By Dr. Jim Dahle, WCI FounderI've been a Boglehead for a long time, although to be fair, I was a Bernsteinhead before I was ever a Boglehead. But I was on the Bogleheads forum before there was a Bogleheads forum, back when it existed as the largest forum at Morningstar.com called the Vanguard Diehards. I was once the 8th most prolific poster on the forum and still rank in the top 20 despite putting 99% of my online efforts over the last decade here at The White Coat Investor. I've attended a couple of national Bogleheads meetings, spoken at local Bogleheads meetings, been on the Bogleheads podcast, been censored, moderated and banned on the forum, written a chapter in a Bogleheads book, and read all three books. In a lot of ways, the origin of The White Coat Investor was simply the adapting of the “Boglehead Message” to physicians and other high-income professionals.
So let me be very clear when I criticize my fellow Bogleheads that the amount of good being done on the forum is several orders of magnitude larger than the amount of harm. But if you can't step back and chuckle at yourself every now and then, you're probably wound a little bit too tight. So today, let's step back and look at some of the silly things that happen among Bogleheads, have a little fun, and maybe even learn something in the process.
10 Boglehead Errors
Maybe there are more, but in relatively short order I was able to come up with ten areas where I think many Bogleheads are missing the mark.
#1 There Is “Boglehead Consensus” on Every Topic
This is one of my personal favorites. Sometimes it shows up as a poster asking “What do Bogleheads think of……” or “What is the Bogleheads Doctrine on….?” But more often it shows up in the answers from someone who feels like they speak for all Bogleheads. Well, there are over 91,000 Bogleheads and if the ratio of posters to lurkers is the same as on the WCI Forum, there are likely over a million people using the forum regularly. Needless to say, there is nobody who can actually speak for the entire community and there is actually very little that the vast majority of the community agrees on. Those principles are best summarized on the wiki:
- Develop a workable plan
- Invest early and often
- Never bear too much or too little risk
- Diversify
- Never try to time the market
- Use index funds when possible
- Keep costs low
- Minimize taxes
- Invest with simplicity
- Stay the course
It's pretty hard to argue with much of that, but you'll occasionally see someone arguing against numbers 5 and 6, but that is about it. Otherwise, people pretty much agree. But beyond that? There is very little consensus about anything.
#2 The Three-Fund Portfolio Is Special
This is the classic dogma that isn't doctrine. It has been prevalent for years and seems to only be getting worse since Taylor published his book. As I wrote in my post “150 Portfolios Better Than Yours“, there is nothing special about the three-fund portfolio (US Total Stock Market, Total International Stock Market, and Total Bond Market.) It isn't objectively better than a two fund portfolio or a four fund portfolio. Total Bond Market Index Fund is not necessarily better than the Intermediate-Term Bond Index Fund.
Now, the three-fund portfolio is fine. It's reasonably simple and quite diversified, unless you're into factor investing. But an investor who doesn't follow its prescription is hardly a Boglehead heretic. In fact, I suspect the vast majority of Bogleheads do NOT use the three-fund portfolio, but you would never know it due to the vocal minority chanting in unison….”Three Fund….Three Fund….Three Fund…”
#3 Optimizing Investments Is The Key to Wealth
The Bogleheads are very good at optimizing investments. They'll help you pick the best funds out of your 401(k) line-up, do some tax-loss harvesting, get your average expense ratio down, and save some tax dollars. But they sometimes miss the forest for the trees. When it comes to reaching your financial goals, optimizing your investments is generally not at the top of the list, at least until the distribution phase.
When someone comes to the forum with an income of $25,000 a year and a $1,200 portfolio they need to be told that they need to increase their income, not swap their Target Retirement 2040 for a Life Strategy Moderate Fund. When someone comes to the forum making $100,000 and saving $5,000 a year, they need to be told that they should spend less and save more, not tax loss harvest. Boosting income and increasing your savings rate are dramatically more important steps, but are ignored far too often.
#4 Risk Tolerance Is Really Important and Static
Larry Swedroe is fond of saying that your portfolio needs to recognize your own individual need, ability, and desire to take risk. Bogleheads have adopted that statement wholeheartedly and repeat it frequently with long discussions about risk tolerance. There are two issues with risk tolerance that are far more nuanced than many Bogleheads recognize:
- It is essentially impossible to measure accurately until it matters most
- It is not static
First, the best test of risk tolerance is what you actually did in a bear market when you lost a substantial amount of money. But all bear markets are not created equal. What you really want to know is what you will do in the worst bear market you will ever see in your life. Unfortunately, by the time you get there, it is too late to adjust your asset allocation to your risk tolerance. All those “risk tolerance” surveys professionals and laymen alike use probably aren't worth the paper they are printed on as far as predicting actual behavior in market downturns.
