Bogleheads® Chapter Series - Getting Started with Investing

00:00:00.000 | that we can share going forward with beginners as well.

00:00:03.320 | So we're going to be starting at the beginning,

00:00:05.840 | so nobody gets left behind, basically.

00:00:08.480 | And one quick note on the material

00:00:11.040 | and how you're welcome to use it.

00:00:13.440 | I'll be posting the slides in PDF format,

00:00:16.720 | and you're welcome to email them to anybody,

00:00:20.240 | share them on the forum, use individual slides

00:00:23.200 | for any purpose you want.

00:00:24.240 | Basically, use the material in any way that you want to.

00:00:29.000 | So there's three primary things that I

00:00:31.040 | want to talk about tonight.

00:00:32.320 | The first one is what I call the building blocks, which

00:00:34.920 | is basically the primary asset classes,

00:00:37.480 | so the primary types of things you would be investing in.

00:00:39.880 | And then the primary types of accounts

00:00:42.320 | in which you would be likely to own those investments.

00:00:45.920 | Next, we're going to move on to constructing a portfolio, which

00:00:48.440 | is basically the actual nuts and bolts decisions

00:00:50.720 | that you have to make in terms of what you're going

00:00:52.840 | to include in your portfolio.

00:00:54.880 | And then I just want to spend some time

00:00:56.800 | on what I call staying out of trouble, which is basically

00:00:59.760 | avoiding the common mistakes that I see investors

00:01:02.240 | to make, both beginner investors and more experienced

00:01:05.320 | investors.

00:01:07.440 | So starting at the beginning, the building blocks,

00:01:09.520 | there's two primary asset classes.

00:01:11.560 | The first one is stocks.

00:01:13.120 | And I know a lot of you guys know this, of course,

00:01:15.200 | but again, we're starting with the basics,

00:01:16.960 | and we're going to go through it pretty quickly.

00:01:18.960 | So with a stock, it's just the share

00:01:20.760 | of ownership in a business.

00:01:22.560 | And the way you make money when you own a business

00:01:25.680 | is that, hopefully, the business earns a profit.

00:01:28.480 | And when the business does that, in many cases,

00:01:31.240 | they will distribute that profit to the shareholders.

00:01:34.040 | That's called a dividend payment.

00:01:35.400 | And so you're just getting money from your shares, basically.

00:01:38.560 | And the other way you can make money as a stockholder

00:01:41.000 | is that, often, when a business earns a profit,

00:01:45.480 | instead of distributing it to the shareholders, what

00:01:47.720 | they will do is reinvest the money into the business

00:01:50.880 | itself with the goal of growing the business

00:01:53.000 | so that it becomes even more profitable in the future.

00:01:55.800 | And when they do that, as long as everything goes well,

00:01:59.320 | the business becomes more valuable.

00:02:01.360 | And because you own a share of the business,

00:02:03.520 | your stock price will go up as well.

00:02:06.920 | So those are the two ways you make money as a stock investor,

00:02:09.400 | through dividend payments and price appreciation.

00:02:12.880 | Just a quick note on terminology,

00:02:14.760 | stocks are often referred to as equities.

00:02:16.920 | It's just another word for the exact same thing.

00:02:20.360 | And the other primary asset class is bonds.

00:02:23.040 | And a bond is just a loan that you make to a borrower.

00:02:27.640 | So the most common types of bonds

00:02:29.040 | are treasury bonds, where you are literally

00:02:30.840 | loaning money to the federal government.

00:02:32.760 | Then we have municipal bonds, where

00:02:34.280 | you're loaning money to a state or local government entity.

00:02:38.040 | And then we have corporate bonds,

00:02:39.600 | where you're loaning money to a business.

00:02:41.880 | And the way you make money as a bond investor

00:02:44.800 | is the same way that any lender makes money,

00:02:47.400 | which is through interest payments.

00:02:48.860 | The borrower is going to pay you interest.

00:02:50.880 | And bonds are in the category of investments

00:02:53.440 | known as fixed income.

00:02:55.040 | Basically, anything that has a yield that

00:02:57.520 | is determined by a contract, an agreement-- so savings

00:03:01.120 | accounts, CDs, and bonds are all fixed income investments,

00:03:04.640 | although bonds are the primary fixed income

00:03:07.080 | investment for most portfolios.

00:03:10.520 | And that's it for asset classes.

00:03:12.560 | Mutual funds aren't technically an asset class,

00:03:15.160 | but they are still something that you definitely

00:03:17.080 | need to know about.

00:03:18.200 | A mutual fund is basically just a pool of money

00:03:21.540 | that is run by a fund manager.

00:03:23.360 | So basically, what you're doing when

00:03:24.860 | you invest in a mutual fund is you are turning your money over

00:03:27.740 | to somebody else.

00:03:28.820 | And then that other person, that fund manager,

00:03:31.340 | they will choose how to invest your money.

00:03:33.220 | So they're making the decisions on your behalf, basically.

00:03:36.420 | And a mutual fund owns a collection

00:03:39.140 | of other investments.

00:03:40.360 | So if it's a stock mutual fund, it's

00:03:41.900 | going to own a whole bunch of different stocks.

00:03:43.580 | If it's a bond mutual fund, it's going

00:03:44.820 | to own a whole bunch of different bonds.

00:03:46.620 | Balanced funds own some of both.

00:03:49.320 | And then there's subcategories of mutual funds.

00:03:51.520 | So there's mutual funds that only

00:03:53.840 | invest in a specific industry or that might only

00:03:55.880 | invest in stocks of small companies and so on.

00:03:59.640 | And mutual funds can be either actively managed or passively

00:04:03.200 | managed.

00:04:04.480 | With an actively managed mutual fund,

00:04:06.920 | the fund manager is actively trying

00:04:10.040 | to pick only the best investments.

00:04:13.040 | So if it's a stock mutual fund, an actively managed stock fund,

00:04:15.960 | the manager is going to be trying

00:04:18.060 | to pick the stocks that have above average performance,

00:04:20.560 | basically.

00:04:22.680 | In contrast with a passively managed fund,

00:04:26.000 | the fund is just trying to track the performance of a given index

00:04:29.400 | usually.

00:04:30.520 | Of course, that raises the question of, what is an index?

00:04:33.280 | And an index is just a number that

00:04:36.400 | reflects the performance of a particular group of investments.

00:04:40.240 | So the S&P 500 is a very famous index.

00:04:43.280 | You'll hear about it a lot.

00:04:44.720 | And what that index represents is just

00:04:47.080 | the performance of the stocks of 500 of the biggest

00:04:50.240 | companies in the United States.

00:04:51.880 | So an S&P 500 fund, it would be a passively managed fund

00:04:56.960 | because the fund manager isn't actively

00:04:59.560 | trying to pick the best stocks.

00:05:01.800 | They're just buying all the stocks

00:05:03.280 | that are listed in that index.

00:05:04.680 | It's a much more hands-off approach.

00:05:06.160 | And that's why we call it passively managed.

00:05:09.240 | The common use for passively managed funds

00:05:11.760 | is to track the total stock market, or total international

00:05:15.720 | stock market, or the total bond market.

00:05:18.920 | And the two most common types of passively managed funds

00:05:21.200 | are index funds and ETFs.

00:05:22.720 | And we'll get into the details in a little bit.

00:05:26.840 | So the two big asset classes are stocks and bonds.

00:05:29.560 | And the big difference between them is how much risk

00:05:31.720 | they involve.

00:05:33.800 | With a bond, the borrower is promising

00:05:36.160 | to pay you a certain amount of money every year as interest.

00:05:39.960 | And they're promising to repay the principal at maturity.

00:05:42.400 | So they're promising to repay the amount that they borrowed.

00:05:45.400 | And the key point here is that a bond is a contract.

00:05:49.560 | The borrower is contractually obligated to pay you money

00:05:52.760 | according to a specific schedule.

00:05:55.480 | Whereas with a stock, there's no guarantees.

00:05:58.440 | Because remember, with a stock, you just

00:06:00.560 | own a piece of a business.

00:06:01.760 | And there's no guarantee that any business

00:06:03.480 | is going to earn a profit.

00:06:05.480 | So you're just expecting returns.

00:06:07.320 | You're basically hoping for returns.

00:06:10.440 | And because stocks have uncertain returns,

00:06:13.920 | they also have higher expected returns.

00:06:17.040 | And you can think of that this way.

00:06:19.240 | Basically, any time that you or anybody

00:06:23.600 | has money available to invest, you always

00:06:26.440 | have the option of buying a bond, which would give you

00:06:28.920 | a predictable rate of return.

00:06:31.200 | So why would anyone ever buy stocks

00:06:33.160 | with their unpredictable return?

00:06:35.120 | The answer is that stocks typically earn greater returns

00:06:38.360 | over an extended period.

00:06:41.080 | So what this slide shows is the last 40 years, basically,

00:06:45.160 | from 1981 through 2020.

00:06:47.280 | You could think of this as somebody's whole accumulation

00:06:49.920 | stage if they started investing immediately after undergrad

00:06:53.680 | and retired at the typical age.

00:06:55.080 | Or maybe this is somebody's accumulation stage

00:06:57.640 | and their first several years of retirement.

00:07:00.360 | And what this shows, the blue line is the US stock market.

00:07:04.400 | The red line is 10-year Treasury bonds.

00:07:06.560 | And the orange line is short-term Treasury bonds.

00:07:09.280 | And this shows if you had invested $10,000

00:07:12.480 | at the beginning of this period in each of these three asset

00:07:15.400 | classes, this is how much it would be

00:07:17.480 | worth at the end of the period.

