What we own and why we own it
In the simple path to wealth I created for my young daughter nine basics guidelines.
Readers noticed that the plan called for only one investment: VTSAX Vanguard Total Stock Market Index Fund (VTSAX). https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT
Here’s why:
1. VTSAX is an Index Fund at Vanguard and that means rock bottom costs. It is surprisingly critical to keep costs low to succeed in investing.
2. VTSAX provides broad diversification. It holds every publically tradedUS based company.
3. VTSAX provides international diversification. Many largeUS companies are multi-national in scope. They, and you as a shareholder, benefit from the growing world economy.
4. Stocks, over time, provide the highest return of any investment class.
5. Stocks are, over time, a fine inflation hedge. People forget that stocks are not just pieces of paper. Stocks are pieces of ownership in operating businesses. Sales, inventory, plants, equipment, brands et al. All of which rise in value with inflation.
6. VTSAX, like the total stock market index it reflects, is self cleansing. A company, and its stock, can experience extremes.
The worst that can possibly happen: It loses 100% and the value falls to zero. Then it drops from the index and is replaced with a new company.
The best that can happen: The company becomes wildly successful. Its value and stock price could rise 100%. Or 200%. Or 1000%. Or 1,000,000%. Or some unlimited percent.
This is one of the key reasons that while the stock market and VTSAX can and do have violent swings down, the march over time has been relentlessly up.
Can it really be this simple? Yep. My core belief is not only should investing not be complicated, simple gets better results. Complicated, of course, pays Wall Street better. If you are worried about them.
this is for these guys
Remember this is for my 19-year-old and other folks with decades ahead of them. Basic #7 in the Simple Path points out that to make this work you have to be able to ignore the panics, stay the course and let the decades work for you. Easy to say and very tough to do. Especially when all the experts are lining up on window ledges.
100% stocks, even in the broadly diversified VTSAX is considered very aggressive. High short term risk (read: gut wrenching drops) rewarded with top long term results. Perfect for those who can handle the ride and have the time.
But it’s not for everybody. Maybe you don’t want to deal with this level of risk. Maybe a bit more peace of mind is required. As you get older you might want to smooth the ride a bit, even at the cost of lower overall returns. You have to sleep at night.
Now that I’m kinda, sorta retired and we have F-you Money, me too. My wife and I hold some other stuff in our portfolio. But not much. Here it is:
45-50% = VTSAX is our core holding, for all the reasons listed above.
25% = VBTLX https://personal.vanguard.com/us/funds/snapshot?FundId=0584&FundIntExt=INT
This is the Total Bond Market Index Fund. Bonds provide income, tend to smooth out the rough ride of stocks and are a deflation hedge. Deflation is what the Fed is currently fighting so hard and it is what pulled theUS into the Great Depression. Very scary.
5% = Cash. Cash is always good to have in hand. You never want to have to sell your investments to meet emergencies. We keep ours here: VMMXX https://personal.vanguard.com/us/funds/snapshot?FundId=0030&FundIntExt=INT
25% = Real Estate. VGSLX https://personal.vanguard.com/us/funds/snapshot?FundId=5123&FundIntExt=INT This is an Index Fund that invests in REITs (Real Estate Investment Trusts).
The Fed has mounted a massive effort fighting deflation. Another way to say it: They are working hard to ignite inflation. In our current situation a little inflation would be a very good thing. But the Fed almost always over shoots. My bet is sometime soon we will see a strong inflationary rebound. VGSLX is my inflation hedge.
While, as noted above, over time stocks are a fine inflation hedge they tend to get wacked in the beginning. Real Estate will respond to inflation much faster and stronger. VGSLX is the safest and easiest way to own it.
As you’ll hear in a future post, your personal home is a terrible investment. But if you feel you must own a home, now is a great time to be a buyer.
Investment real estate is an entirely different thing. You can, and I used to, buy individual properties and do very well. But that’s a part time job. VGSLX does the same with no effort and much broader diversification.
Finally, we have a checking account at our local bank for ready cash and paying bills.
So, that’s it. Four Index Mutual Funds and a checking account. A core holding, an inflation hedge, a deflation hedge and cash for daily needs and emergencies. Low cost, effective, diversified and simple.
This is still pretty aggressive, but it suits us. Want a smoother ride? Willing to accept a lower long term return? Just increase the percent in VBTLX.
In the interest of full disclosure, I do still have a few other investments left in old 401k plans and from my many misguided attempts to pick stocks and fund managers. Boy howdy, I’ve made a lot of mistakes swinging for the fences. That’s a subject for another post.
Here’s the other stuff:
HAINX. Harbor International Fund. I own this in the 401k from the job I just left. It is an actively managed fund and, as such funds go, it has relatively low costs. It also has performed very well over the 5-6 years I’ve owned it.
