Bogleheads® 2022 Conference – Bogleheads University – Principle 1: Develop a workable plan

00:00:00.000 | [ Applause ]

00:00:06.020 | This is my third Bogleheads Conference.

00:00:08.480 | I've been coming every few years for, since, I don't know,

00:00:10.980 | 2008 or something.

00:00:12.120 | And this one's going to be spectacular.

00:00:14.720 | I'm pretty excited about it.

00:00:15.780 | Bogleheads University has a fantastic faculty lined

00:00:19.180 | up as you can see.

00:00:20.100 | I am the least of them, and that's why I am the host.

00:00:22.620 | Let's get into it a little bit.

00:00:25.880 | First, a few disclosures, okay?

00:00:27.940 | All these faculty members, they work for

00:00:30.620 | or they own successful businesses.

00:00:32.760 | They are published authors.

00:00:34.520 | If you buy their books, they make money.

00:00:36.740 | We're not going to tell you what any of these businesses are.

00:00:39.940 | We're going to work very hard not to have any conflicts

00:00:42.700 | of interest in our presentations today.

00:00:44.260 | All right, Rick says, "I have to tell you

00:00:48.580 | about boglecenter.net," which is an awesome place.

00:00:52.060 | Many of you have been coming to the Bogleheads Forum

00:00:54.440 | for a long time and may not have known

00:00:56.360 | about this fantastic resource.

00:00:58.100 | But the boglecenter.net should be your front page

00:01:02.120 | for all things Boglehead.

00:01:03.360 | You can see there's all kinds of things there, including a way

00:01:06.820 | to donate to boglecenter.net.

00:01:09.080 | And I'm going to bribe you into making a donation.

00:01:11.820 | When they do the book signing tomorrow, I have a few copies

00:01:14.580 | of my book that I was able to stuff into my carry on

00:01:16.620 | that I will give you if you make any sort

00:01:18.720 | of donation to boglecenter.net.

00:01:21.120 | But you have to donate more than $2.57

00:01:24.620 | because apparently that's what it costs to process a donation.

00:01:27.900 | So you got to donate more than that.

00:01:29.140 | But boglecenter.net is the hub, right?

00:01:32.600 | Bogleheads has a podcast.

00:01:35.020 | It has both virtual and live events like this one.

00:01:38.360 | There's the forum that most

00:01:39.860 | of you probably already know about.

00:01:41.080 | The wiki is a fantastic resource when you're just trying

00:01:44.140 | to look something up.

00:01:45.040 | The problem with looking stuff

00:01:46.240 | up on the forum is something that was there yesterday is

00:01:48.620 | already at the bottom of the page.

00:01:49.760 | The wiki is not like that.

00:01:51.800 | And it tends to be more peer reviewed and more up-to-date.

00:01:56.700 | And also will give you that information

00:01:59.200 | that you're looking for in a more digestible format.

00:02:01.260 | There's also a Bogleheads blog.

00:02:03.760 | If you are on Reddit, there's a Bogleheads subreddit.

00:02:06.800 | There's a YouTube channel.

00:02:08.740 | And of course, there are Twitter and Facebook social media outlets.

00:02:11.700 | And all that is accessible from boglecenter.net.

00:02:14.660 | So be sure to check that out.

00:02:16.720 | All right.

00:02:17.380 | Here's what we're going to do today.

00:02:18.380 | We're running this operation with military precision.

00:02:20.640 | We started right at 1 o'clock.

00:02:22.000 | We're going to end right at 4 o'clock.

00:02:24.020 | Because they got to turn this room for the reception.

00:02:25.940 | So all these chairs have to be hauled out.

00:02:27.740 | They got to bring in the reception stuff.

00:02:28.940 | So we all got to leave at 4 o'clock.

00:02:30.820 | That means we have to be done at 4 o'clock.

00:02:32.280 | So all the speakers have been whipped into line.

00:02:35.860 | So they're going to follow this schedule more or less.

00:02:37.940 | And then we're going to make up the slack

00:02:39.700 | with the Q&A at the end.

00:02:41.140 | But this is the plan.

00:02:42.160 | We're going to talk about developing a workable plan.

00:02:44.840 | That's my part.

00:02:45.600 | Then we get Christine Benz to teach us

00:02:47.600 | about investing early and often.

