of their budgets if they possibly can.
00:07:17.500 | So that's the first part of the piece.
00:07:21.300 | First part of the adage or first part of the advice,
00:07:26.020 | getting started early is important.
00:07:27.740 | I think we can all agree on that.
00:07:29.300 | The data are unequivocal about the value of doing that.
00:07:33.340 | What about the value of this idea of investing often?
00:07:36.940 | If investing early is so valuable,
00:07:40.380 | shouldn't you just be trying to get your funds
00:07:42.780 | into the market as soon as possible?
00:07:45.140 | The answer to that is a little more nuanced
00:07:47.380 | and I think it's helpful to examine the data.
00:07:50.060 | So this is some research that my colleagues
00:07:53.060 | at Morningstar did and I'll just explain it
00:07:55.700 | because it may be a little bit hard
00:07:57.420 | to read in the back of the room.
00:07:59.500 | But this is examining lump sum investments
00:08:03.660 | versus dollar cost averaging investments
00:08:08.660 | and what you can see is that the lump sum investment
00:08:12.620 | except over very short time horizons
00:08:16.140 | consistently beats the dollar cost averaging investment.
00:08:21.140 | So the basic takeaway here is that if you find yourself
00:08:25.580 | with a lump sum for whatever reason,
00:08:27.700 | and I know this sometimes comes up in my own household
00:08:30.220 | where you have a bonus, for example,
00:08:33.460 | it's easy to equivocate about is this the right time
00:08:37.380 | to put the money in the market?
00:08:39.060 | And the answer is, generally speaking,
00:08:41.740 | if you have a reasonably long time horizon for those funds,
00:08:45.580 | you're probably better just getting that money to work
00:08:48.780 | as soon as possible.
00:08:50.460 | So if you have a lump sum, put it to work
00:08:53.220 | unless you have a very short time horizon.
00:08:56.180 | But there are a few problems with that conclusion.
00:08:59.380 | The first one, and I kept saying this to my colleagues
00:09:02.140 | as they were working on this research,
00:09:03.700 | is most of us don't have a lump sum to invest.
00:09:06.540 | It's just not how we save.
00:09:08.820 | We have fixed amounts that we might be able to find
00:09:12.740 | in our budgets, that's what we can put into the market.
00:09:15.940 | So yes, if you find yourself with a lump sum
00:09:18.740 | and you have a long time horizon,
00:09:20.260 | by all means get it in there,
00:09:21.620 | but most of us don't have our money to save in that way.
00:09:24.700 | Instead, we just have that portion of our paychecks.
00:09:27.980 | And then another benefit of dollar cost averaging,
00:09:31.660 | of dribbling your money into the market
00:09:33.660 | over a period of time,
00:09:35.380 | is that it limits the odds that you'll put the money to work
00:09:38.620 | at precisely the wrong time.
00:09:41.700 | By spacing out your contributions,
00:09:44.780 | it reduces the regrets that you might have
00:09:48.820 | of getting the money to work
00:09:50.380 | and having it be a terrible time.
00:09:52.900 | So that's another key value to dollar cost averaging.
00:09:57.300 | But the big one is simply that most of us
00:09:59.180 | have our funds to invest at regular intervals
00:10:02.260 | rather than all at one time.
00:10:05.940 | This is another slide that I think demonstrates
00:10:08.980 | how dollar cost averaging can smooth out the bumps
00:10:13.900 | of a rough market.
00:10:15.380 | So this examines the 2000s,
00:10:18.660 | which many of you were investing through,
00:10:20.900 | I was investing through.
00:10:22.420 | You remember it was just a bad decade for investors, right?
00:10:25.900 | So we had that dot-com sell-off
00:10:28.780 | in the early part of the decade,
00:10:30.340 | then we had the financial crisis
00:10:32.100 | in the second half of the decade.
00:10:34.500 | Not a great environment.
00:10:36.020 | And so when we look at the person who put a lump sum in
00:10:40.180 | at what would have been a lousy time to do so
00:10:42.980 | in early 2000,
00:10:44.620 | you can see that the lump sum investor
00:10:47.180 | over that very bad decade
00:10:49.660 | actually underperformed the dollar cost averager.