00:07:19.840 | And as you can see, stocks grew by quite a bit more

00:07:22.960 | than the bond investments.

00:07:26.040 | But stocks really do involve a lot more risk.

00:07:29.560 | And that risk, despite what the last 10 years have looked like,

00:07:33.680 | it's not a hypothetical or theoretical thing.

00:07:36.320 | It's a very real-world thing.

00:07:38.280 | And if you're a stock investor, you

00:07:40.400 | will have to experience this at some point.

00:07:43.160 | There will be periods where your stock holdings just

00:07:46.040 | perform terribly.

00:07:48.200 | So this slide, for instance, is the years 2000 through 2002.

00:07:53.040 | And in case you don't remember, that's

00:07:54.640 | the dot-com bubble bursting.

00:07:56.680 | Internet-related stocks have gone up in value quite a bit

00:07:59.720 | in the late '90s.

00:08:00.440 | And then people changed their minds about them.

00:08:03.120 | And they and their stock market overall came crashing down.

00:08:07.160 | And the red line here is the Vanguard Total Bond Market Index

00:08:11.320 | Fund.

00:08:11.920 | So it represents the US bond market.

00:08:14.080 | And the blue line is the Vanguard Total Stock Market Index

00:08:16.520 | Fund.

00:08:17.000 | So it represents the US stock market.

00:08:19.560 | And what you can see is that over these three years,

00:08:22.880 | bonds did fine.

00:08:24.040 | They actually went up in value by 30%,

00:08:25.800 | which is a pretty good few years for bonds.

00:08:28.480 | And stocks lost almost 40% of their value.

00:08:32.040 | And it's worth noting that this is three years.

00:08:37.520 | So if you're a stock investor during this period,

00:08:40.040 | you watched your stocks go down for a year,

00:08:43.120 | and then another year, and then another year.

00:08:47.040 | And a lot of people during--

00:08:50.520 | at some point later in that window, 2001 to 2002,

00:08:54.760 | they basically gave up on stocks.

00:08:56.560 | They said, forget it.

00:08:57.400 | I've had enough.

00:08:58.200 | They pulled their money out of the stock market

00:09:00.440 | and moved it into cash or moved it into bonds.

00:09:03.680 | And that's unfortunate, because when they did that,

00:09:06.480 | what ends up happening is that when the stock market recovers,

00:09:11.800 | their portfolios didn't recover, because they were left

00:09:14.960 | in cash or just bonds.

00:09:16.600 | They weren't there invested in stocks when the stock market

00:09:19.600 | went back up.

00:09:22.600 | And this slide here, it shows the period from October 2007

00:09:26.960 | through February 2009.

00:09:28.560 | So this is the global financial crisis.

00:09:31.120 | And here, again, the red line is bonds.

00:09:33.320 | And you can see that they held their value, pretty much.

00:09:36.520 | And the blue line is the US stock market.

00:09:38.760 | And you can see that it lost about half of its value.

00:09:42.320 | And that's the nature of being a stock investor.

00:09:45.440 | There are periods like this that you just

00:09:48.440 | have to be ready and willing to accept them.

00:09:51.360 | People often refer to it as the price of admission for stocks.

00:09:54.440 | Basically, you just have to be willing to wait it out

00:09:57.160 | so that when the market does come back,

00:09:59.440 | your portfolio will come back.

00:10:00.760 | And so that's the way that you can

00:10:02.120 | earn the greater returns that stocks typically

00:10:05.000 | earn over an extended period.

00:10:06.960 | And another key point here is that this was--

00:10:09.200 | the last bear market that we looked at was three years.

00:10:11.880 | This one was only a year and a half.

00:10:13.720 | You don't know when it's actually going on.

00:10:16.040 | You don't know how long it's going to last.

00:10:18.160 | And you just have to be willing to wait it out, basically.

00:10:23.040 | So that's it for the primary asset classes

00:10:24.840 | and the differences between them.

00:10:26.320 | Moving on to the primary types of accounts,

00:10:28.600 | we have taxable accounts, traditional IRAs.

00:10:31.680 | An IRA generally stands for Individual Retirement Account.

00:10:35.240 | Sometimes it stands for Individual Retirement Annuity

00:10:37.880 | or Individual Retirement Arrangement.

00:10:39.720 | But the key point is just that these are retirement accounts.

00:10:42.800 | Then we have Roth IRAs, 401(k)s and 403(b)s,

00:10:46.200 | and Roth 401(k)s and 403(b)s.

00:10:49.400 | And a taxable account is basically

00:10:51.520 | anything that isn't one of those other special types

00:10:53.680 | of accounts.

00:10:54.600 | So a regular savings account is a taxable account.

00:10:57.200 | Or if you go to a brokerage firm website and open an account

00:11:00.640 | and don't tell them that you want

00:11:02.080 | it to be one of the special types of accounts,

00:11:05.040 | what you'll have is a taxable account.

00:11:06.680 | And we call them taxable because the income

00:11:08.760 | that you earn in those accounts is generally taxable.

00:11:11.560 | So the interest is taxable.

00:11:13.400 | There are some exceptions.

00:11:14.560 | That's kind of beyond the scope of our discussion right now.

00:11:16.600 | But for the most part, you have to pay tax on interest

00:11:19.040 | that you earn in the account.

00:11:21.040 | Dividends are also taxable, but at a reduced rate.

00:11:24.160 | So you're paying a lower tax rate

00:11:25.560 | than you would for most types of income.

00:11:28.600 | And short-term capital gains are taxable at ordinary income tax

00:11:32.400 | rates.

00:11:33.400 | A short-term capital gain--

00:11:35.200 | a capital gain is when you sell something

00:11:36.920 | for more than you paid for it.

00:11:38.160 | That's why it's a gain.

00:11:39.280 | And in this case, it's a short-term capital gain

00:11:41.960 | because it means that you held the asset for one year

00:11:44.720 | or less before you sold it.

00:11:46.240 | And those are taxed at regular tax rates.

00:11:49.000 | Now, we have long-term capital gains, where in this case,

00:11:51.520 | it means that it's long-term because you held

00:11:53.440 | the asset for longer than one year before selling it.

00:11:56.080 | And those are also taxable as income,

00:11:58.600 | but they are taxed at a lower rate, just like dividends are.

00:12:03.120 | Next, we have the traditional IRA.

00:12:05.640 | And with those, there is a limit to how much

00:12:07.920 | you can contribute to that type of account every year.

00:12:10.640 | For 2021, that's the lesser of your earned income, or $6,000,

00:12:15.880 | or $7,000 if you're age 50 and up.

00:12:18.960 | And with the traditional IRA, in theory, at least the amount

00:12:22.960 | you put into the account is deductible.

00:12:25.520 | However, if you have a workplace retirement plan, so a 401(k)

00:12:29.280 | or a 403(b), which we'll talk about in a second,

00:12:31.280 | then depending on your income level,

00:12:32.800 | you might not actually get a deduction for the contributions

00:12:36.040 | that you make to the plan.

00:12:38.280 | The other big benefit, though, of a traditional IRA

00:12:40.480 | is that the money gets to grow tax-free

00:12:42.960 | while it stays in the account.

00:12:44.480 | So you can earn interest and dividends,

00:12:46.080 | and you can sell things for capital gains.

00:12:47.920 | And you won't have to pay tax on any of that

00:12:49.880 | as long as the money stays in the account.

00:12:52.640 | But then when you take the money out,

00:12:54.640 | we call that a distribution, anytime you take money out

00:12:57.120 | of a retirement account.

00:12:58.560 | And distributions from traditional IRAs

00:13:00.720 | are taxable as income.

00:13:01.880 | So basically, you get the deduction

00:13:03.880 | when you put the money in.

00:13:05.400 | Then it gets to grow tax-free while the money

00:13:07.320 | stays in the account.

00:13:08.400 | But then it's taxable when you take the money out.

00:13:11.120 | And if you take distributions before age 59 and 1/2,

00:13:15.880 | there can be a 10% penalty.

00:13:17.520 | There are various exceptions to that penalty.

00:13:20.960 | But the general idea here is that Congress

00:13:22.800 | created these accounts so that they

00:13:25.920 | would be retirement accounts.

00:13:27.120 | And they put this rule in place, basically,

00:13:28.920 | to discourage people from taking money out early.

00:13:32.200 | Next, we have the Roth IRA.

00:13:34.120 | And they share a contribution limit with traditional IRAs.

00:13:36.680 | So $6,000 for 2021.

00:13:38.560 | So I need to right-click on it?

00:13:40.240 | Hold on.

00:13:41.520 | Yeah, use two fingers to click on it.

00:13:43.720 | OK.

00:13:45.880 | And with the Roth IRA, you do not

00:13:48.040 | get a deduction for the amounts that you

00:13:49.680 | contribute to the account.

00:13:51.520 | But the account does get to grow tax-free,

00:13:54.080 | just like with the traditional IRA.

00:13:56.360 | And distributions of earnings, they're completely tax-free

00:13:59.880 | if you're at least age 59 and 1/2.

00:14:02.120 | And this is a bit of a simplification,

00:14:03.760 | but as long as you've had a Roth IRA for five years.

00:14:06.000 | If you take money out early, if you take earnings out early,

00:14:08.520 | there can be a 10% penalty.

00:14:12.000 | And one important point about a Roth IRA

00:14:14.880 | is that the money that you put into it, the contributions,

00:14:17.720 | you can take that money back out tax-free and penalty-free

00:14:21.080 | at any age.

