I occasionally run into articles, forum threads etc that seem to suggest a “Boglehead” approach is missing something, such as this article by Physician and Financial Consultant Shirley Mueller, MD. Aside from the fact that someone who considers herself a financial consultant has to ask someone else what a Boglehead is (how many of us could have written that summary in 3 minutes at 3 am left handed?) it bothered me that she seemed to vaguely suggest or question that perhaps if you were really rich, either the “Boglehead” style of investing didn't work or that there was something better available to you.
What is Bogleheadism?
Mueller's article actually gave a good summary of what Bogleheads believe, which is also available elsewhere on the internet. In case any of this is new to you, here are the basics:
Make a plan, save a bunch, take a reasonable amount of risk, avoid market timing and other investing errors, watch your investing costs (including taxes) and stick to your plan.
Why Wouldn't This Work?
So, since Bogleheadism is pretty much common sense, why wouldn't it work for someone whether they have $10K to invest or $100M to invest? Of course it would. However, some people seem to feel a need to define Bogleheadism more narrowly. Such as you can only invest in index funds (forgetting that the reason why index funds work is primarily due to their low cost including tax-efficiency) or that you can only invest in three broad-based mutual funds or that you can't buy any individual stocks or real estate properties or whatever. Of course if you define Bogleheadism in some super narrow way (such as that John Bogle says you don't need to own foreign stocks or you can't tilt to small, value, momentum or whatever) you're going to be able to find good reasons not to follow it. But that seems kind of silly to me.
The Super Wealthy and Bogleheadism
If you have $20-50 Million bucks, you do have a few unique issues to be concerned about. You've got an estate tax problem, for instance. You also have much less need, yet much more ability, than most to take risk, which may affect your asset allocation. You also have investments that are available to you that aren't available to most investors. For instance, I had someone email me to see if I wanted to buy $250K worth of a hotel in Boise recently. I told him that I didn't have $250K laying around that I was willing to invest in a single property. I simply prefer more diversification in my portfolio. Putting $50K into a single business (which is what a property is) makes me nervous; I'm not going to put five times that much in. But if you have $30M, and plan to invest $10M of it into real estate then putting $250K into a single project is probably no big deal. There are lots of syndicated deals out there like that, both with real estate and small, non-publicly traded businesses. Since it is harder for these investments to raise capital, they may have to offer higher returns in order to get it. But every single one of these requires significant due diligence, since just like publicly traded companies, they don't all do great.
The Ultra-Wealthy probably don't have to drive their own wake boat
Other investments, like hedge funds, that are marketed to the ultra-wealthy are probably better avoided, however. Are there good hedge funds out there? Sure. But the high fees and dilution of talent makes the average return pathetic, so you're facing the same risk a mom-and-pop investor faces when choosing actively managed mutual funds- i.e. the risk of picking a loser outweighs the potential benefit of picking a winner. And of course you're constantly facing the issue that most doctors face- people consider you a whale to be harpooned and are constantly trying to sell you something.
There can even be a case for using some individual securities when you are ultra-wealthy, such as buying individual muni bonds or building your own low-cost, mega-cap stock mutual fund. But the benefits over just buying low-cost index funds in these situations are pretty marginal. So, are there other things out there you can invest in when you have gobs of money? Sure. But that doesn't mean that investing the whole $30 Million into a handful of low cost index funds is somehow a bad move. It still works just fine. It's not like you have to change wholesale from one strategy to another when you hit $100K, $1M, $10M, or $100M. Besides, this simply isn't an issue for the vast majority of high income professionals. Diversified index fund investing scales just fine.
What do you think? Is there some level of assets where Bogleheadism no longer works? Why or why not? Comment below!
I don’t know the maximum asset size Mueller is referring to but CalPERS has turned to passive so it that’s some evidence one would need more than $300 Billion. That’s a B not an M.
From what i read, they only had 4.5 billion w hedge funds, the rest was in other places.
This article is lovely in its logical simplicity. The wealthy can afford more risk, which logically should produce more return (over the long term) if the basic risk reward of the diversified market is maintained. Thus, as you gently observe, one could put more into a low-cost, diversified equity strategy. The alternative thinking seems to be “Hey, I’ve got some extra money. I can afford to lose it, so I think I’ll invest it foolishly.”
I agree, just because you have a lot of money does not mean that you should switch to exotic investments with high fees. The exclusivity of these investments, I think, often plays into the egos of those that have a high enough net worth to invest. Some argument can be made that they offer higher returns than a Bogle-type investment, but the only thing that is certain in these investments is the high fees.
