John J. Brennan - More Straight Talk on Investing

1 Cover

2 Title Page MORE STRAIGHT TALK ON INVESTING LESSONS FOR A LIFETIME JACK BRENNAN with John Woerth

3 Copyright Copyright © 2021 by John J. Brennan. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, ( 978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com . Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission . Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our web site at www.wiley.com . Library of Congress Cataloging-in-Publication Data is Available: ISBN 9781119817338 (Hardcover) ISBN 9781119817352 (ePDF) ISBN 9781119817345 (ePub) Cover Design: C. Wallace Cover Image: Paper Speech Bubble © iStock.com /Aquir

4 Dedication To my growing and loving family. Once we were 5 and now we are 11, with another on the way! and To the millions of Vanguard investors, thousands of crew members, and hundreds of investment professionals who have inspired me and taught me for four decades.

5 Preface

6 Author's Note

7 Acknowledgments

8 PART I: MASTER THE BASICS 1 Successful Investing Is Easier Than You Think A Great Time to Be an Investor Be Knowledgeable: Do Your Homework Be Disciplined: Develop Good Habits Be Skeptical: Avoid Fads Be Observant: Keep Learning About Investing 2 You Gotta Have Trust Trust Yourself Trust the Financial Markets Trust in Time Trust Your Financial Partner Get in the Game 3 A Map to Success: Hmm, Sounds Like a Plan The Single Most Important Thing to Do Think of Your Financial Needs as Imaginary Buckets Saving for Short-Term Needs Saving for College Saving for Retirement Your Debt Plan Know What You Don't Know 4 Save More—Without Feeling the Pinch Developing the Discipline of Saving The Magic of Dollar-Cost Averaging How to Become a Super-Saver Saving versus Investing Setting Your Savings Priorities One More Incentive to Start Saving Early Notes 5 Hope for the Best—But Prepare for Something Less When Inflation Rears Its Ugly Head Future Investment Returns Don't Count on Present Investment Conditions Continuing The Problem with the Long-Term Averages Scenario-Planning Tools Not-So-Great Expectations

9 PART II: CONSTRUCT A SENSIBLE PORTFOLIO 6 Balance and Diversification Help You Sleep at Night Why Balance Really Works Diversification Is Good for You—But Sometimes It Hurts A Case Study 7 You Need a Personal Investment Policy Whether You're Starting with Zillions or Zip Why You Should Care … a Lot Kicking the Tires on Some Different Portfolio Models Developing a Personal Investment Policy Financial Situation Time Horizon Risk Tolerance The Role of Bonds The Role of International Stocks Asset Allocation Models for Retirement Investing Note 8 Mutual Funds and Exchange-Traded Funds: The Easy Way to Diversify Securities or Funds? How Funds Work The Advantages of Funds How You Make Money as a Fund Investor Caveats to Consider 9 How to Pick a Mutual Fund (and How Not To) A Process for Constructing a Portfolio Step 1: Stocks, Bonds, Cash? It's Time to Decide Step 2: Where to Invest Within an Asset Class? Money Market Funds Bond Funds Stock Funds Step 3: Actively Managed Funds, Index Funds, or Some of Each? 10 It's What You Keep That Counts The Lowdown on Lower Costs Costs: Are You Leaving Too Much on the Table? Examine Fund Expense Ratios “But It's Just a Few Percentage Points …” You Can Look It Up Putting Costs in Perspective Be Aware of Transaction Costs Paid by the Fund Taxes Are Costs, Too Resist the Temptation to Trade Frequently Choose Tax-Efficient Funds Use Taxable and Tax-Advantaged Accounts Wisely 11 Risk: Give It the Gut Test Your Investment Risk Duration: A Risk Measure for Bonds A Simple Way to Check a Fund's Past Volatility The Gut Test Measuring Your Risk Tolerance Managing Investment Risk 12 Some Advice on Financial Advice When to Seek Help Assessing Your Needs for Advice Finding the Right Financial Help Assessing the Cost/Value Trade-Off of Advice Making a Choice

10 PART III: MANAGE YOUR INVESTMENTS WITH FOCUS AND DISCIPLINE 13 Buy-and-Hold Really Works Developing the Buy-and-Hold Habit You Will Be Tempted to Abandon Your Buy-and-Hold Strategy Why Frequent Trading Doesn't Work The Unpredictability of the Financial Markets The Cost Penalty Why Market-Timing Doesn't Work 14 Time Is Everything Make Time Your Ally Time Is Your Ally How to Make Up for Lost Time 15 Routine Maintenance for Your Portfolio Your Personal Situation Rebalancing a Portfolio Why Rebalance? To Tame the Risk Monster When to Rebalance The Tax Monster Joins the Risk Monster Rebalancing Takes Discipline Keep Things Simple How to Clean Up a Messy Portfolio Note 16 Stupid Math Tricks for Smart Investors

11 PART IV: STAY ON COURSE 17 “It's a Mad, Mad, Mad, Mad World” Speculative Bubbles Tulipmania A Modern Gold Rush The Dot-com Bubble Some Commonalities among Manias How to Protect Yourself from Speculative Manias 18 Why You May Be Your Own Worst Enemy Being Overconfident About Your Own Abilities Allowing the Current Environment to Blind You to the Larger Context Thinking You See a Pattern Where None Exists Focusing Too Much on Short-Term Losses Feeling Compelled to Do Something—Anything Letting False Reference Points Distort Your View of Value Remembering Things Selectively How to Foil Your Own Worst Enemy What's the Lesson? 19 Bear Markets Will Test Your Resolve Some Background on Bear Markets How Does a Bear Market Feel? Very Scary The Lesson of Balance and Diversification (Again) Bearing a Bear Market? Tips for Enduring Bear Markets What Not to Do in a Bear Market 20 Navigating Distractions to Reach Your Destination Trust the Truths You Already Know Recognize That Everyone Has an Agenda Be Wary of Market Predictions Be Skeptical of Hype About Hot Performance Be Suspicious of “Experts” What Makes Headlines Is Not Always New Beware the “New, New Thing” 21 Is the “Smart Money” Smart? Yes, but… An Introduction to Alternative Investments 22 Regrets? I've Had a Few 23 Getting to Boca Destination Boca You Can't Eat Relative Performance How to Make Sense of Relative Performance Information Your Fund's Performance Isn't the Same as Your Investment Performance My Dad's in Boca