00:14:22.280 | So if you're 23 right now, and you put $6,000 into a Roth IRA

00:14:27.040 | this year, and then by next year,

00:14:29.680 | that $6,000 has grown to $6,500, and it turns out

00:14:32.960 | that something comes up and you need to take money out,

00:14:36.320 | the $6,000 that you put in, you can take that back out

00:14:39.360 | tax-free and penalty-free, even though you're way younger

00:14:41.720 | than 59 and 1/2.

00:14:42.600 | It's only if you took out the earnings.

00:14:44.400 | If you took out the growth as well,

00:14:45.920 | that's where the penalty can come into play.

00:14:48.960 | And the ability to contribute to a Roth IRA,

00:14:51.920 | it phases out based on your modified adjusted gross income.

00:14:54.720 | So basically, if you earn too much,

00:14:56.280 | you can't contribute to a Roth IRA.

00:14:57.840 | There's a concept called the backdoor Roth IRA, which

00:15:03.880 | is beyond our discussion here.

00:15:06.400 | But basically, if you earn more than the limits shown

00:15:09.120 | on this slide, that's something that you should look into,

00:15:11.560 | because it might be a way that you could effectively

00:15:13.680 | contribute to a Roth.

00:15:16.240 | Next, we have the 401(k) plan, which

00:15:18.680 | is a lot like a traditional IRA, but it's through your employer.

00:15:21.600 | So basically, the amount that you put into the account,

00:15:24.640 | it reduces your taxable income.

00:15:26.200 | So you get some tax savings this year.

00:15:27.880 | And the account gets to grow tax-free.

00:15:29.760 | And then when you take money out,

00:15:31.120 | it's taxable as a distribution.

00:15:32.520 | So again, that's a lot like a traditional IRA, basically,

00:15:36.080 | all three of those things.

00:15:38.040 | One big difference is that there is a much higher contribution

00:15:40.480 | limit, so it's $19,500 for 2021, or $26,000 if you're age 15 up.

00:15:45.880 | And another critical point about 401(k)s

00:15:48.640 | is that many employers offer what's

00:15:50.140 | called a matching contribution, which

00:15:51.960 | is where, as long as you put a certain amount--

00:15:53.960 | OK, hold on.

00:15:58.040 | So as long as you put a certain amount into the account,

00:16:02.240 | your employer is going to match that contribution.

00:16:05.320 | And that's a great deal, because they're basically

00:16:08.440 | doubling your money for you.

00:16:09.720 | So it's a 100% return that's risk-free,

00:16:13.960 | which is obviously better than you're going to get basically

00:16:16.520 | anywhere else.

00:16:17.120 | So if your employer offers a match,

00:16:19.680 | you want to make sure to contribute at least enough

00:16:22.000 | to get that match.

00:16:23.920 | And for our purposes, 403(b) plans,

00:16:27.560 | they're basically the same as 401(k) plans.

00:16:29.480 | Everything we've talked about so far

00:16:31.160 | is the same with a 403(b).

00:16:33.760 | 403(b)s are just through different types of employers,

00:16:36.320 | so nonprofit employers and some government entities,

00:16:40.880 | whereas 401(k) plans are usually through businesses basically.

00:16:44.920 | And then just like with the IRAs,

00:16:47.040 | we have the traditional version and the Roth version,

00:16:49.280 | same thing with 401(k)s and 403(b)s.

00:16:52.160 | And one point of note is that your employer doesn't

00:16:55.200 | necessarily have to offer a Roth option,

00:16:57.920 | even if they offer a regular 401(k) or 403(b).

00:17:01.800 | And the contribution limit for Roth 401(k) and 403(b) accounts

00:17:05.440 | is shared with regular 401(k) and 403(b) accounts.

00:17:08.200 | So it's $19,500 for 2021 or $26,000 if you're age 15 and up.

00:17:14.120 | And because these are Roth accounts,

00:17:15.760 | you don't get a deduction for the money

00:17:17.280 | that you put into the account, but it

00:17:19.120 | does get to grow tax-free.

00:17:20.960 | And as long as you're at least age 59 and 1/2,

00:17:24.400 | and as long as your first Roth contribution to the plan

00:17:27.640 | was five years ago, then the distributions

00:17:30.360 | are tax-free as well, including the earnings.

00:17:34.040 | One point of note about Roth 401(k) and 403(b) plans.

00:17:39.440 | Remember, just a minute ago, we were

00:17:41.000 | saying that with a Roth IRA, you can take your contributions

00:17:44.280 | back out tax-free and penalty-free at any time.

00:17:47.160 | That doesn't apply to Roth 401(k) and 403(b)s.

00:17:50.600 | It's just Roth IRAs.

00:17:51.960 | With a Roth 401(k) or 403(b), your money

00:17:54.320 | is going to be more tied up.

00:17:55.720 | And if you take it out before 59 and 1/2,

00:17:57.960 | you might have a 10% penalty.

00:18:01.720 | So that's it for the building blocks.

00:18:04.880 | We can pause here for questions if we want to,

00:18:06.760 | or I can move on to constructing a portfolio,

00:18:09.240 | the nuts and bolts decisions that we have to make.

00:18:12.880 | Miriam, do we have any questions that we want to tackle right

00:18:15.480 | now?

00:18:18.120 | Oh, you're muted right now.

00:18:19.320 | I'd like to open it up to the green.

00:18:25.600 | I decided to open it up to participants for questions.

00:18:29.080 | If you have one for Mike, you can put it

00:18:31.520 | into the chat or raise your hand, and we will unmute you,

00:18:36.640 | and you can ask it out loud.

00:18:40.360 | Mike, I do have one question, and that

00:18:42.960 | is, could you discuss exactly why

00:18:47.480 | a stock and a bond are different under the hood

00:18:53.360 | for your portfolio when you go into those terrible bear

00:19:00.200 | markets that you showed on those graphs?

00:19:02.720 | Why is the bond--

00:19:04.640 | why is holding some bonds--

00:19:08.120 | what is it doing to your portfolio?

00:19:09.840 | It looks like the bonds are just cooking along,

00:19:12.520 | and the stocks are going way down.

00:19:15.200 | So my instincts tell me it's just leveling out

00:19:18.120 | your portfolio more, but why is that?

00:19:21.720 | Yeah, that is generally the idea.

00:19:23.280 | We'll get to that in a second when

00:19:24.720 | we talk about asset allocation.

00:19:27.000 | But the reason is that bonds are a contract, right?

00:19:31.600 | The borrower is going to keep paying you

00:19:34.400 | interest throughout the period, even if the stock

00:19:37.640 | market is going down.

00:19:38.760 | I mean, unless the borrower defaults, which can happen,

00:19:41.760 | but as long as you stick to high credit quality bonds,

00:19:46.200 | then you're going to keep collecting those interest

00:19:48.360 | payments year after year after year until the bond matures.

00:19:52.240 | So they provide a return that is mostly

00:19:57.920 | independent of the stock market.

00:19:59.200 | There are certainly some economic things

00:20:00.880 | that can affect both stocks and bonds, but it's a contract.

00:20:04.920 | And the borrower is paying you interest every year,

00:20:07.040 | so the rate of return doesn't depend on the stock market,

00:20:09.880 | basically.

00:20:10.840 | So basically, would you say that when

00:20:13.800 | you have these recessions, and the companies

00:20:16.120 | are having difficulty, so the price of their shares

00:20:20.040 | goes down, and even though it's a mutual fund,

00:20:25.160 | because it's a mutual fund of stocks, it goes down.

00:20:28.360 | The value of each share goes down, so your value goes down.

00:20:33.760 | But in a bond, in a bond mutual fund also,

00:20:37.760 | the value of the bond doesn't go down necessarily, right?

00:20:42.640 | And because it keeps paying interest,

00:20:45.000 | it is actually keeping you afloat.

00:20:48.640 | Right, yeah.

00:20:50.280 | The bond's price, whether it goes up or down,

00:20:53.280 | it could be affected by whether the company or company's

00:20:56.440 | in question.

00:20:58.560 | If their credit rating changes, that

00:21:00.240 | would affect the price of the bond, certainly.

00:21:02.440 | And it's affected by interest rates in the market.

00:21:05.200 | But if you're holding a bond to maturity,

00:21:07.680 | you're just collecting those interest payments

00:21:09.600 | the whole time, regardless of what the stock market is doing.

00:21:12.520 | And you're talking about, for starting out investors,

00:21:17.080 | owning bond mutual funds, not individual bonds themselves.

00:21:22.720 | Is that correct?

00:21:24.440 | It's true with both, because a mutual fund

00:21:28.400 | is owning individual bonds.

00:21:30.480 | That's what they are doing.

00:21:32.040 | So in either case, you're basically just receiving

00:21:34.800 | that interest over time.

00:21:36.000 | And the prices of bonds can move up and down

00:21:38.920 | based on interest rates and changes in credit rating

00:21:41.000 | of the borrowers in question.

00:21:43.280 | But those fluctuations tend to be

00:21:46.120 | quite a bit less dramatic than with stocks.

00:21:48.520 | And the primary part of the return is through interest.

00:21:51.960 | And because that's a contract, it's very predictable.

00:21:57.080 | So we did receive a couple of questions.

00:22:02.320 | So one where bond owners are the creditors of the company.

00:22:07.960 | If a company goes bankrupt, do bondholders get paid?

00:22:16.520 | They often do.

00:22:17.720 | It depends on how the assets of the company.

00:22:21.720 | So when a company goes bankrupt, it doesn't usually

00:22:23.800 | have zero assets.

00:22:24.880 | It's got some assets left.

00:22:26.120 | And it depends on how the assets of the company

00:22:28.120 | compare to the liabilities of the company.