I see one of the biggest benefits of surpassing your magic financial number as being able to continue to keep the pedal to the metal with a low cost, but aggressive investment allocation. You don’t need to be as conservative as someone that is right at their retirement financial goal. If you have a big enough financial cushion, you can stay more aggressive in higher return/higher volatile areas such as a 100% equity portfolio as long as a large, prolonged correction won’t adversely affect your retirement. At this stage, we are talking about a serious chunk of change where significant future growth can take place.
Doubling of $100k may not seem like a big deal, but doubling of $5mm or $10mm once or twice can drastically change what you can do for others, whether it be multigenerational or charitable giving. Your focus changes from looking at your money from a selfish standpoint to looking at it from a giving standpoint where you can seriously change the outcome of many people’s lives.
I think your last paragraph is a profound truth. If you have enough for your own needs with very conservative investing, there is some temptation to do that (like that annoying couple on TV that loves each other and their tax-free bonds). The alternative (as you suggest) is to invest more aggressively, with the possibility to “drastically change what you do for others.” I like the situation in which the lowest realistic return on my investments provides for my needs, and the (likely) excess helps future generations. It’s hard to accumulate a significant portfolio these days, and having one somewhere in a family can provide security and opportunity for many.
IMHO, this strategy works for everyone. However, having a very good friend that falls into the category of the pretty wealthy (Not ultra) we enjoy talking about investments, etc. He has explained that many of his peers are just as guilty of many of the same mistakes that investors of all other types make. With the wealth they have accumulated, many fall into the trap of thinking that they have the ability to “outperform” others. Either by access to investments unaccredited investors cannot, or, just because they have all this money and they are “successful”, and this means they are smarter than others and they should do better. I think what they need more than anything else are a good tax advisor and estate guidance.
I enjoy the bogleheads forum. However, I have participated in some very bizarre exchanges there. Like many belief systems, there tends to be a militant attitude among some of the followers. I used to enjoy Mr Money Mustache as well, but got turned off by the elitism of the site.
Jim:
A friend recently invested in seven trust funds with Vanguard. Each trust fund was invested in three funds 1) Total Stock Market; Total International and Total Bond Market.
In my opinion, broad market index funds are superior for nearly all portfolios.
Thank you for an excellent article!
Best wishes
Taylor Larimore
I was really active on the Bogleheads forum between 2010 and 2012 before I started working at Vanguard until several months ago. I was appreciative that the site helped me get a job. They give a lot of good advice for free and any average person would be well served to follow their simple message. If someone was looking for free investment advice it’s about as good as you could do anywhere.
On the other hand, the moderators are very aggressive on what they allow on the site. While WCI allows even insurance agents going off on diatribes to comment, the Bogleheads will lock threads and ban users for going “off topic” or including any links they don’t like, while allowing site links to long time members’ business websites. Lots of the folks that comment there have a seemingly religious devotion to the three fund portfolio, so much so that it’s no use trying to have any academic discussions there. It is not an intellectually open place like a university classroom might be. Whenever there’s good evidence to suggest that the three fund portfolio isn’t the absolute best you could shoot for, like adding value, momentum, etc., they dismiss it and say “well broad market portfolios are mean variance efficient.” The three fund portfolio might be best bc its simple and does a very good job, but it’s not presented that way. People just say, “it’s the best, end of story.” I ran into the same thinking in the research groups at Vanguard, where they wouldnt ever espouse different viewpoints because they couldnt scale products to invest with these styles so they’d put out another paper why market cap indexing is the best. That investment school of thought is from the 50s, 60s, and 70s and ignores lots research that’s come out since then.
Several of the higher ups managing the funds at Vanguard held VERY anti-Boglehead style portfolios. They told me privately when I asked about their own preferred asset allocation. They had millions of dollars and wanted to take far more risk to potentially fund larger charitable bequests. If you have a very high ability and willingness to take risk, the 3 fund portfolio is not the best you could use even if you believe in CAPM, because it is not as volatile as other asset classes and hence you should be able to make more with EM, small stocks , etc. over time. I think the Money Mustache forums are filled with more open minded people giving a variety of good thoughts on investing, versus the ideological fundamentalism you will get at Bogleheads.
Thanks for your comment. Clearly there are people at Vanguard who hold views very different from Jack Bogle and the Bogleheads. I mean, look at all the active funds!
