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.
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!