So, I got lucky. But that’s what it is: Luck. Actively managed funds can and do outperform their indexes. This one has for me. But rarely for the long term. Meanwhile, the higher expenses are always there. Now that I can, I’ll be rolling this over to Vanguard. It’s been a nice run. No great hurry, but no sense pressing my luck either.
CGMFX. CGM Focus Fund. This is a very aggressive fund run by Ken Heebner. Heebner is a super-star fund manager and Focus was, a few years back, the best performing fund there was. Or close to it.
The last few years? Not so much. I’ve gotten killed in it. Did Ken get stupid? I doubt it. Will he get his mojo back? Who knows. The take away here is fund managers don’t get any better or smarter than Heebner. But the index has still left him in the dust. Beating the index year after year is vanishingly hard, even for guys this good.
I also have a very few dollars in a handful of stocks. Not gonna name them ’cause it’s a bad idea to have them. But I like to play.
What can I say. I’m a slow learner.
Disclaimer: This is only sharing what we own. You are solely responsible for your own choices.
Care to comment? Just click on the circle on the top right of the post.
Update: HAINX, CGMFX and all individual stocks are now gone.
Addendum: What if you can’t buy VTSAX? Or even Vanguard?
37 Comments
I agree with you in principle…but in reality I do not.
I think things need to be more actively managed…to a level well within an armchair investor’s ability. Look at it this way:VTSAX (your core stock holding), as well as SPY (S&P500) have returned ~ 0% over 10 years…deadly to those who are retired and have been withdrawing monthly.
Hi Reggie….
Welcome aboard and thanks for your comment.
No question stock returns over the last decade have been, ahem, disappointing. Historically they provide the greatest return of any asset class, but certainly not without risk.
This is why for my 19-year-old daughter with decades ahead they make sense at 100%. But, as I tell her, you have to be able to ride the downs without losing sleep.
This is also why, for us retired folks, it is only half of the mix. Admittedly this is still very aggressive but I’m comfortable with riding the declines. Even the mega tsunami of 2008-9. But then, my “stash” has also grown large enough to weather such storms without impacting my lifestyle. Due of course, to having taken the ride.
My concern with your suggestion that things need to be more actively managed is the underlying assumption your armchair investor would have done better than a 0% return over the last ten years. It is, of course, entirely possible to do far worse than 0% return.
Research indicates the vast majority of individual investors do, in fact, far worse than the index. So do the majority of professionals who make investing their life’s work. It is vanishingly difficult and that’s why those who can do it are household name superstars like Warren Buffet.
If one chooses to be an active manager (something BTW I choose for many years) it is well to be keenly aware of the extraordinary challenge being undertaken.
Asset allocation is the more reliable tool, and that’s why we have bonds and RIETS and cash.
Cheers!
JC
Hey JC,
Hello from a fellow New Englander; this is a great article/blog!
What’s your split amongst taxable accounts and retirement accounts?
For a 27 yr old looking to achieve FIRE asap with his fiancee, what would you recommend the split be?
Thanks,
J
Hi J…
Welcome and thanks for the very kind words. Glad you are enjoying the blog and finding it of some value. How did you come across it?
Regarding our split, it is roughly 50/50 taxable v. IRAs. Mostly because we keep the dividend paying REIT and Bond funds in the Tax sheltered IRAs and the VTSAX in the taxable account. But this info doesn’t really address your question.
We maximized our contributions to Roths, IRAs, 401ks as aggressively as we could. But with a 50% savings rate we were also able to build assets outside as well. Remember, our goal was never to retire early but rather to have F-you money so we could step back whenever we choose. My wife did it for 10-12 years to be a stay-at-home mom and, as I’ve described elsewhere I’ve done it 3 or 4 times for periods ranging from three months to 5 years.
If you and your fiancé plan to hang up working for money at, say, 35 you’ll want more of your assets available in taxable accounts. IRAs/401k are typically unavailable without penalty until you are 59.5 years. (although you can access them earlier with an equal annual distribution process. but that locks you in.)
So here are some considerations:
Anytime your employer offers a “match” with the 401k, grab it. The instant 100% gain outweighs other considerations.
Fund Roth IRAs next. They have no immediate tax deduction but your contributions plus everything they earn are free of income tax going forward. Importantly, there is no required distribution when you are 70.5. These will be your longest held investments.
Given your situation, beyond these I’d focus on aggressive savings and building your taxable investments so you’ll have ready access to your $$.
Traditional IRAs depend on your tax bracket. If your earnings are low you might be better off keeping the money in taxable accounts. Especially if you’ll be tapping it before 59.5.
If you’ll be living on your investments from 35 until 59.5 (when you can access IRAs without penalty) you’ll want to have non-IRA investments available.
Hope this helps!
Thanks for your insight, JC! I came across your blog by surfing the comments over at the triple M. I admire the perspective of your posts, keep up the good work!