00:02:49.900 | And then Alan Roth is going to teach us about risk.

00:02:53.140 | Christine's going to come back and talk about diversification.

00:02:56.060 | Then we're going to take a break.

00:02:57.080 | It's a 10-minute break.

00:02:58.500 | No kidding, 10 minutes after we start, you got to be back

00:03:01.380 | in your seat, and we're going to be talking.

00:03:04.300 | Then we're going to -- Rick Ferry's show comes on, right?

00:03:06.680 | He's going to talk about not timing the market.

00:03:08.280 | And he's going to talk about using index funds.

00:03:10.280 | Then we're going to go back to Alan, who's going to talk

00:03:13.520 | about keeping your costs low.

00:03:14.920 | And then the treat you've been waiting for all day is going

00:03:18.100 | to come on with Mike Piper, talking about minimizing taxes.

00:03:21.580 | And that is such good stuff, we're going

00:03:23.500 | to give you a break right in the middle of it.

00:03:24.640 | Another 10-minute break, and then he's going to come back

00:03:27.840 | and talk about investing with simplicity.

00:03:29.560 | I'll finish up with a short bit about stay the course,

00:03:32.480 | in case you didn't get the hint

00:03:33.640 | from the book you were handed when you registered.

00:03:35.480 | And then we're going to do Q&A with the five of us, okay?

00:03:39.220 | All right, let's get started with my part here and talk

00:03:44.660 | about developing a workable plan.

00:03:47.640 | And this, in my opinion, is one of the most important things

00:03:51.640 | in personal finance and investing.

00:03:53.380 | But since no one's here to do an introduction of me,

00:03:55.720 | those of you who don't know me,

00:03:56.780 | I'll tell you a little bit about myself.

00:03:58.100 | The picture is what I like to do.

00:04:00.080 | The rest is why I get to stand up here and talk to you.

00:04:02.780 | I'm an emergency physician by education and training.

00:04:05.640 | I have zero financial training, at least formally, as it goes.

00:04:09.120 | But I've been a Bogle head since 2004.

00:04:11.280 | I had a net worth of zero in 2004, and I've been

00:04:15.200 | with the Bogle heads all the way from there

00:04:17.020 | until financial independence a few years ago.

00:04:19.020 | At one point -- I'm now the 25th most prolific poster

00:04:22.600 | on the forum.

00:04:23.160 | At one point, I was the eighth most prolific poster

00:04:26.240 | on the forum, and my wife turned to me and said,

00:04:28.360 | "You're spending way too much time online talking

00:04:31.180 | about investing to not be making any money doing it."

00:04:33.480 | And so I took the Bogle head philosophy to my peers,

00:04:37.160 | to my profession, with a successful online business.

00:04:39.700 | It wasn't successful initially, but it was eventually.

00:04:42.080 | I've authored four books on personal finance and investing

00:04:45.560 | and asset protection, multiple book chapters, including one

00:04:48.300 | in the Bogle Head's Guide to Retirement.

00:04:49.720 | I've created the most widely read physician-specific

00:04:52.920 | investing website in the world.

00:04:54.360 | I have a popular podcast, and I've also created a conference.

00:04:57.560 | Now, this is the fun part about the faculty.

00:04:59.540 | They've all been keynote speakers at my conference.

00:05:01.940 | I pay them thousands of dollars to come and speak

00:05:04.960 | to the people that come to my conference,

00:05:06.580 | and they've come here voluntarily

00:05:08.220 | for free to speak to you.

00:05:09.900 | They are really a star-studded faculty that we have.

00:05:12.920 | [ Applause ]

00:05:16.540 | Except me.

00:05:17.520 | You're stuck with me.

00:05:18.480 | All right.

00:05:19.580 | So let's talk about a workable plan, okay?

00:05:21.820 | Single most important piece of advice that I can give

00:05:24.860 | to you is to have a plan.

00:05:26.160 | If you fail to plan, you plan to fail, and I want you

00:05:31.560 | to write the plan down.

00:05:33.600 | The reason why is that when you write a plan down,

00:05:37.580 | it forces you to actually make the plan, right?

00:05:41.040 | We all think we have a plan in our head,

00:05:42.480 | but what it is is some half-baked notion

00:05:44.360 | of what we're going to do.