00:22:30.400 | But bondholders, as creditors of the company,

00:22:35.240 | they are one of the first parties

00:22:37.680 | in line to get a share of the assets

00:22:41.840 | that the business still has.

00:22:44.200 | Whereas stockholders are basically the end of the line.

00:22:47.560 | If a company is going bankrupt, stockholders

00:22:49.440 | are usually getting nothing.

00:22:50.680 | But bondholders, they might not necessarily

00:22:53.360 | get the entire amount that they're promised.

00:22:55.720 | But they'll usually be getting something.

00:23:00.360 | Another question, what is preferred stock?

00:23:03.840 | Is this better than normal stock?

00:23:06.360 | That's a great question.

00:23:07.840 | Preferred stock, it's called preferred

00:23:11.240 | precisely because of the topic we were just

00:23:13.080 | talking about in terms of the order of if a company goes

00:23:19.440 | bankrupt, a preferred stockholder

00:23:21.800 | stands ahead of regular stockholders

00:23:25.240 | in line in terms of potentially getting

00:23:27.200 | some assets from the company.

00:23:29.760 | A preferred stock, it has a fixed amount of dividends

00:23:34.000 | that it pays.

00:23:36.160 | But it's not a contract like with a bond.

00:23:40.280 | The company can choose not to pay those dividends

00:23:43.920 | in many cases.

00:23:45.320 | But the amount of dividends that the preferred stock

00:23:50.800 | is supposed to pay, the company has

00:23:53.600 | to pay those dividends to the preferred shareholders

00:23:56.480 | before paying any dividends to common shareholders.

00:24:00.280 | So it's still an equity investment.

00:24:03.680 | But it's a little bit more like a bond than a regular stock

00:24:07.160 | is because they generally have a high level of income.

00:24:10.480 | And it's a somewhat predictable level of income.

00:24:14.080 | But they still can fluctuate in value quite a bit

00:24:17.160 | just like regular stocks can.

00:24:18.720 | And they don't necessarily pay anything

00:24:21.120 | just like regular stocks.

00:24:25.560 | So if I have a Roth 401(k) for longer than five years

00:24:30.440 | and then roll it into a Roth IRA,

00:24:33.400 | do I have to meet the five-year rule again?

00:24:36.080 | Do you have to meet the five-year rule again?

00:24:38.040 | For withdrawals, the penalty-free withdrawals.

00:24:41.160 | In that case, it depends.

00:24:43.960 | It's the Roth IRA five-year rule that we'd

00:24:46.680 | be concerned with then.

00:24:47.720 | So if that was the first time you opened a Roth IRA,

00:24:51.240 | then yes.

00:24:52.440 | But if you had already had a Roth IRA for 10 years

00:24:55.400 | or something, and now you're rolling Roth 401(k) assets

00:24:58.160 | into it, then you've met the applicable five-year rule.

00:25:02.800 | Mike--

00:25:07.720 | Can we go ahead and move on?

00:25:09.400 | Yeah, that's all the questions that I've seen.

00:25:11.880 | If anybody else has any questions, post it in the chat.

00:25:16.280 | The only other question, Mike, is about ETFs.

00:25:22.160 | And is there a preference, ETFs or mutual funds?

00:25:27.320 | Yeah, we're going to talk about that in just a second.

00:25:29.560 | Oh, OK.

00:25:31.320 | I had a quick question before you move on, Mike.

00:25:33.360 | You spoke about how interest is taxed at a higher

00:25:37.760 | rate than dividends.

00:25:39.440 | Is it marginally more, or are dividends much more favorable?

00:25:44.600 | Can you elaborate on that?

00:25:45.880 | Sure.

00:25:47.000 | Depending on your income level, dividends sometimes

00:25:50.720 | are taxed at a 0% rate.

00:25:52.720 | So dividends can be--

00:25:55.840 | that would be quite different, 0%

00:25:58.680 | as opposed to the tax bracket that you're in.

00:26:01.640 | However, as your income level goes up,

00:26:04.360 | your taxable income level, dividends

00:26:06.840 | will be taxed at a higher rate.

00:26:09.800 | But no matter your income level, dividends

00:26:12.880 | are going to be taxed at a lower rate

00:26:14.600 | than regular ordinary interest income.

00:26:16.600 | But the difference between the two,

00:26:18.440 | it's not a fixed percentage.

00:26:20.160 | So sometimes it's a big difference.

00:26:21.600 | Sometimes it's a small difference.

00:26:24.800 | Thanks.

00:26:25.800 | And we did receive one more question.

00:26:29.120 | If you hold a bond to maturity, you're

00:26:31.200 | not affected by the price of the bond.

00:26:33.360 | How does this work with a bond fund that

00:26:37.280 | does not have a maturity date?

00:26:38.920 | That's getting into something called the duration,

00:26:46.800 | is what we're interested in.

00:26:49.920 | So the price of a bond is moving up and down

00:26:52.040 | based on changes in market interest rates.

00:26:55.120 | And the duration of the bond fund

00:26:59.680 | is going to tell you how sensitive the price of that

00:27:04.280 | bond fund will be to changes in interest rates.

00:27:08.000 | Basically, it's a rough calculation.

00:27:11.560 | But for instance, if a bond fund has a six-year average

00:27:15.400 | duration and interest rates go up by 1%,

00:27:18.520 | then the price of the bond fund would go down by about 6%,

00:27:21.640 | so the average duration times the change in interest rates.

00:27:26.160 | And so the longer the duration of the bond fund,

00:27:28.920 | the more volatility you're going to experience in its value

00:27:33.480 | over time as interest rates move up and down.

00:27:35.600 | Can we go on?

00:27:40.400 | Yeah.

00:27:41.080 | All right.

00:27:41.960 | So constructing a portfolio, you're

00:27:43.760 | going to have to decide whether you

00:27:45.200 | want to use individual stocks and bonds or mutual funds.

00:27:48.120 | If you are going to use mutual funds,

00:27:49.680 | you need to decide whether they should be actively managed

00:27:52.080 | or passively managed.

00:27:53.280 | And you need to figure out what asset allocation

00:27:55.600 | you want to use.

00:27:56.280 | So the big question there is how much in stocks

00:27:58.240 | and how much in bonds.

00:28:00.400 | So first question, individual stocks and bonds

00:28:03.200 | or mutual funds?

00:28:04.560 | And the answer, don't bother picking individual stocks.

00:28:09.000 | The reason for this is that the expectations for a company,

00:28:13.280 | they are already priced into the company's stock price.

00:28:17.800 | That's a complicated sounding thing.

00:28:19.800 | Basically what it means is that a stock's performance is not

00:28:24.520 | a function of how profitable the company turns out to be.

00:28:27.720 | It's a function of how profitable the company is

00:28:30.160 | as compared to what the market expected.

00:28:32.200 | A lot of people think that you just

00:28:33.640 | have to pick a profitable company

00:28:35.720 | to pick a winning stock.

00:28:36.760 | So they look and say, Amazon, Google,

00:28:38.840 | those are profitable companies.

00:28:40.120 | So surely those will be winning stocks going forward.

00:28:43.040 | But it's not that simple.

00:28:44.640 | Because to pick above average stocks,

00:28:47.520 | you don't just have to identify profitable companies.

00:28:49.720 | You have to identify companies that

00:28:51.680 | turn out to be more profitable than the market expected

00:28:55.040 | them to be.

00:28:56.200 | And that's tricky.

00:28:57.480 | Because the market is, on average, pretty darn smart.

00:29:01.040 | It's made up of a lot of professional investors.

00:29:03.640 | And that's who you're competing against when you're

00:29:05.680 | picking individual stocks.

00:29:08.200 | Because every time you make a transaction, if you're buying,

00:29:12.080 | there's somebody on the other side of the transaction.

00:29:14.320 | There's somebody selling, by definition.

00:29:16.040 | If you're selling, there's somebody buying.

00:29:18.200 | And the way it works is that most

00:29:22.320 | of the transactions in the market

00:29:24.400 | are done by the parties that control the most dollars.

00:29:27.720 | So most of the time, the people you're competing against here

00:29:31.600 | are hedge fund managers, mutual fund managers, pension fund

00:29:35.120 | managers, and so on.

00:29:36.360 | And so you're competing against people

00:29:37.920 | who are probably at least as qualified as you are.

00:29:41.480 | And they probably spend more time doing this than you do.

00:29:44.360 | And they probably have access to information

00:29:46.200 | that you don't have access to.

00:29:47.440 | Because their company probably has full-time analysts

00:29:51.040 | providing them information.

00:29:52.160 | Or they're buying research from other companies

00:29:54.480 | that you probably aren't paying for.

00:29:56.040 | So it's a competition where the odds are really not

00:29:59.760 | in your favor.

00:30:01.960 | And when you use individual stocks,

00:30:04.480 | you're increasing the risk of your portfolio.

00:30:07.200 | Because if you use a mutual fund,

00:30:09.080 | it's really easy to pick a mutual fund that

00:30:10.840 | owns hundreds or thousands of stocks.

00:30:13.920 | Whereas if you pick individual stocks,

00:30:16.920 | you're probably not going to buy several hundred of them.

00:30:19.480 | You're probably only going to buy a handful.

00:30:21.520 | And so you're less diversified.

00:30:24.280 | And because of who you're competing against,

00:30:27.720 | you're not increasing your expected returns at all.

00:30:31.000 | So using individual stocks is a decision

00:30:33.240 | where you're increasing your risk without an increase

00:30:36.640 | in expected return, which is generally something

00:30:38.960 | that we want to avoid.

00:30:39.880 | If you're taking on more risk, you only

00:30:41.320 | want to do that because you're going

00:30:42.880 | to be getting higher expected returns.