Your reply has helped clarify. Given my age, positioning my retirement account all within VTSAX seems most wise since I won’t touch it for years to come & for keeping costs low.
I guess I’m scratching my head over allocation within the taxable account. Given the volatility of VTSAX year over year, it will be hard to rely on if living off the assets.
A balanced fund like, like a VBINX, would provide a growing-but-semi-stable $$ to use up. Yet, the dilemma is that bonds aren’t the most tax-efficient assets especially if their in a taxable account. Your thoughts?
J
Hi J….
Makes sense. I’ve noticed an influx of readers from over there of late.
Basically you want to keep bonds, REITS, and high div stocks in 401k/IRAs. protects the dividends from the tax man.
stock funds, like VTSAX, provide most of their gain with capital gains at a lower tax rate. so they can go in your taxable account.
VBINX is a fine fund and will do the job, but as you point out the bond component makes it less tax efficient. It also has a slightly higher expense ratio. This is way I choose VTSAX and VBTSX. I can put them where I want and pay lower expenses. Still VBINX does it all for you and makes it even simpler.
Where is your $$ now, what is your savings rate and when is your retirement target? If you don’t mind my asking….
JC
Thanks JC.
I’ve been in the accumulation/learning phase; similar starting out as to how Jacob began…sad to say, it is all still sitting in a savings acct as I’ve been reading up on all the classics the last year and blog surfing before making the leap. My current rate is at 60%. Regarding target, I’m still contemplating as to whether the best goal to aim for is a full FIRE fund (at current living expenses) or to buy an income property(live in it) while continuing same savings rate to reach a smaller FIRE fund faster since living costs would lessen, plus have additional stream of income and be further diversified aside of ‘paper’ assets.
I suppose what is ultimately desired is best summed from “The Richest Man in Babylon”, ‘…a golden stream that continually floweth into thy purse and keepeth it always bulging…an income that continueth to come whether thou work or travel.”
Thanks,
J
I’m a little late to the party (I’ve just found your blog and am catching up on all old posts) but I was wondering…..how did you choose specific index funds to invest in?
I’m just a few years older than your daughter and have finally realized that I’m ready to start ‘thinking’ about it all but I’m still overwhelmed by all the choices. For example, you have 25% in VBTSX but over at MMM he’s recommended VFSTX for bond based index funds but I don’t have the knowledge to accurately distinguish pros/cons between the two.
Does anyone have recommendations for a good in depth guide to things like risk factors, expense ratios, and capital gains? I can find tons of resources that gloss over investing but so far nothing that’s both approachable and thorough.
Thanks!
Welcome Chemistay…
…glad you found your way over here. From you comment I’m going to guess you are around 22. It is awesome that you are turning you attention to investing so early. Nothing is more powerful than the compounding of your investments over time and the sooner you start the faster and further you’ll go. Kudos.
I come to my choices by trial and error over literally decades. Fortunately you don’t have to do that. If you haven’t already, take a moment to read:
http://jlcollinsnh.wordpress.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/
In it you’ll find what and why I recommend to my daughter and, by extension, other young people starting on this path. Keep in mind, this is a very aggressive approach. It only works if you have the time horizon and the guts to ride out the gut wrenching drops like we had in ’08. Over the next 50-60 years of your investing life you can expect to go thru several more. You’ll also see incredible bull markets. Don’t let yourself be made frightened by the one or giddy by the other.
VFSTX is a short-term bond fund. Typically people buy these to earn a bit more interest, with a bit more risk, than a money market fund on the cash they want to have readily available. Details here:
https://personal.vanguard.com/us/funds/snapshot?FundId=0039&FundIntExt=INT
It serves a very different role than VBTSX. This is a total bond market fund providing broad-based exposure to bonds of all terms. VBTSX is a better fund to hold for the long term. It compliments the Total Stock Market Index (VTSAX) which does the same for stocks. This gives broad diversification over both.
For good, clear no-nonsense info on investing check out Vanguard’s website. You can also compare VFSTX and VBTSX on their site, looking at yields, expenses et al.
Good luck and stop back anytime with more questions.
Thanks for your quick reply!
My situation is slightly less straight forward than your daughter’s, unfortunately. (Also, I still feel like I’m 22 most days but I’m pretty close to birthday #25…definitely time to get my financial life in order!)
I’m currently a graduate student which means I’m making some money but I also have some deferred college loans that I want to pay back in about two years when I graduate (before they start accruing interest). I’ve saved up the ~$12,000 that I owe but its just sitting in a savings account and I’d like to put it in something relatively stable but with slightly more potential for growth than my bank account which is why I’m trying to figure out the differences between bond based index funds.