00:05:45.200 | And when you actually write it down, it exposes the gaps

00:05:48.600 | in your thinking, the gaps in your plan,

00:05:50.620 | until you realize that's a problem.

00:05:52.740 | I don't know what that is, and you go do more research,

00:05:55.780 | or you get some help, and you can fill those gaps

00:05:58.800 | in the plan.

00:05:59.300 | So you need a written plan.

00:06:01.000 | The other benefit of a written plan is that you can go back

00:06:03.480 | to it and remind yourself

00:06:05.920 | of why you're doing things the way you're doing them,

00:06:08.080 | or how you decided you were going to do them.

00:06:11.420 | And so it's really important to write it down.

00:06:13.520 | And I've been harping on this now with my audience

00:06:16.100 | for the last 12 years, and so I was really depressed

00:06:18.220 | to do a survey last year and find out that half

00:06:20.140 | of them still didn't have a written financial plan.

00:06:22.440 | And so I want you to get a written financial plan, okay?

00:06:26.600 | If you need professional help to do that,

00:06:28.380 | get the professional help.

00:06:29.980 | A few thousand dollars

00:06:31.500 | to have someone help you make a financial plan may be the best

00:06:34.760 | money you ever spent.

00:06:35.620 | It is a fantastic investment, and way cheaper than paying them

00:06:39.820 | for investment management.

00:06:41.020 | Okay, so what's in a financial plan?

00:06:44.840 | Well, there's a lot more to it

00:06:46.160 | than just an investing policy statement.

00:06:48.180 | It's not just about investments, right?

00:06:50.640 | You should have a plan about how you're going to get rid

00:06:53.040 | of your student loans or other debts,

00:06:54.600 | how you're going to reduce them, what you're going to do

00:06:56.960 | for your insurance, you know, we're talking

00:06:58.940 | about disability insurance and life insurance

00:07:01.140 | and property insurance and that kind of stuff.

00:07:02.880 | All right, housing plan, where you're going to live,

00:07:05.260 | how you're going to pay for it, spending plan, a.k.a. a budget.

00:07:08.640 | Right. Then, of course, you've got to have an investing plan.

00:07:11.300 | And then, eventually, you're going to need some sort

00:07:14.480 | of an estate plan, and probably an asset protection plan

00:07:17.960 | as well.

00:07:18.280 | So all of that goes into your written plan.

00:07:20.000 | I'm going to focus mostly today on just the investing portion,

00:07:22.500 | but all of that should be part of your plan.

00:07:24.440 | And this document is not something you write down once

00:07:26.800 | and file away and never look at again.

00:07:28.800 | This is a living, changing, working document.

00:07:31.900 | So let's zero in on it.

00:07:34.620 | There are five pieces to an investing plan.

00:07:38.700 | Okay. The first one, and the problem is,

00:07:40.840 | one of these pieces is sexy, and the other four are not.

00:07:43.860 | Okay. The sexy one is number four,

00:07:46.520 | choosing the investments, right.

00:07:48.120 | Everybody likes that.

00:07:48.900 | Everybody likes talking about the investments.

00:07:50.760 | But the truth is, that's a very difficult thing to do

00:07:54.140 | if you haven't done the three steps above it.

00:07:55.960 | If you have done the three steps above it, it's really simple.

00:07:59.060 | And so, it's important that you do them in order.

00:08:02.160 | Set your goals.

00:08:03.340 | Choose what accounts you're going to invest in for each goal.

00:08:08.240 | Determine an asset allocation for each of your goals.

00:08:11.300 | Select the investments to fulfill that asset allocation.

00:08:14.680 | And then determine whatever your rules you're going to use

00:08:17.480 | for changes and maintenance to the plan.

00:08:19.240 | Those are the five pieces.

00:08:20.800 | Okay. So let's talk about setting goals, right.

00:08:23.580 | You got to set your goals.

00:08:24.600 | Just set them.

00:08:25.460 | It's okay if they change.

00:08:26.600 | This is what keeps us from setting them.

00:08:27.940 | Because we're afraid they're going to change,

00:08:30.560 | or I'm going to want something different.

00:08:31.800 | You just set a goal.

00:08:32.820 | So what if it changes in three months?