00:30:45.280 | So most people should be using mutual funds rather

00:30:50.840 | than individual stocks.

00:30:52.240 | And then that leads us to the question

00:30:54.480 | of whether they should be actively managed or passively

00:30:56.720 | managed.

00:30:58.600 | And remember, with an actively managed fund,

00:31:01.600 | the goal is for the manager to pick investments

00:31:05.040 | that are above average.

00:31:07.080 | And so we could ask, how often are active managed funds

00:31:12.360 | able to actually do that?

00:31:14.040 | And as it turns out, the answer is not very often.

00:31:16.560 | Most actively managed funds perform worse

00:31:19.680 | than their passively managed counterparts.

00:31:22.720 | For instance, Morningstar put out

00:31:24.720 | a study that looked at the 20-year period ending

00:31:27.640 | in December of last year.

00:31:29.320 | And they asked, in each of these different categories

00:31:32.880 | of mutual funds, what percentage of actively managed funds,

00:31:38.400 | both A, survived through the period

00:31:40.640 | so they didn't get shut down by the fund manager,

00:31:43.400 | and B, they outperformed the average passive fund

00:31:48.880 | in that category.

00:31:51.120 | And it turns out, for US large cap blend funds,

00:31:54.600 | so that's actively managed funds that

00:31:57.920 | invest in large companies, it was only 12.8% succeeded.

00:32:03.000 | For large cap value funds, it was 16.8%.

00:32:06.400 | 11.3% for large cap growth funds.

00:32:09.680 | 8.7% for mid-cap funds.

00:32:12.720 | 29.6% for small cap funds.

00:32:14.960 | So that's better, but still way below 50%--

00:32:19.200 | much worse odds of--

00:32:20.840 | you're much less likely to succeed than to fail.

00:32:23.920 | And 14.6% for foreign large cap blend funds.

00:32:27.360 | And then on the fixed income side,

00:32:29.280 | 9.7% for intermediate term core bond funds.

00:32:32.280 | So basically, your odds of success

00:32:35.200 | with an actively managed fund, your odds

00:32:37.120 | of outperforming the average passively managed fund,

00:32:41.440 | they're terrible, to put it frankly.

00:32:43.480 | They're really quite bad.

00:32:47.240 | Another way to look at it is you could

00:32:49.080 | say, within a given category of mutual fund--

00:32:52.240 | so international stock funds, for instance--

00:32:55.360 | what would be the best way to pick a fund that

00:32:58.720 | is likely to be a top performer?

00:33:00.840 | And this is what Morningstar's Russell Kennel--

00:33:03.680 | he's their director of manager research--

00:33:05.360 | here's what he had to say.

00:33:07.080 | This is from a 2016 article.

00:33:08.800 | He said, "The expense ratio is the most proven predictor

00:33:11.280 | of future fund returns.

00:33:12.720 | We find that it's a dependable predictor when we run the data.

00:33:15.720 | That's also what academics fund companies and, of course,

00:33:18.280 | Jack Bo will find when they run the data."

00:33:20.040 | Again, this is from a 2016 article before he passed away.

00:33:24.240 | So he's talking about expense ratios here.

00:33:26.520 | And the expense ratio is what the fund manager

00:33:28.560 | charges to run the fund.

00:33:32.640 | And with an actively-managed fund,

00:33:35.480 | the expense ratios are higher because they're

00:33:37.800 | paying analysts, basically.

00:33:39.640 | They're paying people to do all this research

00:33:41.520 | to try to pick the best stocks and best bonds.

00:33:44.120 | And with a passively-managed fund,

00:33:46.240 | they're just buying all the investments that

00:33:48.080 | are listed on the given index.

00:33:50.040 | So it's a much more hands-off thing.

00:33:51.560 | And you can do it with a lot less labor, basically.

00:33:54.760 | It's less expensive to do.

00:33:55.880 | So passively-managed funds have lower expense ratios.

00:33:59.680 | And from the article that the previous quote came from,

00:34:02.840 | what Russell Kennel did is he sorted funds into quintiles

00:34:05.440 | by expense ratio.

00:34:06.640 | And he asked, for each mutual fund,

00:34:08.920 | what is the likelihood that that fund would survive and be

00:34:12.600 | a better-than-average performer?

00:34:15.120 | And basically, what you can see here

00:34:19.320 | is that the more expensive the fund, the lower the likelihood.

00:34:22.760 | Was a 62% chance of success for the cheapest quintile of funds,

00:34:27.440 | then 48% for the next cheapest quintile, then 39%, then 30%,

00:34:30.960 | then 20%.

00:34:31.680 | So basically, as the funds get more expensive,

00:34:34.520 | the less likely they are to be top performers.

00:34:38.360 | And the least expensive funds tend

00:34:40.280 | to be passively-managed funds.

00:34:41.760 | So they're the most likely top performers.

00:34:44.160 | However, you don't have to worry about really small differences

00:34:50.480 | in expense ratios.

00:34:51.560 | If we're talking about 0.05% versus 0.07%,

00:34:54.760 | that's not the sort of thing that's

00:34:56.200 | likely to show up in the performance

00:34:57.960 | in any meaningful way.

00:34:59.720 | What you really want to be focused on

00:35:01.200 | is, if you have the choice between 0.05% and 0.5%,

00:35:05.800 | so 10 times as much, that's the sort of thing

00:35:08.200 | that's going to make a big difference

00:35:09.200 | over an extended period of time.

00:35:10.480 | And if you're using passively-managed funds,

00:35:16.200 | you'll have to decide whether you want

00:35:18.160 | to use index funds or ETFs.

00:35:21.560 | And there is one important thing to know about this decision,

00:35:27.120 | and it is that it doesn't matter.

00:35:29.000 | It really doesn't matter.

00:35:30.600 | For most people, there are hundreds

00:35:34.520 | of financial planning decisions that matter more than this one.

00:35:37.320 | That's not an exaggeration.

00:35:39.760 | The difference is the advantage of ETFs,

00:35:42.720 | they let you use orders other than market orders.

00:35:45.760 | And if you're a new investor and you're

00:35:47.360 | wondering what is a market order and what is something

00:35:49.640 | other than a market order, you don't even need to look it up.

00:35:52.680 | You don't need to worry about it.

00:35:54.040 | You can if you want to, but it's not going to be important.

00:35:57.240 | Another difference is that ETFs let

00:35:58.800 | you place a trade during the day and have it executed right

00:36:01.880 | away, whereas with an index fund,

00:36:03.640 | the trade will be executed at the end of the day.

00:36:06.480 | That's how mutual funds work.

00:36:07.920 | And again, that's something that usually doesn't matter.

00:36:11.600 | ETFs sometimes have very slightly lower costs.

00:36:17.040 | And that's an advantage, but again, it's

00:36:18.720 | pretty slight, and from one fund company to the next,

00:36:21.480 | it might not even be true.

00:36:23.760 | So those are the advantages of ETFs.

00:36:25.960 | The advantage of index funds, basically they

00:36:28.200 | let you place round dollar amount orders.

00:36:30.800 | In some cases, you can't buy fractional shares of an ETF.

00:36:35.120 | So let's say you open Roth IRA, you put $6,000 into it,

00:36:39.120 | and you want to invest all of that in a certain ETF.

00:36:41.880 | You might only be able to invest $5,990.

00:36:46.040 | You might have $10 left over sitting in cash

00:36:48.080 | because that wasn't quite enough to buy another share,

00:36:51.600 | whereas with an index fund, you can buy fractional shares,

00:36:54.200 | so you can invest the whole $6,000.

00:36:56.680 | But that's also a really small difference.

00:36:59.640 | So seriously, this isn't important.

00:37:01.400 | You could flip a coin to make this decision

00:37:04.000 | and then never worry about it again for the rest of your life,

00:37:06.800 | and that would be fine.

00:37:09.040 | So moving on to our third question, which

00:37:10.840 | is what asset allocation to use.

00:37:13.200 | The big question here is basically

00:37:14.660 | how much of the portfolio should be in stocks, so risky stuff,

00:37:18.000 | and how much of it should be in bonds, fixed income,

00:37:20.280 | safer investments.

00:37:22.320 | And this should be based on your risk tolerance.

00:37:26.040 | Your risk tolerance has two components.

00:37:27.720 | First, there's an economic component,

00:37:30.360 | which is basically how much risk you can afford to take.

00:37:33.640 | And then there's a mental psychological component,

00:37:36.200 | which is how much risk you can handle psychologically,

00:37:39.720 | basically.

00:37:41.080 | And on the economic side, for most people,

00:37:44.160 | at the very beginning of their career,

00:37:46.480 | their economic risk tolerance is low

00:37:48.680 | because you need to get an emergency fund in place.

00:37:50.800 | Basically, you need a few months of living expenses

00:37:53.000 | and something safe before you start

00:37:54.880 | investing in something risky.

00:37:56.320 | Because you could get laid off.

00:37:57.840 | You can have an unexpected medical expense,

00:38:00.760 | an expensive car repair, something like that.

00:38:02.800 | And you need to know that you have some assets on hand

00:38:05.360 | to pay for that sort of thing.

00:38:07.360 | However, once you have an emergency fund in place,

00:38:11.720 | if you're early in your career for the rest of your assets,

00:38:15.720 | your economic risk tolerance is basically as high

00:38:18.720 | as it's ever going to be.

00:38:20.040 | Because if you aren't going to be spending this money

00:38:22.960 | until 30 years from now, the stock market

00:38:25.720 | could go way down next week or next year or next month.

00:38:29.560 | Then that would be fine.