Second, risk tolerance is not static. It has been clearly shown that our estimated risk tolerance is higher in bull markets than in bear markets. Plus, what really matters is your behavior, not your risk tolerance. As Phil Demuth said,
Even if risk tolerance existed and could be measured accurately, why would it be an important factor to consult when considering how to invest? You should invest in the way that has the greatest prospect to fulfill your investment goals. That might mean taking more or less risk than you would prefer. If you are a sensitive soul who can brook no paper losses, the solution is to get a grip, not to invest “safely” if that locks in running out of money when you are old.
A lot of people need to be told to “get a grip” instead of having a long discussion about risk tolerance. I'm just amazed to see people who have decided they could tolerate a 65/35 portfolio but not a 70/30 portfolio. Don't kid yourself. Those portfolios will perform almost exactly the same. If you can't tolerate one, you almost surely won't be able to tolerate the other.
#5 Expense Ratios Always Matter
I find it hilarious to watch people try to reduce their overall mutual fund expense ratio by a basis point or two. It was particularly interesting to watch those same people get flustered when Fidelity came out with index funds with a 0% expense ratio. As discussed under #1, cost matters, and it matters a lot. But little costs don't matter a lot. When costs get down to a certain level, other things matter more. For instance, with an index fund three things matter:
- What index
- How well the fund tracks it
- At what cost?
Once you get down below 10-20 basis points, #1 and #2 matter a whole lot more than #3.
#6 Investing in Real Estate Means 3 AM Toilet Calls
One of the most bizarre things I've run into over the years is the battle between mutual fund investors and real estate investors. Each is convinced that the other school of thought is composed entirely of fools. The mutual fund investors are derided for their “paper assets” and the real estate investors are told their investments are really “a second job.” However, I've simply run into too many real estate investors who know nothing about the importance of portfolio construction, risk management, minimizing costs, and diversification. I've also run into too many mutual fund investors who don't know there are real estate investments outside of managing single-family homes, think depreciation is always a bad thing, and can't believe that a real estate investment with an expected return of 15-30% could possibly exist.
Wise investors take advantage of the benefits of both schools of thought. Publicly traded REIT index funds are not the only viable real estate investment. You can invest in real estate without getting 3 am toilet calls. Index funds are real investments in real companies with real profits, not “paper assets.”
#7 Entrepreneurship Is a Bad Idea
Along with real estate investing, any type of entrepreneurship is also frequently poo-pooed on the forum. It may be that the forum attracts conservative investors who tend to have stable jobs in engineering firms, corporate America, or medicine. They are correct that most small businesses fail in short order. However, there are plenty of examples right on the forum of very successful entrepreneurs who end up with portfolios of $5M, $10M, or even $50M. Instead of simply telling people not to engage in any sort of entrepreneurial pursuit, it would be better to provide advice about going about the process in a smart way, minimizing leverage and providing the longest possible runway, especially if it can be done initially on the side.
#8 Liquidity Is Critical
Talking to some investors you would think there was a high likelihood that they would need to liquidate their entire portfolio tomorrow. For a group that encourages a long-term perspective and avoids market timing, you would think they would be a little more open to capitalizing on the illiquidity premium with at least some portion of their portfolio. I simply cannot reconcile the need to have 100% of a portfolio be liquid when one only needs about 4% a year from it. I have surveyed groups of docs and asked how much of their portfolio they would keep liquid if they were being paid significantly more for being illiquid. Most respondents chose to place a majority of the portfolio into illiquid investments! Certainly putting 10-25% of a portfolio into illiquid investments is not an insane move.
#9 Doctor Bills Should Always Be Negotiated Retroactively
The last couple of years an “anti-doctor” vibe seems to have crept onto the forum. Post after post in the “consumer issues” section seems to relate to a medical bill and how unfair it is. While I'll be the first to admit that our health care system (and especially how we pay for it) has serious problems, the repeated suggestions on the forum to not pay bills or demand discounts wear thin. Guess what? Doctors are expensive. If the bill is accurate and your insurance company has paid its portion, then it's time for you to pay your portion. If you don't like the deal you made with your insurance company or the deal the insurance company made with the doctor on your behalf, then go to a new insurance company. But singling out physician bills over all other professions is not fair when they have already provided you the promised services.
#10 Mr. Money Mustache and Dave Ramsey Are the Devil Incarnate
Once or twice a month there is a thread dealing with one or the other of these two individuals. Rather than acknowledging the massive amount of good these two public figures have done in the world, posters nitpick the things they do not agree with and warn against ever reading anything these two gentlemen have written or said.