00:08:35.180 | You can adjust the plan for that.

00:08:37.700 | But the goals need to be smart goals.

00:08:39.640 | Specific, measurable, attainable,

00:08:43.680 | relevant to you, and time limited.

00:08:47.120 | Okay. Here's some examples.

00:08:48.620 | And these come from my original plan that we wrote in 2004.

00:08:51.160 | Our investments will provide an income

00:08:53.540 | of $100,000 per year in 2006 dollars, while still growing

00:08:56.860 | at the inflation rate, providing us financial independence

00:08:59.420 | by June 28th, 2030.

00:09:00.780 | That's a smart goal.

00:09:02.400 | Get rich, not a smart goal.

00:09:04.440 | Be a millionaire, not a smart goal.

00:09:06.400 | That's a smart goal.

00:09:07.960 | Okay. So some goals may have to do with your net worth,

00:09:10.460 | some with your income, some with your savings rate.

00:09:12.900 | Okay. Here's another example.

00:09:14.200 | We'll be worth $1 million by June 28th, 2017.

00:09:17.140 | Or this one.

00:09:18.520 | We'll have the equivalent of four years

00:09:19.740 | of in-state tuition at BYU.

00:09:21.180 | That's my alma mater.

00:09:22.040 | In each 529, by the time each child turns 18.

00:09:25.120 | Right. These are smart goals.

00:09:27.100 | That's what you want to set.

00:09:27.960 | You might be wondering the relevance

00:09:30.120 | of June 28th is my birthday.

00:09:31.360 | All right.

00:09:33.700 | It's also important that one great benefit

00:09:36.060 | of these goals is it allows you to define enough

00:09:39.840 | so that you recognize it when you get there.

00:09:42.600 | Because there are far too many people in our society

00:09:45.060 | that don't know how much enough is.

00:09:46.900 | All right.

00:09:48.640 | Next, you've got to choose what accounts you're going

00:09:50.480 | to invest in.

00:09:51.020 | Okay. So you choose an investing account for each goal.

00:09:54.220 | So retirement's the obvious one.

00:09:56.900 | It's the big one.

00:09:57.740 | It's, you know, as Jonathan Clements says,

00:09:59.900 | it's basically the whole point

00:10:01.620 | of your financial life is saving up enough money

00:10:04.320 | to pay for retirement.

00:10:05.500 | You tend to do that in accounts like 401Ks and 403Bs, 457Bs,

00:10:09.980 | IRAs and Roth IRAs, defined benefit plans.

00:10:12.700 | If you work for the federal government,

00:10:14.280 | the thrift savings plan, and of course, you can save as much

00:10:17.320 | as you want in a taxable account.

00:10:18.860 | For education, we have 529s are probably used most commonly,

00:10:23.220 | but you can also save up for them with Coverdell ESAs,

00:10:26.200 | uniform transfer to minors accounts, and a taxable account.

00:10:30.980 | Health care expenses, health savings account.

00:10:34.260 | Any big purchases or your emergency fund tends

00:10:37.340 | to be in a taxable account.

00:10:38.620 | But it's important to find what accounts you're going to invest

00:10:41.440 | in for these goals before you get started,

00:10:43.540 | recognizing that it will change as you change employers,

00:10:46.920 | as account contribution limits change.

00:10:48.960 | These ratios of how much you have in tax-protected accounts

00:10:53.000 | like tax-deferred and tax-free accounts,

00:10:55.000 | as well as taxable accounts is likely

00:10:57.360 | to change over the years.

00:10:58.480 | There was a time when I didn't have a taxable account at all.

00:11:00.740 | Now it's my largest account, and that often happens to people.

00:11:05.220 | Tax diversification means having some money

00:11:07.980 | in tax-free accounts, some money in tax-deferred accounts,

00:11:10.980 | and some money in taxable accounts.

00:11:12.680 | That's a good thing.

00:11:13.540 | But in general, you don't want to seek after that

00:11:16.260 | if it means paying a whole lot extra in taxes to have it.

00:11:18.920 | So try to get some tax diversification,

00:11:21.340 | but try to get it at a good price.

00:11:23.560 | All right, I'm a big fan of a top-down approach to investing,

00:11:29.360 | to have an overall asset allocation or division

00:11:32.780 | of how you're going to invest your assets,

00:11:34.740 | and then selecting investments to fulfill that plan.