00:38:30.840 | It doesn't hurt you at all.

00:38:32.040 | Because all that really matters is

00:38:33.720 | what your account balance looks like 30 years from now

00:38:36.920 | when you actually are going to be spending the money.

00:38:39.960 | So early in your career, once you have an emergency fund,

00:38:43.320 | your economic risk tolerance is pretty high.

00:38:46.200 | The mental side of things just depends

00:38:48.680 | on your personal experiences.

00:38:50.440 | And it depends on your personality.

00:38:52.040 | Some people are just naturally comfortable with more risk.

00:38:54.920 | And some people aren't.

00:38:56.080 | And it's important to just try to know where you stand

00:38:59.240 | on that matter personally.

00:39:02.680 | What this slide shows, this data is from Vanguard.

00:39:05.280 | It basically shows just the average annual return

00:39:09.160 | for portfolios at different allocations.

00:39:11.560 | As we move down the slide, we get

00:39:13.520 | to riskier allocations, so more in stocks.

00:39:16.440 | And you can see that the average annual return over from 1926

00:39:20.560 | to 2019, so a very long period, more stocks

00:39:23.440 | means higher returns on average.

00:39:25.720 | But then we look at the next column too.

00:39:27.520 | And what that's showing is exactly what it says.

00:39:29.480 | It's the worst calendar year.

00:39:30.640 | So for this given allocation, how much

00:39:33.920 | did the portfolio lose in the worst calendar year on record?

00:39:37.640 | And you can see that the more money you have in stocks,

00:39:40.280 | the harder you get hit when the stock market goes down.

00:39:42.560 | It's pretty straightforward.

00:39:44.320 | But the idea here is you want to try

00:39:46.360 | to pick an allocation that you can stick with, something that

00:39:49.640 | isn't going to exceed your risk tolerance.

00:39:52.400 | Because when you exceed your risk tolerance,

00:39:54.680 | it causes stress and anxiety, which

00:39:57.000 | is detrimental in its own right.

00:39:59.720 | But then it can have very negative financial consequences

00:40:02.320 | also.

00:40:02.920 | Because just like we talked about when

00:40:06.080 | we were looking at a couple of bear markets earlier,

00:40:08.280 | if the market goes down and you start to panic,

00:40:11.280 | you realize you've exceeded your risk tolerance.

00:40:13.280 | You're absolutely not comfortable with the losses

00:40:17.120 | you're feeling in your portfolio right now.

00:40:19.440 | Then you take your money out of the market.

00:40:21.960 | Well, then when the market goes back up,

00:40:23.920 | your portfolio doesn't go up along with it.

00:40:26.520 | You're sitting there in cash.

00:40:28.400 | So you want to pick an allocation

00:40:30.040 | that you can stick with, even through the down markets.

00:40:35.760 | Now, we can next look at what a portfolio might

00:40:39.000 | look like in terms of an ideal group of holdings.

00:40:42.280 | A common theme on the Bogleheads forum

00:40:45.640 | is the three-fund portfolio.

00:40:46.960 | And I think it is a great idea.

00:40:48.600 | It's basically just a total stock market index

00:40:51.160 | fund, or a comparable ETF, and a total international stock

00:40:55.280 | index fund, or a comparable ETF, and then a total bond market

00:40:58.000 | index fund, or ETF.

00:40:59.840 | And with just these three funds, you've

00:41:02.840 | got everything you need.

00:41:04.720 | Your portfolio will be extremely diversified,

00:41:07.760 | because with those two stock funds,

00:41:10.560 | you will own literally thousands of companies

00:41:12.440 | from around the world.

00:41:13.360 | So massively diversified portfolio of stocks.

00:41:16.680 | And your bond portfolio is going to be very diversified

00:41:18.960 | well with a total bond market index fund.

00:41:23.280 | So it's everything you need.

00:41:24.680 | And as long as you stick with funds from a reputable fund

00:41:28.000 | company, so Vanguard, Fidelity, or Schwab, for instance,

00:41:31.840 | it's going to be low cost as well.

00:41:34.320 | And it's simple, which is nice because it

00:41:38.200 | makes it easy to understand.

00:41:40.200 | Because the three funds here, they each

00:41:42.880 | represent something very tangible.

00:41:45.040 | The US stock market, international stock market,

00:41:47.480 | and bonds.

00:41:48.320 | There's nothing esoteric or weird here.

00:41:50.040 | It's just basic things that make sense.

00:41:52.880 | You can understand why they're each there.

00:41:55.920 | And it's easier to maintain.

00:41:57.880 | Because with any portfolio, what eventually happens--

00:42:03.760 | you'll pick a targeted allocation,

00:42:05.960 | but then some part of your portfolio

00:42:08.040 | performs better than the other parts.

00:42:10.160 | So if this is the intended allocation,

00:42:11.800 | then it's going to be this.

00:42:12.840 | You'll have a little bit too much of something

00:42:14.760 | and a little bit too little of something else.

00:42:16.880 | So what you have to do is called rebalancing,

00:42:18.800 | where you bring the portfolio back

00:42:20.520 | to its intended allocation.

00:42:22.600 | And if you only have three different [AUDIO OUT]

00:42:26.240 | that's a lot easier to do.

00:42:27.840 | If your targeted allocation is 10 different funds,

00:42:30.840 | and it's 11% of this and 3% of that,

00:42:33.120 | 17% of that, and so on, then it takes more math

00:42:36.240 | to figure out exactly how many dollars of each of those things

00:42:38.920 | you should have.

00:42:39.760 | And it takes more transactions to do the necessary buying

00:42:42.120 | and selling.

00:42:42.680 | So fewer funds makes that process easier.

00:42:46.080 | And if you want to, you can go one step simpler,

00:42:49.080 | which is to just use a two-fund portfolio, where you're just

00:42:51.920 | using a total world stock index fund or an ETF.

00:42:57.000 | So then what you're doing there is basically

00:42:59.760 | it's one fund that owns both the US

00:43:01.920 | and international components, and then a bond fund.

00:43:05.120 | And that's it.

00:43:05.920 | And again, that's a very diversified portfolio.

00:43:08.840 | And it's going to be very simple and extremely inexpensive.

00:43:11.800 | That would be a great portfolio, in my opinion.

00:43:15.440 | And if you want to, you can go one step simpler,

00:43:18.160 | which is just use a target date fund.

00:43:19.960 | Those are the funds with a date in the name.

00:43:21.760 | So target retirement 2050 or something like that.

00:43:24.640 | And those funds hold an underlying allocation

00:43:27.840 | of other funds.

00:43:29.280 | And the idea is that over time, as they get closer

00:43:33.320 | to the date in the name, they move

00:43:35.600 | from an aggressive allocation to a more conservative allocation.

00:43:41.320 | An important point about these funds,

00:43:42.840 | though, is that there's a lot of variation

00:43:46.000 | in the underlying allocation from one fund company

00:43:48.640 | to another.

00:43:49.640 | So if you were looking--

00:43:51.000 | for instance, if you looked up the 2035 fund from six

00:43:55.600 | different fund companies, and you looked them up

00:43:58.080 | on Morningstar, and then you clicked over

00:43:59.360 | to the Portfolio tab so you see the actual asset allocation,

00:44:02.640 | they're not going to be the same as each other.

00:44:04.560 | There's going to be a fair bit of difference.

00:44:06.880 | So with target date funds, what you actually want to do

00:44:10.920 | is ignore the date in the name, as crazy as that might sound.

00:44:14.880 | Just pick based on the allocation.

00:44:16.760 | You just want to look at the underlying allocation

00:44:19.440 | and pick the one that looks like a fit for your personal risk

00:44:22.480 | tolerance.

00:44:23.800 | Because you could find that even if you're

00:44:26.440 | planning on retiring in 2050, maybe the 2035 fund

00:44:30.880 | is a better fit, or vice versa.

00:44:33.480 | So pick based on the allocation.

00:44:36.120 | And just like with any funds, pay attention

00:44:39.200 | to the expense ratio.

00:44:40.840 | Some fund companies have very inexpensive target date funds.

00:44:44.880 | Some companies have expensive ones.

00:44:47.040 | So if you can get a lower expense ratio,

00:44:49.360 | your target date fund is likely to be a better performer

00:44:51.680 | than if you have a high expense ratio.

00:44:54.920 | And that's the second part of our talk.

00:44:56.680 | Next, we'll move into staying out of trouble.

00:44:58.560 | So just some tips for avoiding mistakes.

00:45:00.360 | We can stop here for questions if we want to.

00:45:02.320 | Sure, we have a few questions here.

00:45:08.760 | The first question we received, can you

00:45:12.120 | talk about 30-year Treasury bond yields,

00:45:16.920 | and why is that a hot topic nowadays?

00:45:21.160 | Gosh, I don't honestly know why that's a hot topic nowadays.

00:45:24.440 | Because you know what?

00:45:25.360 | I don't pay super close attention

00:45:27.520 | to nominal interest rates.

00:45:31.040 | I pay much more attention to inflation-adjusted interest

00:45:33.360 | rates.

00:45:34.040 | Sorry, can't help you.

00:45:37.600 | And why are those important?

00:45:39.880 | Why are those important?

00:45:41.120 | Because it's always real returns that matter,

00:45:43.200 | inflation-adjusted returns.

00:45:46.760 | They go back a few decades to when I was a young'un.

00:45:50.240 | And we had extremely high nominal interest rates,

00:45:53.320 | but we also had very high inflation.

00:45:55.640 | So in real terms, bond investors weren't actually

00:45:59.000 | doing any better.