00:10:53.380 | There will be periods in time
00:10:55.300 | where the dollar cost averager,
00:10:56.860 | because he or she is getting the money to work
00:10:59.260 | when the market's depressed, when it's fallen further,
00:11:02.380 | that person will come out ahead.
00:11:04.820 | But asset class diversification helps address that.
00:11:08.740 | So the blue bars in this slide
00:11:11.180 | show that the dollar cost averager
00:11:15.300 | in a 60/40 stock bond portfolio
00:11:18.660 | actually outperformed the lump sum investor
00:11:22.140 | simply because having that balanced
00:11:24.840 | asset class diversification
00:11:27.020 | helped take the edge off of the lump sum portfolio.
00:11:32.340 | Investment.
00:11:33.340 | So I think perhaps the most important thing
00:11:37.340 | about dollar cost averaging
00:11:38.980 | and why I would say that investing often makes so much sense
00:11:43.980 | is that it just instills discipline.
00:11:46.420 | In your budgeting, in your financial plan,
00:11:49.900 | this idea of putting all of your contributions
00:11:53.220 | on autopilot helps ensure that you stick with the plan.
00:11:57.060 | In fact, we've had kind of a lively debate
00:12:00.740 | among our Morningstar staff about budgeting.
00:12:03.780 | And I've always said,
00:12:05.800 | I really have never had a budget in my household.
00:12:08.460 | The main thing we've done
00:12:10.180 | is that we have automated our savings.
00:12:12.460 | We've set up our savings
00:12:14.460 | and then we have just let the chips fall
00:12:16.920 | in terms of how we manage the money that we have left over.
00:12:20.700 | I think that's a fantastic practice.
00:12:24.320 | It's something that takes a certain amount of discipline,
00:12:26.940 | but the great thing is that
00:12:28.300 | all of these financial services providers
00:12:31.100 | are very willing to let you
00:12:32.740 | put your contributions on autopilot.
00:12:34.780 | And you can do it with everything.
00:12:36.380 | I think most people kind of stop with their 401ks.
00:12:39.720 | You can do it with your IRA contributions,
00:12:41.980 | most HSA, health savings account contributions
00:12:45.180 | are coming out of your paycheck on autopilot.
00:12:49.220 | We do it with our taxable accounts as well.
00:12:54.220 | So having that discipline helps ensure
00:12:57.820 | that you stay invested.
00:12:59.220 | It helps ensure that you make those contributions
00:13:01.760 | and you stick with your plan.
00:13:03.200 | So this slide shows the merits of staying invested
00:13:08.200 | because it helps ensure that you are on board
00:13:12.260 | for the market's best days.
00:13:13.860 | And one thing we know and is worth saying
00:13:16.220 | in this sort of environment
00:13:19.260 | where we've seen almost everything go down
00:13:22.380 | is that if you can just stick with that plan,
00:13:26.460 | oftentimes when the market turns,
00:13:28.340 | it turns very quickly when things get better.
00:13:31.140 | And it's very hard to predict when that will be.
00:13:33.860 | So having that regular dollar cost averaging plan
00:13:37.340 | just helps keep you in your seat and stick with your plan.
00:13:40.540 | So getting started,
00:13:42.100 | even with a small amount is the way to go.
00:13:44.860 | Lump sum investing, if you have a lump sum,
00:13:47.380 | get it put into the market as soon as possible,
00:13:49.700 | unless you have a short time horizon for those funds,
00:13:52.700 | in which case you may want to dollar cost average.
00:13:55.280 | And then of course, you'd also want to be thoughtful
00:13:57.580 | about what asset allocation you use.
00:14:00.500 | And finally, investing fixed sums at regular intervals
00:14:04.900 | is just a great way to run your household savings plan
00:14:09.140 | and ensure that you stick through
00:14:11.740 | these tricky market environments.
00:14:14.020 | So I'll just leave it there.
00:14:15.060 | I know we have to keep things moving along.
00:14:16.900 | So I'll see you later to talk diversification.
00:14:19.900 | (audience applauding)
00:14:24.420 | Thank you, Christine.
00:14:26.220 | Isn't she great?