I highly recommend Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever. This well-researched book details how the intellectual foundations of passive investing were built; the dramatic stories of how Vanguard, BlackRock, and Dimensional Fund Advisors developed into dominant asset managers; and how ETFs gradually transformed the investing landscape. In part of the only footnote in this section, I drew on this book to describe many of the common misconceptions about the origin of index funds and the character of John Bogle, founder of Vanguard.
For a book with concise coverage of the essentials of personal finance, read The Index Card by Helaine Olen and Harold Pollack.
Brian Feroldi's book Why Does the Stock Market Go Up? is a quick read that answers many questions about how the stock market works.
Moshe Milevsky's book Are You a Stock or a Bond? discusses the interaction of your human capital with investment risk, as explained in the section on risk. Milevsky's interview on The Rational Reminder is here.
Morgan Housel's book The Psychology of Money jumps through a variety of foundational lessons about investing and sound financial behavior. His interview on The Rational Reminder is here.
The books Larry Swedroe co-authored on retirement and factor investing are useful, detailed guides.
A common recommendation for beginner investors is The Simple Path to Wealth by J.L. Collins (and his series of blog posts here). I don't recommend this reading. The book has multiple factual errors detailed in this footnote.[1] Aside from these flaws, it offers boilerplate buy-and-hold advice that can be found in many other places. The book also has, in my view, an irrational antagonism toward debt, highlighting lack of debt as a pillar of building wealth. (I suggest a more balanced approach to paying off debt.)
The Millionaire Next Door discusses the results of extensive study of people with high net worth. It emphasizes the traits that can eventually make people with unexceptional incomes into millionaires. Advice from the book includes: live frugally and spend much less than you make; invest your savings; explicitly budget your spending; value financial independence; understand how to minimize taxes; avoid luxury expenses that conspicuously signal wealth rather than build it; marry someone at least as frugal as you are; and encourage your children to become self-sufficient. High income helps too, of course, but is not strictly necessary to reach a seven-figure net worth by middle or old age. Aside from some fun anecdotes, that is the essence of the entire book.
The White Coat Investor is a tremendous resource for finance and investing, and most of the info they publish is not specific to physicians. They also have many posts directed at members of the US military, because the founder was a military physician. Consider signing up for their email newsletters. The White Coat Investor is my strongest recommendation for information on many topics, such as tax-advantaged accounts and life insurance.
The Finance Buff is a great explainer of many concepts in personal finance. I recommended his post on Series I savings bonds in the section on risk.
The Bogleheads wiki is a good source of information. For example, in the tax section I recommended their entry on tax-efficient fund placement.
The Retirement Nerds channel has some of the best explanations of complex issues involving Social Security, Medicare, and estate planning. Anyone who is 60+ or who wants to help someone that age would find this channel very helpful.
Bits about Money and Net Interest are superb blogs for nerds who want to learn about the inside baseball of banking and finance. Patrick McKenzie, the author of Bits about Money, is a great follow on Twitter @patio11. He has a rousing guide to salary negotiation here.
The podcast Odd Lots is a great explainer of topics in finance, mainly through interviews with experts on whatever is relevant to markets and the economy. They have a talent for creating timely episodes that are often still relevant a year later.
Preet Banerjee’s YouTube channel has a series of short videos which explain investing step by step in basic terms, and I recommend those linked in this playlist. Videos 9 and 12 are skipped deliberately, because they contain descriptions that don't apply to the investments in this guide.
At a higher level of difficulty, The Plain Bagel is a channel that covers many investment topics with great clarity.
Ben Felix's channel has an unusual level of technical explanation, while still being very accessible. He provides extensive scholarly citations to support his views on investing. He also co-hosts a podcast called The Rational Reminder, where he interviews experts or explores the evidence on a variety of investing topics. Click here to see a video in which he outlines the basics of investing according to his views. The Rational Reminder podcast has a community forum with great discussion from well-informed listeners. The Rational Reminder is my strongest recommendation for information on portfolio management.
These three YouTubers are Canadian financial professionals, but nearly all of their advice applies universally. Many of their videos are linked throughout the guide. Patrick Boyle, a London-based professor and former hedge fund manager, has a great YouTube channel as well. His style of investing is far different than the one advocated in this guide, but his videos provide very informed (and funny!) commentary on current events and important issues in financial markets. In addition to his regular stream of videos, I recommend this playlist of his lectures on portfolio management.