00:46:00.000 | And if you're looking at after-tax numbers,

00:46:02.280 | bond investors were not doing very well at all,

00:46:04.640 | because the whole nominal return gets taxed.

00:46:08.520 | And so it's real returns that always matter.

00:46:12.280 | And so generally, if I'm looking at interest rates,

00:46:16.800 | I'm going to be looking at TIPS yields rather than nominal

00:46:20.920 | treasury yields.

00:46:21.800 | All right, next question.

00:46:27.640 | Do mutual funds or ETS report performance net of expenses?

00:46:34.360 | Yes.

00:46:35.480 | They should both be reporting performance net of expenses.

00:46:39.440 | So if they do, if two index funds

00:46:47.520 | report the same or similar performance

00:46:49.720 | and have the same or similar accuracy in tracking

00:46:53.800 | whatever index that they follow, but with different expense

00:46:57.920 | ratios, why bother?

00:47:01.040 | Why bother picking-- well, if two mutual funds,

00:47:05.760 | you've got two index funds in the same category,

00:47:07.920 | and if you plot them both on a chart

00:47:09.840 | and they look like they're basically identical,

00:47:12.080 | they probably are.

00:47:13.600 | And you probably don't need to worry about one

00:47:16.320 | as opposed to the other.

00:47:17.280 | Either one is probably going to be a perfectly fine choice.

00:47:19.760 | OK, let's see.

00:47:24.520 | Do I need a separate emergency fund

00:47:30.960 | if I have an invested taxable account that I

00:47:34.400 | can access when I need to?

00:47:37.400 | Well, I mean, that taxable account

00:47:39.000 | might be your emergency fund.

00:47:40.640 | You need to know that you have assets on hand

00:47:43.720 | that you can get to in the case of an emergency.

00:47:47.320 | Of course, as your portfolio grows, yes, absolutely.

00:47:50.360 | Just the bond part of your portfolio

00:47:52.440 | is your emergency fund, and that's absolutely fine.

00:47:54.720 | All right, in reference to the three-fund portfolio

00:48:00.960 | you were discussing earlier, do we

00:48:02.640 | need an international bond fund?

00:48:05.320 | No, you don't.

00:48:09.760 | With bonds, you don't need to diversify at all, actually.

00:48:12.400 | You could just use Treasury bonds.

00:48:15.280 | Because one of the primary reasons we diversify

00:48:17.120 | with stocks is that any one stock

00:48:18.880 | can go to zero because the company can go bankrupt.

00:48:21.760 | With bonds, there's always the choice

00:48:23.400 | of Treasury bonds, which are backed by the Treasury.

00:48:25.800 | And you don't need diversification at all.

00:48:28.280 | If you're using corporate bonds, you do want to diversify.

00:48:30.680 | And that's why, if you're using corporate bonds,

00:48:32.640 | you want to use a total bond market fund.

00:48:35.520 | But no, you don't need diversification in bonds

00:48:38.680 | at all, necessarily.

00:48:39.560 | So you don't need an international bond fund

00:48:42.000 | and, especially right now, if you compare Vanguard's

00:48:45.360 | total international bond fund to their total US bond fund,

00:48:49.880 | the yields on the international fund are lower,

00:48:52.680 | and the fund has higher risk.

00:48:54.600 | So to me, it just doesn't seem like a very compelling

00:48:58.560 | argument.

00:49:01.440 | I have a question, Mike.

00:49:04.680 | Many investors think that, if they invest in index funds,

00:49:12.720 | they will be investing, and they will receive average returns,

00:49:17.720 | that an index fund gives them average.

00:49:22.360 | But my understanding, an index fund just tracks an index.

00:49:28.320 | If the index goes up, your fund goes up.

00:49:31.880 | If the index goes down, your fund goes down.

00:49:36.280 | What the index fund is is not average.

00:49:39.400 | It is following the index and keeping you out of trouble,

00:49:45.680 | because you have not tried to beat the index.

00:49:49.440 | It's keeping you out of trouble.

00:49:51.360 | And also, what you will never do is do worse than the index.

00:49:58.040 | You are the index.

00:49:59.960 | Never do worse than the S&P 500.

00:50:02.440 | You will always be at the S&P 500.

00:50:05.960 | Yeah, the idea that index funds are average

00:50:09.880 | is a sales pitch for actively managed funds.

00:50:13.400 | And it's factually false.

00:50:18.840 | The overwhelming majority of actively managed funds

00:50:21.280 | do worse than their passively managed counterparts.

00:50:23.760 | We just look at those percentages.

00:50:25.760 | So if you're looking at a fund that outperforms

00:50:31.000 | 84% of actively managed funds, I don't know how

00:50:34.480 | you would call that average.

00:50:36.320 | The 84th percentile is not average.

00:50:38.560 | So no, the idea that index funds will only give you average

00:50:44.080 | is factually false.

00:50:47.520 | There's no ambiguity about it.

00:50:49.960 | They are better than average.

00:50:54.160 | And also, on a target date fund, for young investors

00:50:59.280 | who are looking at their 401(k), for example,

00:51:02.920 | and they see maybe 45 or 50 funds,

00:51:07.520 | they see a huge list of mutual funds.

00:51:10.680 | And they don't know what to do.

00:51:12.080 | And they just want to move on with their life

00:51:14.600 | and just pick something that's good.

00:51:17.200 | A target date fund is great.

00:51:19.920 | And even if they just pick the target date fund for when

00:51:23.480 | they think they're going to retire at 65, let's say,

00:51:28.800 | from a good fund company, which most 401(k) plans are,

00:51:33.360 | that would be sufficient until they learn more

00:51:35.840 | about investing.

00:51:36.720 | And then maybe they would tweak it.

00:51:38.760 | Would you agree with that?

00:51:40.480 | Yeah, I think target date funds are

00:51:42.360 | a great choice for beginners and for people

00:51:45.600 | who aren't beginners.

00:51:46.960 | I think target date funds are a very sophisticated way

00:51:53.200 | to invest, frankly.

00:51:54.400 | They are a brilliant conception that with one fund,

00:52:00.800 | you can own this extreme level of diversification.

00:52:03.800 | And as long as you're using a good fund company,

00:52:07.360 | low costs also.

00:52:08.600 | And that's a fantastic product.

00:52:11.400 | Yes, I think absolutely.

00:52:12.760 | For people starting out, that's often a great way to go.

00:52:17.480 | And it's a perfectly reasonable choice for people

00:52:19.520 | who aren't just starting out.

00:52:21.480 | And also, since a target date fund then

00:52:25.120 | glides down through your life until you retire,

00:52:30.240 | it glides down in asset allocation automatically.

00:52:33.960 | The fund company does it for you.

00:52:36.360 | You don't have to decide, well, now that I'm 40 years old,

00:52:40.280 | I think I should be 70% bonds.

00:52:43.640 | Or should I be 20?

00:52:46.200 | Instead of making those decisions,

00:52:48.320 | if you really just want to invest it and not worry about

00:52:53.920 | it, the target date fund will take you

00:52:56.680 | into a more conservative asset allocation when you retire.

00:53:01.800 | Yeah, target date funds are low maintenance.

00:53:05.800 | They're not entirely hands off, because you should still

00:53:08.280 | check it every once in a while to make sure it still

00:53:10.520 | owns the things that you hope that it owns.

00:53:13.360 | But they're very low maintenance.

00:53:15.160 | That's great.

00:53:16.440 | To that, I would add, they're also

00:53:17.920 | rebalancing in between the recalibration

00:53:21.240 | that Miriam's referring to.

00:53:22.480 | So even before you get to the different asset allocations,

00:53:27.880 | you're rebalancing, which we know is critical.

00:53:31.880 | So Mike, I have a question for you going back

00:53:34.520 | to the first segment, the catch up provision

00:53:37.200 | you mentioned where folks can contribute more to their IRAs

00:53:41.400 | if they're 50 or over.

00:53:44.560 | Is it that they're 50 by the end of the calendar year

00:53:49.440 | or 50 at the time of the contribution?

00:53:51.720 | So let's say someone contributes early in the year

00:53:56.680 | when they're not yet 50, and then they

00:53:58.880 | turn 50 late in the year.

00:54:02.320 | What is the rule around that?

00:54:03.840 | It's the end of the year.

00:54:05.960 | So as long as they're 50 by the end of the year.

00:54:08.640 | Yeah, age at the end of the year that matters.

00:54:10.840 | In almost every IRA related case,

00:54:14.040 | it's almost always your age at the end of the year.

00:54:16.640 | And that's a general tax concept.

00:54:19.160 | Marital status also.

00:54:20.360 | If you get married in the middle of the year,

00:54:22.280 | it's your marital status at the end of the year

00:54:24.000 | that determines your filing status.

00:54:25.480 | So for most things, there are some exceptions.

00:54:28.200 | But for most things, they're looking at the end of the year

00:54:31.600 | to determine how old you are and whether you're married

00:54:34.400 | and so on and so forth.

00:54:36.960 | Great.

00:54:38.360 | Should we move on?

00:54:39.760 | I think so.

00:54:40.840 | OK.

00:54:41.320 | Sure.

00:54:42.160 | All right.

00:54:42.680 | So staying out of trouble, which is really just some tips

00:54:45.400 | for avoiding common mistakes.

00:54:47.960 | First, I would encourage you to try to keep a long term focus.

00:54:51.800 | A lot of people check their portfolios every day,

00:54:53.920 | and you don't have to.

00:54:55.200 | And in fact, you really probably shouldn't.

00:54:57.640 | And you don't even have to check it every month.

