Do you live in Italy and are intrigued by the Bogleheads' investment philosophy? You are not alone. Many people find these principles interesting, yet they are difficult to apply outside the US, because most guides are aimed at Americans. This article analyses the Boglehead philosophy and adapts it to Italian investors. We will analyse this strategy based on simplicity, discipline and patience. We will explore practical ways to apply these principles in Italy and introduce Curvo, an app designed to make Bogleheads' investments accessible to all investors.
Understanding the Bogleheads' investment philosophy
Investing can seem daunting and complex, especially if you are not familiar with the financial markets. Fortunately, a group known as Bogleheads has formulated a philosophy that simplifies this process, focusing on long-term, low-cost, diversified investments. This approach is universal, beneficial, and can be used by all investors around the world, including those in Italy.
Who are the Bogleheads?
The Bogleheads are a group of individual investors who follow the principles of John Bogle, the founder of Vanguard, credited as the inventor of index funds. This group started from an online forum in the late 1990s and has since grown into a large community that shares advice and supports each other. The Bogleheads are known for their simple and low-cost investment philosophy.
The Boglehead Philosophy
The Boglehead investment philosophy consists of a set of ten principles that will guide you towards financial independence. These principles are designed to be simple yet effective and promote a disciplined approach to managing personal finances and investments:
- Live below your means
- Invest early and often
- Never bear too much or too little risk
- Never try to time the market
- Use index funds
- Keep costs low
- Minimise taxes
- Invest with simplicity
- Stay the course
Live below your means
The Bogleheads emphasise the importance of saving a significant portion of your income and avoiding unnecessary expenses. By living frugally, you can allocate more money towards investments, which can potentially grow over time.
Invest early and often
The sooner you start investing, the more time your money has to compound and grow. Regular and consistent investments, regardless of market conditions, can help you amass a substantial corpus over time.
Never bear too much or too little risk
Your investment portfolio should reflect a balance of asset classes, such as stocks and bonds, which aligns with your risk tolerance and financial goals. Over-exposure to risky assets or excessive conservatism can both hinder your financial progress.
Diversification is a crucial strategy to control risk. By investing in a variety of asset classes and geographic regions, you can mitigate the risk of significant losses.
Never try to time the market
Bogleheads advocate for consistent, long-term investing rather than attempting to buy low and sell high, which is notoriously difficult to execute successfully.
Use index funds
Index funds, which aim to replicate the performance of a specific market index, generally outperform actively managed funds over the long term, primarily due to their lower costs. And they work! A globally diversified index such as the MSCI World index, which consists of over 1,600 stocks across more than 20 countries, has delivered an average return of 10.8% since 1979.
Keep costs low
Investment costs, including fund expenses and taxes, can eat into your returns. By choosing low-cost investment options and employing tax-efficient strategies, you can enhance your net returns.
Bogleheads recommend using strategies to reduce the tax burden on your investment returns. Every euro paid in taxes is a euro less in return!
Invest with simplicity
A simple investment portfolio is easier to understand, manage, and maintain.
Stay the course
The financial markets fluctuate, but Bogleheads recommend sticking to your investment plan unless your financial circumstances or goals change. Selling under panic during downturns or over-enthusiasm during bull markets, can harm long-term financial outcomes. When investing, gains are made over years rather than days.
Bogleheads philosophy is based on patience, discipline and the power of compound interest. As an Italian investor, you can apply these principles to your financial situation and goals. The key is to start early, invest regularly, diversify your portfolio and remain disciplined over time. Despite market volatility, this philosophy can help you achieve financial independence in the long term.
Applying the principles of Bogleheads in Italy
Most investing resources like the Bogleheads are focused on an American audience. Therefore, implementing this investment philosophy in Italy can seem daunting, particularly when navigating the local financial landscape.
Here are some practical ways on how to invest like a Boglehead in Italy.
Selecting low-cost index funds in Italy
Index funds are a key component of the Bogleheads' philosophy. They offer a low-cost, diversified investment option that replicates the performance of a specific market index. Many of these funds are available to Italian investors, most often in the form of ETFs (Exchange-Traded Funds). ETFs allow investors to invest in a broad market index, providing diversification and low fees.
In Italy, it is possible to invest in ETFs in two ways:
- With a broker
- Through an app like Curvo
Using the first way presents a number of difficulties. Initially, one has to choose the right broker. There are numerous types available, with different rates depending on the trades to be made. One must be careful in selecting the broker with the lowest costs for the services one needs, such as executing monthly transactions and buying ETFs: essential services for applying the Boogleheads strategy in Italy.
In addition, one has to be careful about tax management, in fact, many brokers, such as DEGIRO, follow the Declarative Regime, and it is up to the investor to declare their capital gains and pay taxes on them. Conversely, others, such as Fineco, follow the Administered Regime, and it is the broker who calculates the taxes to be paid and pays them to the State as Tax Substitute.
It all sounds very complicated already, but that's not the end of it!
When using a broker, the challenge lies in selecting the right funds. There are thousands of funds available. Moreover, not all index funds are the same. They may vary in terms of their expense ratio (the fees charged by the fund), the index they follow, their overall performance, and their tax efficiency. It is crucial to examine these aspects before making your choice.
Building the best ETF portfolio aligned to you and your goals is one of the most challenging parts.
Implementing a buy-and-hold strategy in Italy
The Bogleheads' approach recommends a buy-and-hold strategy, which involves buying securities and holding them over the long term, regardless of market fluctuations. This can be done by investing regularly in selected index funds.