[Update 2025—After another five years as a Boglehead, I've got another five items to add to this list. Here we go!]
# 11 Big Required Minimum Distributions are Bad
In the category of “don't cut off your nose to spite your face” is the practice of doing whatever it takes to reduce the size of Required Minimum Distributions (RMDs). I've seen Bogleheads advocate for taking your money out of tax-deferred accounts before you had to (only to reinvest the money in taxable accounts), doing ill-advised Roth conversions at very high marginal tax rates, using bizarre tax location strategies, and more all in hopes of reducing the size of RMDs (and especially their associated tax bill.) It's important to remember that the goal isn't to pay as little in taxes as possible, it's to have the most money left after paying taxes. Big RMDs aren't something you should mourn, they're something you should celebrate. They mean you made a lot of money, saved a lot of it, were able to leave it in an account where it would compound tax-free for many decades, and earned high returns on it. They now mean you can spend or give lots of money away, even after paying the taxes on it. Few people really have a true RMD problem (where they're pulling money out of a tax-deferred account at a higher marginal tax rate than they put it in at), but those who do should thank their lucky stars for their good fortune. Qualified Charitable Distributions (QCDs) and an intelligent Roth conversion program can help optimize things, of course, but even without optimization, large RMDs might be the best “first world problem” ever. We never complain about having a higher income (and its associated tax bill) before retirement. No sense in starting in your mid 70s.
# 12 Fears About Running Out of Money
Way too many Bogleheads seem to lie awake at night worrying about running out of money. They advise ridiculously conservative withdrawal rates and strategies. In reality, most of them are on track to be the richest person in their graveyard. The transition from accumulator to decumulator is challenging for most good savers and since most Bogleheads are GREAT savers, this is a particularly difficult problem for them. The older you get, the harder it is to turn money into happiness. Don't wait too long to get started. You're not immortal and there's only so much joy that can be derived from a spreadsheet with big numbers on it.
# 13 Anti-Early Retirement Bias
Along those same things, many Bogleheads advise against early retirement or FIRE due to concerns about not having enough or not being able to fill your time. Decisions about when to stop working are incredibly personal, but one should not fear it due to silly reasons like
- What will you do for health insurance? (Buy it on the open market with your millions.)
- Won't you run out of money? (Not with a reasonable, flexible decumulation plan.)
- What about IRMAA? (Another great first world problem!)
- Won't you get bored? (Few retirees complain about this and you can always go get another job if you can't find anything better to do).
- Don't you owe more to society for your education? (A particularly common complaint among docs, but no, you don't owe anyone anything once you've paid off your student loans or similar contracts.)
# 14 Complexity is Worth It
Despite Jack Bogle's words about simplicity (“When there are multiple solutions to a problem, choose the simplest one”) many Bogleheads have ridiculously complicated financial lives and strategies. Their spouse or heirs will have a mess to sort out whenever they go. Worse, they're using their limited time and energy left on this sphere to earn just a little more money that isn't going to make a lick of difference in their lives. Bogleheads are usually hobbyists and find it fun to play with their money, even if it actually costs them money and certainly costs them time.
Occasionally you see the opposite problem, where a Boglehead isn't willing to add a smidge of complexity which might allow them to reach their goals a little sooner or safer. What is rarely seen, however, is a reasonable discussion about the merits of adding an additional tax strategy, asset class, credit card, or retirement account which carefully weighs the additional complexity against the likely additional value for that person.
# 15 The Roth Contribution or Conversion Decision Can Be Calculated Precisely
One of the most hilarious things I've seen in personal finance is people doing complicated calculations to figure out whether or not to do a Roth conversion. The funny thing about the Roth decision is that it's either obvious what the right thing to do is, or it's “sixes” (i.e. six of one, half a dozen of the other). The most important factors that would go into any calculation one would do to make this decision are not only unknown, but unknowable. Things like future investment returns, future earnings, future tax rates, and lifespan of yourself and your heirs. It's a garbage in, garbage out calculation. Your answer is only as good as your assumptions/inputs. Certainly when one of your factors cannot be known for 40 years, it seems silly to use a decimal point in your calculation. But that level of analysis (and pretended precision) is common to see, or at least asked for, on the forum.
As I mentioned at the beginning, there are many Bogleheads who aren't holding on to any of these misguided beliefs. It is a very diverse community after all with a variety of incomes, professions, genders, races, sexual orientations, and religions. But there are too many Bogleheads who are not only making these mistakes, but evangelizing them.
What do you think? Anything else that Bogleheads frequently get wrong? Do you think these are valid criticisms?