I think if you look carefully, there are plenty of Bogleheads, maybe the majority, and including Jack Bogle, using something besides a “three-fund portfolio.”
That said, the three fund is certainly among reasonable portfolios and has the benefit of being easy to recommend to those who don’t eat and drink investing. I’ve seen far worse.
When I began managing my own money I converted my assets into a strict 3 fund portfolio, US, Intl, Bond. Reading at bogleheads I was surprised at how few other people had a strict 3 fund portfolio. From what I read most of the regular posters will say that a 3 fund portfolio is good enough, BUT they want to add in a little extra. I actually feel like a minority there.
Do you feel you are missing out, or have sleepless nights because others are adding stuff to their 3 fund portfolio?
I work with a few very rich individuals. They all make the same mistakes that everyone else makes. One had an advisor trying to pick an individual stock and lost 5% of a very large portfolio. Another has a “money guy” who invests in blue chip companies for a high fee. Both would have been better off sticking with the traditional approach.
That being said, they both have used their wealth to make deals that most people could not finance with a small portion of their wealth. Those deals have allowed them to paper over their subpar returns in the stock market.
I basically have a 3 fund portfolio. Almost 1 million in it. Scares me if I’m doing the right thing or not. Always thinking if i should tilt to small value and add some REITS or do something else. Don’t understand much to know the answer. Wish there was a crystal ball too
On the other side, with an estate problem I can see ultra rich individuals buying artwork and life insurance to avoid taxes.
Not sure artwork does much for your taxes. The tax on collectibles is pretty high. While cash value life insurance does grow in a tax-protected manner, you may not come out ahead on an after-tax basis due to the high costs of the insurance component.
Whether or not you should tilt your portfolio is a bit more controversial. Most important is having a portfolio you can stick with. Far better to stick with the 3 fund portfolio than to add some other asset classes and not stick with it. But obviously I believe in a small/value premium or I wouldn’t have incorporated it into my portfolio. Same with real estate. I use both REITs and other real estate. But you don’t HAVE to. It’s not like a 3 fund won’t work. It’ll work fine. Something else might work a little better, but it could also work out worse.
Well, your 3 fund portfolio probably holds more securities than many 10 fund portfolios. I am guessing over 20,000 securities in your little 3 fund portfolio. I think the 3 fund portfolio is fine, especially if you like to re-balance often. Holding 10 different funds and having to rebalance them all drives up expenses that probably are not paid for by better performance.
You certainly don’t get more securities by adding additional holdings to a three fund portfolio. What you get are tilts. Whether that is worth the higher expense ratios depends. The costs of rebalancing can be kept very, very low however, especially if done in a tax-protected account. I basically ignore that because it costs me very little. But the cost of the tilts is not insignificant.
WCI what are the costs of tilts?
Usually a higher ER. For example, you can buy Vanguard TSM for 5 basis points. But the Vanguard REIT fund is 12 basis points. So you get the REITs in TSM at a relatively low price, but are paying twice as much in order to tilt toward more REITs.
better to diversify to 7-10 funds tips reits intl bond emerging mkts, long term inv. grade, etc etc et
ESTATE PROBLEMS-not relevant federally to 99% here as the exemption is 5.3 million/spouse more or less
state estate problem-much bigger issue as in NJ where the exemption is 675k/spouse and your heirs could be hit with a few hundred grand in taxes
check your estate tax laws
[Post removed for spamming the blog. Seriously David, what made you think it was acceptable to post that same comment advertising your firm in multiple locations on the website?-ed]
But what about institutional investors, like universities? I know the University of Utah recently pushed Utah’s Board of Regents to allow it to put up to 40% of its endowment in “alternatives.” They’re pros, aren’t they? Aren’t they smart to put their money in opaque alternative investments sold to them by geniuses?
In all seriousness, this is something that has bothered me a lot, so any thoughts on the matter would be appreciated. What would you do with $500 million or more?
The Alaska Permanent Fund did something like that years ago. As I recall, I don’t think it turned out all that well.
You can compare this:
http://www.apfc.org/home/Content/aboutFund/fundHistory.cfm
and this:
http://www.apfc.org/_amiReportsArchive/Historical%20returnsFY13.pdf
and see if you think adding alternative investments in 2004 was a good idea or not. Looks like it is currently 36% stock, 20% bonds, 12% real estate and 32% “alternatives” including “other”, “infrastructure”, private equity, and absolute return strategies.