https://www.bogleheads.org/wiki/Bogleheads®_investment_philosophy
The Bogleheads® follow a small number of simple investment principles that have been shown over time to produce risk-adjusted returns far greater than those achieved by the average investor. Many of these ideas are distilled from Nobel prize-winning financial economics research on topics like Modern Portfolio Theory and the Capital Asset Pricing Model. But they are very easy to understand and to implement, and they work. In fact, the basis of all of these principles is the idea that successful investing is not a complicated process, and can be accomplished by anyone with a small amount of effort.
These ideas come from the investing philosophy of Vanguard-founder John Bogle. They have been further distilled and explained in thousands of posts on the Bogleheads forums, starting with original contributors Taylor Larimore and Mel Lindauer. More advanced concepts were first widely introduced to the Bogleheads community by investing author Larry Swedroe, a tradition that has been carried on by Rick Ferri among many others.
This wiki article provides many details about how to apply these principles, given constraints, such as the specific tax-advantaged accounts an investor has available. For a video presentation of Bogleheads principles, refer to Video:Bogleheads® investment philosophy.
The Bogleheads approach to developing a workable financial plan is to first establish a sound financial lifestyle.
Develop a sensible household budget - one that provides for needed expenditures, discretionary pleasures and savings for big ticket items like home purchase and higher education for dependents, as well as savings for long term retirement planning.
Next, after establishing your sound financial lifestyle and you start investing for the future, many believe it is valuable to put a simple plan in writing. Relax! Of course you can’t know the future! But it will serve you to imagine one scenario. The enemy of a good plan is the search for a perfect plan. Make assumptions, and then change them when you get better ideas or better information. Our goal is to enable these possibilities. Putting your plan in writing will help give you the discipline to “stay the course”.
Fig.1. Returns compounded at 8% per annum
Once you establish a regular savings pattern, you can begin the process of accumulating financial wealth. How much saving is enough? Twenty percent of income is a good baseline number. If you plan to retire before age 65 or plan to leave significant assets to charity or children, you probably need to save even more.[1] The reason starting a regular savings plan early in life is important is that compounding of investment returns can be magnified over a longer period. Figure 1. demonstrates the benefit of starting early.
The best way to save money is to arrange automatic deductions from your paycheck. Many 401(k)s already provide this convenience. When you invest in an IRA or taxable account, select a fund company able to automatically deduct money from your bank account the day after pay day. This concept, described as "paying yourself first," goes a long way towards establishing and reinforcing reasonable spending habits.
There are specific guidelines for which accounts you should fund and in what order. But always remember, you first need to save the money. Saving regularly is more important than investment selection when starting this lifelong process.
To know whether an asset allocation is right for your risk tolerance, you need to be brutally honest with yourself as you try to answer the question, "Will I sell during the next bear market?, which is very hard to accurately assess before you have already gone through a bear market.
Owning stocks is necessary to get the expected return needed to accumulate funds for retirement. Stocks provide us with a share of the profits generated by publicly owned companies in the economy. But in exchange for the hope of high return, stocks are extremely volatile and risky. Many investors learned how risky stocks can be in 2008 when they fell 50% from their previous highs. Over time, stock prices roughly follow the trend of the economy, which is to grow. But prices can stagnate or decline for decade-long periods. This is why having an allocation to bonds is a necessary element of asset allocation.[2]