Reddit has several forums (subreddits) with great discussion of financial issues as well as wikis that provide some of the best compiled information on the internet. Subreddits I've found useful include r/personalfinance, r/Scams, r/investing, r/Banking, r/CreditCards, r/RealEstate, and r/FirstTimeHomeBuyer.
Dimensional Fund Advisors, Alpha Architect, and AQR publish high-quality, relevant research. If you use Reddit, you can join Alpha Architect's subreddit to see posts linking to their research.
The ETF Research Center website has a tool that calculates the overlap of the weighted allocation of different ETFs. For example, the overlap between VTI (total US) and VOO (the S&P 500) is currently 84%. The overlap between VT (total global) and AVUV (US small cap value) is currently 1%. The ETF database and ETF.com are great resources for comparing and searching for ETFs.
The website Portfolio Visualizer provides an effortless means of backtesting various portfolios. For example, you can use the asset allocation backtest tool to compare the returns of US small cap value stocks vs. US cap-weighted stocks since 1972. The portfolio backtest tool lets you compare the total return of specific funds as far back as 1985. On a more advanced level, you can use this part of the website to test what exposure to different factors a given fund has achieved by simply typing in its ticker symbol and selecting the Fama-French five-factor model (or other models like the AQR model if you're interested). Be aware that the factor regression is valid only for funds that invest in US stocks.
Some brokerage platforms have useful tools that can be accessed simply by creating an account. Charles Schwab has a great interface to view dividends and other distributions. Search the fund's ticker and click the "Distributions & Yields" section. If you log into your Fidelity account and search a fund's ticker symbol, you can click on "Composition" or "Statistics" and view a great deal of information supplied by Morningstar. The funds DFAC, DFUS, and DFAU have similar titles, but you can observe major differences in their characteristics, like the weight in different market capitalizations. Some of this info is also on the fund webpages. DFAC is the most factor-tilted of the three, which is why it's part of one of the suggested portfolios.
Terms are ordered according to the section in which they were introduced (or discussed in detail). Many of the links lead to the term’s Investopedia entry. Someone who has read this document and understands these concepts is probably ready to start carefully investing. Deep mastery is not always necessary: if you haven’t yet understood every nuance of bond pricing, or you don't totally understand what the Federal Reserve does, that is fine. But before you invest in a long-term bond ETF, you should understand the chief influences on the fund’s value, which includes knowing that the share price will dip if interest rates increase (or more accurately, if investors revise their expectations in the direction of interest rates increasing).
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Tax-advantaged account - 401(k) / IRA / HSA / 529
Guidelines for personal finance
Practical information for execution
Click here for the next section — Advanced topics
All sections:
- Cover page
- Introduction to index funds
- Thinking about risk
- Tax-advantaged accounts
- Your psychology
- Investing for retirement
- Guidelines for personal finance
- Building a stock portfolio
- Fund proposals
- Advice
- Practical information for execution
- Taxes
- Vocabulary and further resources
- Advanced topics
1 Errors in The Simple Path to Wealth
The errors documented below are not a personal attack on J.L. Collins. Nearly all of his errors are reflective of widespread misconceptions among the investing public. However, I think they indicate that Collins has a superficial understanding of financial markets, and that he should not be considered a reliable source of information.
Throughout the book, Collins most frequently uses 11.9% as an expectation for US cap-weighted stock returns, based on the US returns in 1975-2014. Given the global average of 8% since 1900, it is arguably irresponsible to tell beginner investors that they can expect 12% returns in the future, based on cherry-picking an unusually successful 40-year interval in a single country with unusually high historical returns. He does admit that future returns could be lower, and that 8% is a frequently used projection, but continues to use 11.9% to produce some very rosy calculations. Although it may seem small before doing the math, the practical difference between an average return of 8% and 11.9% is enormous. In the section on retirement, we covered an example that assumed an average return of 8% and suggested a savings target of $8,080 in the first year. If we assumed an average 11.9% return, that would lower our savings target to $2,913! The theme of relying on above-average performance is developed further in chapter 29, in which he embraces the 4% rule. The invention of the rule was based on historical US market returns, and it does not hold up well in the returns of most other countries.