00:55:00.440 | Because if you are, again, if you're

00:55:02.440 | 30 years from retirement, what your portfolio does tomorrow

00:55:07.080 | or next week or next month or even next year,

00:55:10.080 | it just doesn't matter.

00:55:11.360 | What matters is how much money is there on the day

00:55:14.200 | that you need to spend the money.

00:55:15.880 | And so you can have all sorts of volatility in the meantime.

00:55:19.520 | And that can be fine.

00:55:20.520 | You don't have to worry about what's

00:55:22.040 | going on in the market over short periods of time.

00:55:26.440 | Also, I would encourage you to watch out for recency bias

00:55:29.200 | in your thinking.

00:55:30.160 | Recency bias is a cognitive bias that basically we all

00:55:35.640 | have as humans.

00:55:37.280 | And it's the tendency to assume that whatever

00:55:39.800 | has been happening recently is what will continue to happen.

00:55:42.920 | And so the way that affects us with investing

00:55:44.760 | is that when the market has been going up lately,

00:55:47.760 | people just assume that that's what's

00:55:49.320 | going to continue to happen.

00:55:50.520 | And so like right now, when you've

00:55:51.920 | seen a whole bunch of years of good returns in a row,

00:55:55.840 | you see a lot more people who feel really good about stocks

00:55:58.520 | and their very high stock allocations

00:56:00.680 | because they're just assuming that the market's

00:56:02.680 | going to keep going up.

00:56:03.840 | And then the opposite thing happens

00:56:05.200 | when the market's going down.

00:56:06.400 | People just-- they feel bad about stocks

00:56:08.440 | because they assume it's going to keep going down.

00:56:10.480 | So you see people pulling their money out of stocks.

00:56:13.000 | And both of those things are detrimental.

00:56:14.800 | You generally want to pick an allocation

00:56:18.440 | that you can stick with and don't assume

00:56:20.920 | that whatever the market is doing right now

00:56:22.920 | is what it's going to be doing next week or next month.

00:56:26.840 | My next tip would be to automate your investing to the extent

00:56:29.640 | that you can.

00:56:30.680 | So with a 401(k), you can sign up

00:56:32.440 | to have contributions made from every paycheck, basically.

00:56:37.560 | And with an IRA, you can set it up with a brokerage firm

00:56:39.960 | so that a certain amount is taken out

00:56:41.400 | of your checking account and put into the account every month.

00:56:44.240 | And when you do that, you're automating your progress,

00:56:48.640 | basically.

00:56:50.440 | A lot of people, what they do is they

00:56:52.240 | spend however much they spend.

00:56:54.360 | And they plan to save and invest whatever's left over.

00:56:58.200 | But when you do that, a lot of times

00:56:59.960 | there isn't very much left over.

00:57:01.240 | Sometimes there's nothing left over.

00:57:02.880 | And so you don't actually make any progress

00:57:04.720 | towards your goals over time.

00:57:06.120 | But if you do it in the other order,

00:57:07.640 | if you automatically contribute every month,

00:57:09.960 | then you'll be forcing yourself to only spend the amount

00:57:13.520 | that you should be spending.

00:57:15.080 | And you will automatically be making progress

00:57:17.080 | towards your goals every month because you

00:57:18.880 | are saving every single month.

00:57:21.400 | And just like Guruji and Maryam were both saying,

00:57:24.760 | target date funds automate rebalancing as well.

00:57:27.000 | So that's another thing you can automate if you want to.

00:57:29.360 | Every day they bring the fund back to the targeted

00:57:32.480 | allocation.

00:57:33.000 | So that's another way that you can be hands off.

00:57:35.920 | And the more things that you automate with your investing,

00:57:40.240 | the less often you have to check your portfolio

00:57:42.360 | because there's fewer things that need to be done.

00:57:45.960 | And that's nice because it helps make it easier

00:57:49.240 | to not worry about all of that volatility

00:57:52.240 | from one day to the next.

00:57:55.560 | My next tip would be to ignore the financial news.

00:57:59.360 | The financial media's goal is just

00:58:01.680 | to get your attention because that's their business model.

00:58:04.520 | They make money based on advertising.

00:58:06.480 | So in the online world, they just want traffic.

00:58:08.840 | They just want you to click on their article.

00:58:10.720 | And in the TV world, they just want

00:58:12.680 | you to watch their TV show so that they can

00:58:14.800 | sell their ad spots for more.

00:58:16.880 | So every day there's a flood of information.

00:58:19.680 | And recently it's been about Tesla and Bitcoin and GameStop.

00:58:23.480 | 10 years ago, it was about other stuff.

00:58:25.640 | 10 years from now, it'll be about other stuff.

00:58:27.920 | But the point is that there's always

00:58:29.480 | going to be this information just hitting you every day,

00:58:32.520 | millions of articles it feels like.

00:58:34.880 | And their goal is just to get you to click on it.

00:58:40.400 | So they sensationalize stuff.

00:58:41.800 | The headlines are written in a way

00:58:43.440 | to make everything sound really exciting or scary or important

00:58:46.840 | when it usually actually is not important.

00:58:48.720 | It's not important information to your actual financial

00:58:51.680 | planning.

00:58:52.880 | And if you can tune out all of that noise,

00:58:58.360 | it frees up time because you're not spending

00:59:01.000 | time reading nonsense.

00:59:02.960 | But it also frees up mental energy.

00:59:05.680 | And with that time and mental energy,

00:59:09.000 | you can focus on the stuff that really matters.

00:59:12.120 | So in investing, that would be, are you

00:59:13.760 | saving enough every month?

00:59:15.520 | Do you have a reasonable asset allocation?

00:59:17.560 | Are you using low-cost funds?

00:59:19.320 | Are you at least making sure to get the maps in your 401(k)?

00:59:22.800 | And then there's a ton of other financial planning topics

00:59:26.320 | that are at least as important that don't have anything

00:59:28.600 | to do with investing.

00:59:29.720 | Do you have disability insurance?

00:59:31.320 | And if you have dependents, do you have enough life insurance?

00:59:35.520 | And do you have a will that names

00:59:37.600 | guardians for your kids?

00:59:39.040 | Stuff like that that's really important.

00:59:41.120 | And if you can ignore--

00:59:43.920 | not be wasting any time and mental energy worrying

00:59:46.400 | about what your portfolio did today

00:59:48.400 | and what Bitcoin did today, if you can just ignore all that,

00:59:52.040 | you've got more time and energy to focus

00:59:53.880 | on the things that matter.

00:59:56.840 | And my last tip would just be to point out

00:59:59.320 | that there's no perfect portfolio.

01:00:02.000 | There's no perfect asset allocation except in hindsight.

01:00:06.120 | A lot of times when people first get started investing

01:00:09.200 | or when they first find the Vogelheads,

01:00:11.800 | they get analysis paralysis.

01:00:13.640 | They get totally hung up on trying to figure out exactly

01:00:17.920 | the right allocation.

01:00:18.840 | Should it be 25% in bonds or 30%?

01:00:22.480 | And should it be 30% in international or 40%?

01:00:26.680 | And do I need a small cap value fund?

01:00:28.680 | And do I need a REIT fund?

01:00:29.840 | And do I need this?

01:00:30.640 | And do I need that?

01:00:32.000 | And that prevents you from making any progress

01:00:35.480 | because you're trying to get it exactly right.

01:00:38.680 | But you don't have to because there are plenty

01:00:41.040 | of good enough allocations.

01:00:43.480 | The three-fund portfolio that we talked about,

01:00:45.680 | that's a great portfolio.

01:00:47.480 | The two-fund portfolio, that's another really great one.

01:00:50.160 | A target date fund, as long as you check the allocation

01:00:52.680 | and make sure it's a good fit,

01:00:54.080 | that's also a really great portfolio.

01:00:57.800 | And any of those allocations,

01:01:00.480 | they're good enough to get the job done

01:01:01.880 | as long as you do your part.

01:01:03.240 | So as long as you're saving enough every month,

01:01:05.800 | and as long as you don't do something stupid

01:01:07.320 | like take all of your money out of stocks

01:01:08.960 | after the market has gone down,

01:01:10.760 | those allocations, they'll be fine.

01:01:12.520 | They will be good enough.

01:01:14.880 | And there's no best fund except in hindsight either.

01:01:19.480 | A lot of people you see spend a lot of time

01:01:21.720 | trying to pick exactly the very best actively managed fund,

01:01:25.920 | but we don't know which fund

01:01:27.920 | will be the best actively managed stock fund

01:01:29.960 | over the next 10 years.

01:01:31.000 | We only know which one was the best over the last 10 years.

01:01:35.240 | But the good news is that, again,

01:01:37.000 | there's plenty of good enough funds.

01:01:40.200 | If you stick with just the basic

01:01:42.480 | total stock market index fund,

01:01:45.080 | that's a good enough fund.

01:01:46.400 | The total international stock index fund,

01:01:48.160 | that's a good enough fund in that category.

01:01:50.320 | Just basic index funds or ETFs from a reputable provider,

01:01:55.320 | they're gonna have low costs.

01:01:57.840 | They're gonna be diversified.

01:01:59.320 | They're good enough.

01:02:00.280 | They'll get the job done.

01:02:01.520 | And so that's really all I've got.

01:02:04.240 | I hope you got some useful takeaways

01:02:05.440 | in terms of the building blocks of a portfolio

01:02:08.440 | and the actual decisions

01:02:09.440 | in terms of what to include,

01:02:11.000 | and then hopefully some useful tips

01:02:12.560 | for avoiding the common mistakes that we see.

01:02:14.800 | [BLANK_AUDIO]

Bogleheads® Chapter Series - Getting Started with Investing

Chapters