The challenge here is to maintain discipline and not react to market volatility. One may be tempted to sell when prices are falling or try to predict the market to maximise returns. However, the Bogleheads' philosophy maintains that it is long-term investing, and not short-term fluctuations, that leads to success.
Sticking to this strategy requires a level of patience and emotional control that some investors may find challenging.
When investing through a broker, you can set up a standing order to automatically send money to invest each month. Unfortunately, most brokers do not offer a way to automate the investment process, and in this case it becomes difficult to manually manage the orders each month. In this case, Curvo can help you by fully automating the monthly investment process, from debiting the amount from your account to realising the investment, according to your portfolio.
Efficient tax management
Efficient tax management is key to maximising investment returns. In Italy, as in many other countries, taxes can erode a significant portion of your investment returns if not managed effectively.
There are two relevant taxes for Italian investors when investing in ETFs:
- Tax on capital gains and dividends (26%) or on returns on government bonds (12.5%)
- Stamp duty (0.2%)
Each has its impact on the choice of your portfolio.
Rebalancing your portfolio
The Bogleheads' philosophy also emphasises the importance of maintaining the target asset allocation through regular portfolio rebalancing. This involves adjusting the portfolio periodically to keep it aligned with the desired level of risk and return.
In practice, this means that it may be necessary to sell some assets that have performed well and buy others that have performed poorly. This can be counter-intuitive and emotionally demanding, as it involves selling the 'winners' and buying the 'losers'. It also requires constant monitoring of your portfolio and an understanding of when and how to effectively rebalance positions.
Curvo, the easiest way to invest like Bogleheads in Italy
The challenges of investing through a broker
In the previous section, we looked at how it is also possible to invest Bogleheads-style in Italy. However, managing one's investments through a broker can present significant challenges. Initially, it is essential to build an appropriate ETF portfolio, a process that requires understanding one's financial objectives, one's risk tolerance and choosing the appropriate index mix. Next, one needs to identify the ETFs that best align with one's investment strategy. This requires opening an account with a broker and mastering the procedures for purchasing ETFs.
If you intend to follow the Bogleheads' principle of investing consistently, you will have to repeat this process every month. However, implementing a buy-and-hold strategy via a traditional broker often requires periodic manual investments, which can be extremely time-consuming and can result in missed investment opportunities if you forget to make a scheduled purchase.
Efficient tax management is key to maximising investment returns. However, understanding and exploiting tax investment options can be complex when dealing with a broker. It often requires a deep understanding of both investment options and tax matters. For instance, if you happen to invest in a distribution ETF instead of an accumulation ETF, you will pay a 26% tax on dividends.
Finally, rebalancing is essential to maintain the desired level of asset allocation and risk. Using a traditional broker, involves manually selling overrepresented assets and buying under-represented ones. This process can take a lot of time and study and can incur transaction costs.
In summary, Bogleheads' investment principles offer a robust and disciplined approach to wealth creation. Brokers can provide the tools necessary to implement these principles, but the investment process may not be the easiest. You may not have the interest, time or motivation to overcome the learning curve required to start investing on your own. Or, you may simply prefer to spend your time on what is most important to you, rather than on investment management.
We built Curvo to make this strategy accessible to all investors in Italy
Curvo was built to meet these challenges. The idea for Curvo was born when Yoran, one of the co-founders, who is passionate about the investment philosophy of Boglehaeds, could not find a guide to implement this strategy through a broker. He was convinced that indexed investing was a very powerful and useful tool to improve one's financial well-being, however he was aware that there were many obstacles and frictions for access by all investors, especially the more inexperienced ones.
By providing access to a careful selection of portfolios consisting of low-cost, high-quality index funds, we make it easy to build your own investment portfolio.
When you sign up, you are asked a few questions to get to know your objectives and risk profile. Then, the portfolio that best suits your needs is selected.
Furthermore, all portfolios are managed by NNEK, a Dutch investment company controlled by the Dutch regulatory authority (AFM).
Through the Curvo app, one can also fully automate one's investments with NNEK, from when the money is debited every beginning of the month until the investment is practically executed. In this way, it becomes easy to stick to the Bogleheads' principle of investing early and often. Moreover, fractional shares ensure that all money is always invested. No money is left in the account without producing returns.
Curvo helps to manage taxes efficiently. We help comply with all tax and administrative regulations, and offer detailed guidance when needed.
Finally, portfolio rebalancing is done automatically. If your portfolio deviates too much from the planned allocation, NNEK will automatically adjust your investments to bring them in line with the target asset allocation.
The Bogleheads philosophy simplifies the complex investment process with ten principles focused on low-cost, diversified financial products.
The universal application of this philosophy can also be made by Italian investors. We have, in fact, seen how to put the Bogleheads principles into practice using a broker, even though this entails quite a few difficulties and can be intimidating, especially if one is a neophyte in the world of investments.
As founders of Curvo, we wanted to make Bogleheads-indexed investing accessible to all Italians. We created Curvo to address the different challenges of investing through a broker, such as portfolio creation, manual investing, tax management and rebalancing. The platform aligns with the Bogleheads' principles of simplicity, discipline and patience, making it a suitable investment for all Italian investors.
Questions you may have
What is the 50-30-20 rule for Bogleheads?
This rule states that 50% of your budget should be allocated for basic needs (housing, food, health care, insurance, transport, etc.), 30% for wants (hobbies, travel, etc.) and 20% for savings and investments.