In chapter 7, he writes that stock returns are distributed in something like a bell curve. The reality is that stock returns are highly positively skewed. In other words, the returns of the overall market are driven by a tiny fraction of companies. This is very different than what a bell curve implies.
Primarily in chapter 7, the book states that the stock market "always goes up" in the long run because it is "self-cleansing". "Companies routinely fade away and are replaced with new blood ... This process of the new replacing the dead and dying is what makes the market ... self-cleansing." It is not correct that the positive long-term returns of the stock market rely on new, emerging companies. Jeremy Siegel and Jeremy Schwartz disproved this common assumption in a paper in the Financial Analysts Journal, as well as Siegel's book Stocks for the Long Run. They found that between 1957 and 2012, the 500 companies in the original S&P 500 index delivered far better returns than the actual S&P 500 index! The average difference was over 1% per year, compounded for 56 years. One reason for this is familiar to those who understand the value premium. As Siegel wrote in chapter 8 of his fifth edition: "Although the earnings and sales of many of the new firms grew faster than those of the older firms, the price that investors paid for these stocks was simply too high to generate good returns." (Unfortunately Siegel did not extend the analysis in his sixth edition, which was published in 2022.) This finding is discussed on the Rational Reminder podcast here. Self-cleansing may sound like a nice process, but it's not the driver of returns.
The title of chapter 8 is "Why most people lose money in the market". The research he cites shows that this isn't true. The bad news is that investors underperform the funds they invest in because of their attempts at market timing, but that doesn't mean they lose money! They make less money than they could have.
Chapter 9 perpetuates the widespread myth that the US stock market did not recover from the Great Depression until the 1950s. He discusses the difference made by reinvesting dividends earlier in the book, but appears to forget about it here.
The same chapter claims that stocks are "a pretty good inflation hedge". The term "inflation hedge" has a narrower meaning than he appears to think. An asset class does not become an inflation hedge simply by achieving returns higher than inflation (in the long run, globally). By the same criterion, intermediate- and long-term bonds are inflation hedges as well. An asset must reliably respond positively to inflation in order to be a hedge, which stocks do not. He is correct that stocks tend to outperform bonds in high-inflation environments, whereas bonds tend to outperform stocks in deflationary environments (see Figure 16 on page 13 here). But inflation is good for neither asset class.
Chapter 9 also states that inflation is good partly because it "allows debtors, like the government, to pay back their creditors with 'cheaper dollars.'" This is a misunderstanding of how interest rates are settled upon in financial markets. Every loan has an assumption of inflation already baked into the interest rate. Higher expected inflation (or a greater perceived risk of unexpectedly high inflation) would result in a higher interest rate to compensate the lender. Low, stable inflation has many benefits, but it does not benefit debtors in this way. (He gestures at this understanding in chapter 12, so it is hard to tell why he makes this mistake in chapter 9. Yes, unexpected inflation can be good for debtors, but expected inflation is neither good nor bad.)
In chapters 14 and 16, he writes that it is best to hold bonds in tax-advantaged accounts. This is debatable at best, and I would argue that it is incorrect. It's certainly not something that should be written as if it were a plain fact.
In chapter 32, he endorsed using a donor-advised fund (DAF) through Vanguard to make charitable donations. "Because it is run through Vanguard, expenses are rock bottom." The fees at Vanguard Charitable are competitive with its peers at Schwab and Fidelity, but DAFs are ultimately not a competitive landscape (for now). As I discussed in the section on tax-advantaged accounts, the fees are high enough to override the tax benefit that most people would receive. Nearly everyone considering a DAF would be better off leaving the money invested in their taxable account, then eventually donating the shares. If a charity of choice doesn't accept shares, it does help that you can donate the shares to a DAF, and promptly transfer cash to the charity (without investing in the DAF).
The description of John Bogle in The Simple Path to Wealth is fawning. Here are some excerpts from chapter 24:
He is the creator of the modern low-cost index fund and my personal hero. ...
Before Mr. Bogle, the financial industry was set up almost exclusively to enrich those selling financial products at the expense of their customers. It mostly still is.
Then Mr. Bogle came along and exposed industry stock-picking and advice as worthless at best, harmful at worst ... Wall Street howled in protest and vilified him incessantly.