00:11:38.800 | So it turns out that your asset allocation is the most

00:11:42.660 | important determinant of your investment return.

00:11:45.520 | The mix of assets, the mix of investments that you invest in,

00:11:49.400 | is going to cover something like 80%

00:11:53.060 | of your investing return is going to come

00:11:55.180 | from that asset allocation.

00:11:57.180 | So it's really important.

00:11:58.080 | It's probably not the most important thing

00:11:59.940 | that actually determines you reaching your goal.

00:12:02.280 | That probably has more to do

00:12:03.100 | with your savings rate, quite honestly.

00:12:05.220 | But it matters for your investment return,

00:12:08.480 | and the further you get into your investment career,

00:12:10.540 | the more your investment return affects you reaching your goals.

00:12:14.280 | You want to make sure you're taking on enough risk

00:12:16.520 | to beat inflation long-term and to meet your goals.

00:12:18.940 | Alan's going to be talking in a little while

00:12:20.800 | about a little more in-depth about risk.

00:12:22.820 | But you don't want to take on more risk than you can handle.

00:12:26.000 | I like to think of it like the price is right.

00:12:27.960 | You've seen the game show, right?

00:12:29.160 | You've got to bid and try to guess the price

00:12:31.200 | of whatever they have up there on stage, and you want to get

00:12:33.680 | as close as you can without going over.

00:12:36.100 | And that's kind of like risk tolerance with investing.

00:12:39.260 | You want to take on about as much risk as you can handle,

00:12:42.160 | but not too much that you panic and end up selling low

00:12:45.520 | in a nasty bear market.

00:12:47.280 | I generally recommend people include at least three asset

00:12:51.120 | classes in their asset allocation.

00:12:53.200 | I think you can get a lot of benefits by going up to as many

00:12:55.980 | as seven asset classes.

00:12:59.360 | Maybe there's some benefits as you push that up to 8, 9, 10.

00:13:02.360 | Beyond 10, you're just playing with your money, okay?

00:13:04.840 | That is just complexity without additional benefit.

00:13:07.780 | So if you look at your portfolio

00:13:09.160 | and you've got 16 different asset classes,

00:13:11.280 | simplification is probably in order.

00:13:13.840 | And Mike Piper is going to be talking about that today.

00:13:16.000 | Avoid analysis paralysis.

00:13:19.420 | This happens to a lot of people.

00:13:20.560 | They realize there are a million different ways you can set

00:13:23.040 | up an asset allocation, and they can't move.

00:13:27.060 | They can't get started because they can't decide.

00:13:29.640 | Well, the truth is there is no perfect asset allocation.

00:13:33.520 | Nobody knows in advance what the best one is.

00:13:35.600 | So just pick something reasonable and stick

00:13:38.160 | with it for the long run.

00:13:39.520 | And that's the most important thing is that you stick

00:13:41.600 | with what you've chosen rather than what exactly you've chosen.

00:13:44.640 | Because each of those asset classes you included in your mix

00:13:48.600 | of investments is going to have its day in the sun.

00:13:51.400 | It's okay to make adjustments to your plan,

00:13:55.000 | but what usually happens when we're making an adjustment is

00:13:57.740 | you do what I did in 2007 when I added REITs to my portfolio.

00:14:02.200 | Subsequently watched them drop 78% in value over the course

00:14:07.540 | of the next year.

00:14:08.300 | Now, they've done fine in the long run because I've kept them

00:14:11.060 | in my portfolio ever since.

00:14:12.860 | And my long-term return is something like 11 or 12%

00:14:15.300 | or something on that asset class.

00:14:17.180 | But that first year it wasn't very good.

00:14:19.900 | And truthfully, I was probably performance chasing.

00:14:22.920 | And that's what happens a lot when you're adding new asset

00:14:25.460 | classes to your portfolio.

00:14:26.620 | So beware of that.

00:14:27.540 | You should also spend some time on asset location.

00:14:30.340 | Asset location is what assets go in which account.

00:14:32.860 | I'm not going to get into the details of that, but the idea is

00:14:35.780 | that you can add a little bit of extra return there

00:14:37.980 | by managing the taxes well.