Mr. Bogle responded by creating the first S&P 500 index fund. The wails and gnashing of teeth continued even as Bogle's new fund went on to prove his theories in the real world. ...
But increasingly over the past four decades the truth of Bogle's idea has been repeatedly confirmed.
This is not unique to Collins; it is a fairly standard narrative about the birth of index funds and the sainthood of John Bogle. Undoubtedly, Bogle's company Vanguard played a central role in advancing index funds and driving down management fees across the global investment industry. But the claims that index funds were "Bogle's idea", that Bogle "exposed" stock pickers, and that Bogle created "the first S&P 500 index fund" are all false. For more accurate information on the origin and evolution of index funds, I suggest reading the book Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever. The author Robin Wigglesworth describes multiple violations of the standard Bogle narrative.
Bogle was opposed to index funds for many years. In 1960, when he was an unknown private figure, he published a paper (under the pseudonym John B. Armstrong) arguing against passive investing in the Financial Analysts Journal. Vanguard started its first index fund in August 1976, tracking the S&P 500. That was Vanguard's only index fund until its bond fund was launched in 1986, its extended market fund in 1987, and its total US market fund in 1992. Wigglesworth wrote in chapter 8 that even in the late 1980s, "Bogle was still primarily focused on building up Vanguard's raft of actively managed funds." According to Gus Sauter, who was Vanguard's chief investment officer from 2003 to 2012, Vanguard's index funds were 3% of its assets under management when he joined the company in 1987. I think few index investors are aware that Vanguard is still one of the largest managers of active funds, even though index funds now constitute a supermajority of its assets under management.
It is not true that Bogle "exposed" the industry of stock-picking. As discussed above, he was not an enemy of active management, and worked hard to make Vanguard one of the largest active managers. He certainly resented the outrageous management fees of his era. Second, there were many people who paved the way for Bogle's successful marketing of index funds. John McQuown performed well-funded research at Wells Fargo and helped organize a wide-ranging group of researchers centered in Chicago. If anyone exposed the stock-picking industry, it was the people who curated the data and built the intellectual foundation for passive investing: Eugene Fama, James Lorie, William Sharpe, and others. In July 1971, Wells Fargo launched the first index fund, which aimed to equally weight all stocks listed on the New York Stock Exchange. It became apparent that an equal-weighting approach was impractical at the time. So in November 1973, Wells Fargo launched a fund tracking the S&P 500.
Rex Sinquefield managed to convert a fund at American National Bank to an S&P 500 index fund in September 1973, making it the first publicly marketed index fund. He followed up with passive funds focused on smaller companies and international companies. Dean LeBaron started offering an S&P 500 index fund in 1972 at his startup company Batterymarch, but failed to attract a single institutional investor until late 1974. Paul Samuelson, one of the great economists of the 20th century, helped by repeatedly writing in support of index funds. Bogle does have a rightful claim to the first index fund available to retail investors. The three predecessors to Vanguard's S&P 500 fund were available only to institutional investors, although ordinary people did benefit through their pension plans.
What can we conclude? Bogle did not help develop the intellectual arguments for index funds; he did not create the first index fund; and during his entire life before retiring from the chief executive position at Vanguard in 1996, he was not a purist supporter of passive investing. So why is the standard narrative about Bogle's crusade for index funds so popular? Partly because people have a tendency to simplify narratives and like to assume that one hero can generate a revolution. But also because, after retiring from the top position at Vanguard, Bogle fashioned himself a public image as the patron saint of passive investing. In chapter 8 of Trillions, Wigglesworth wrote: "In his later years, Bogle spent much of his time polishing the legend of Jack Bogle, in fact so much so that some friends felt he was writing others out of the picture." One of Bogle's books even committed a falsehood in writing. In the introduction to the 2017 edition of The Little Book of Common Sense Investing, Bogle wrote: "In retrospect, it seems clear that my pioneering creation of the first index mutual fund in 1975 provided the spark that ignited the index revolution." In chapter 13, he repeated: "The first index fund was created by Vanguard in 1975. It took nine years before the second index fund appeared—Wells Fargo Equity Index Fund, formed in January 1984." Although the hubris in the first sentence is not entirely unearned, the self-serving inaccuracy remains.
See John McQuown's interview on the Rational Reminder here. ↩