00:14:39.700 | All right.

00:14:41.580 | The fourth step is to choose your investments.

00:14:43.340 | You just want to choose investments

00:14:44.860 | to fulfill your asset allocation based on the availability

00:14:48.100 | in those accounts.

00:14:49.420 | It can be really easy.

00:14:51.460 | Like 25% of my portfolio is in U.S. stocks.

00:14:54.260 | It all goes in one fund.

00:14:55.520 | VTI or VTSAX, the Vanguard Total Stock Market Index Fund.

00:15:00.380 | It's my favorite mutual fund.

00:15:02.200 | And that's literally 25% of my portfolio.

00:15:04.940 | Super simple.

00:15:05.920 | Right? Other things might be more complicated, though.

00:15:08.520 | Like I have an asset class for inflation index bonds.

00:15:11.960 | Some of that money is in a TIPS ETF.

00:15:15.120 | Some of it is in individual TIPS bought at Treasury Direct.

00:15:18.420 | Some of it is in IBONZ.

00:15:19.800 | A little more complexity there.

00:15:21.500 | And if you get into some more exotic asset classes,

00:15:25.100 | such as direct real estate investing, or private equity,

00:15:27.860 | or crypto assets, it can get really complicated.

00:15:30.400 | Okay? So, in general, as Rick will tell you later today,

00:15:35.240 | favor broadly diversified, low-cost index funds.

00:15:38.820 | You can just pick one fund per asset class.

00:15:41.440 | That works.

00:15:42.280 | You know, five asset classes in your portfolio,

00:15:44.640 | you got five funds.

00:15:45.980 | Super simple.

00:15:46.860 | You can even consider a simple fund of funds

00:15:50.780 | if you're only investing in retirement accounts

00:15:52.720 | and you have a good fund of funds available

00:15:54.780 | in every account.

00:15:55.540 | We'll have one of our speakers that will teach you

00:15:57.840 | about simplicity who does just that.

00:16:01.560 | Lastly, set up some rules.

00:16:03.340 | Okay? Things change.

00:16:05.260 | For example, when are you going to rebalance?

00:16:09.000 | How are you going to rebalance?

00:16:10.440 | Right? So, you need a rebalancing policy in there.

00:16:13.460 | How are your investments going to be selected?

00:16:16.080 | What's the criteria for adding

00:16:18.380 | or subtracting asset classes from the portfolio?

00:16:20.860 | How will your asset allocation change over time?

00:16:23.700 | A lot of people like to get less aggressive

00:16:25.200 | as they approach retirement.

00:16:26.400 | Okay? How's that going to change?

00:16:27.600 | You should put that in your written investing plan.

00:16:29.680 | What are you going to do in a bear market?

00:16:31.660 | How are things going to change in a bear market, if at all?

00:16:34.860 | Put that in your asset allocation plan.

00:16:37.120 | And, of course, one thing that we like to have is,

00:16:40.500 | we have a waiting period to keep us

00:16:42.280 | from doing anything stupid on a whim.

00:16:43.940 | We have to wait three months before we can make any changes.

00:16:47.600 | So, that keeps us from, hopefully,

00:16:49.320 | doing as much performance chasing as we did in 2007.

00:16:51.800 | So, here's some examples of rules.

00:16:54.620 | No asset class will represent more than 30%

00:16:56.960 | or less than 5% of our portfolio.

00:16:58.820 | We'll rebalance our asset allocation

00:17:00.960 | as frequently as necessary using the 5/25 rule,

00:17:03.680 | using new investment money as much as possible.

00:17:05.700 | If selling an untaxable account or selling an investment

00:17:08.780 | with significant trading costs is required,

00:17:10.500 | rebalances may be performed no more than once a year.

00:17:12.820 | These are examples of what I mean by rules.

00:17:15.500 | And then, of course, there's our three-month waiting period rule.

00:17:17.960 | So, to recap, you set your goals.

00:17:22.120 | You choose accounts for each goal.

00:17:24.240 | You determine an asset allocation for each goal.

00:17:26.960 | You select investments.

00:17:28.440 | And then, you determine the rules for changes and maintenance.

00:17:31.860 | [ Silence ]

Bogleheads® 2022 Conference – Bogleheads University – Principle 1: Develop a workable plan

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