At this point, I’m thinking I should open a Roth and max out contributions (before April 17th) at $10,000 in something like VFSTX and use the remaining $2000 to open up a taxable account (In something similar? Safe but lowish growth?). My plan would be to pull out the principal without penalty when the loans become active and keep anything it makes as a nice little future tax-free bonus. Anything else I save from this point on will be free to go into a higher risk, longer term investment. I keep going back and forth on the best way to do this though because I don’t quite understand the tax implications for things like a Roth IRA vs. taxable investment and bonds vs. stocks etc. I feel like I should max out my Roth but I don’t make enough (yet!) to save $5000 every year and I need that $12000 to be available when I graduate so I don’t have to pay the evil loan company any more than I borrowed to get my degree.
Luckily, these funds are above and beyond what I need to live each month and I still plan on having around $2000 in a savings account for any surprise expenses. Up until now I’ve been terrified to put any money in investments but I’ve finally seen the light and realized that this attitude is actually hurting the future me.
Any advice? I’ll definitely do some more snooping around the Vanguard website as well.
1st, big time kudos for having the cash set aside to cover your student loans the moment you graduate. That tells me you’re a fiscally disciplined guy, and that in turn colors my answer.
let me give you two answers: what you should do and what I personally would do.
What you should do is put the 12k into VFSTX. This is short term money you are investing and stocks and intermediate and long bonds are long term investments. Greater returns with greater short term risk.
VFSTX is perfect for this application because it is a short term bond fund. It will give you a better return than a money market fund with very little addition risk.
Moreover, I am a huge fan of Roth IRAs and believe everyone should max them out whenever possible. Since $5000 is the annual limit I assume you’d place the 10k with your 2011 (which you can add up until April 15) and 2012 contribution allowances.
You mention then withdrawing the 10k without penalty in two years to pay the loan. Since I don’t know the law on this I’ll assume you’ve done your homework and it’s possible. If it is, I like it. This is a little fancy for my taste, but given your evident discipline, go for it.
The extra 2k you can keep in the same fund but in a taxable account. Then, when you graduate and begin working switch the Roth to VTSAX for the long haul and keep adding to it.
Now, here’s what I’d do. 1st this is based on a few assumptions:
You have a high risk tolerance like me
Your job prospects when you graduate are good
You are planning to save 30%+ percent of your income
As before, 10k into the Roth but in VTSAX. This will be the start of your long-term wealth building. The 2k into VFSTX for safety, liquidity and a bit of extra return.
Upon graduating, I’d then pour my full efforts into getting the loan paid thru my income and funding the 5k per year into the Roth. Plus funding, if offered, any 401k at least up to any company match.
As an alternative, and if VTSAX grows over the next two years, you could also follow your plan of pulling the 10k, leaving the money earned and paying off the loan. But if you are as disciplined as you appear, I wouldn’t bother. Just focus on paying them agressively out of income.
You’re asking all the right questions. Good luck!
Thanks for your take on things! I’ll probably end up going the more conservative route since I’m still weighing my options for life after graduate school.
One more quick question: why do you have your cash in a low yielding money market account at Vanguard rather than a higher interest savings account like Ally and ING offer?
I’m really enjoying your blog and looking forward to future posts!
Thanks Chemistay…
glad you are enjoying and I appreciate your participation. although now you’ve asked me an embarrassing question.
The answer is habit, and I have yet to check out online accounts. Interestingly, I was just reading about them here and added my own comment:
http://www.20sfinances.com/2012/02/07/reader-question-series-where-to-keep-your-savings/
Seems Ally is favored over there.
Since I tend not to keep much cash and usually am planning to deploy it in short order, my Vanguard Money Fund is simply more convenient.
I understand! I opened an account at ING before Ally was around and have been very happy with it but would seriously consider Ally if I was starting out now for a few perks like being able to scan in checks rather than sending them by mail (or having to keep a physical bank account to transfer money). Once you open an account though, you can link it to Vanguard easily. (This is what I did when I took the plunge and opened my Roth IRA this week…yeah!)
cool beans! one of the great things about the comments section is I get to learn new stuff too.
I’d be very interested in hearing the details:
your assessment of Ally v. ING
how to open these
interest rates
linking to Vanguard
Want to do a guest post? If so, write it up and shoot me an email. it will be the 1st on the blog!
Thank you so much for sharing this information – it’s so useful! I’ve jumped around many of Vanguard’s funds and admit 2008 and scared me. I know have most everything in the Wellesley Fund and I know it is considered conservative. With a 10-15 year horizon do you think it is TOO conservative?
Don’t feel bad, Fuji. 2008 scared everybody. It had me biting my nails, too. It was a real test of my “ride out the storms” mantra. Yet here we are, closing in on those levels once again a few short years later.
Years ago I remember looking at Wellesley and my impression is very positive. Your question prompted me to revisit it. It is a great fund and I don’t even like actively managed funds.
Very impressive long term performance and a very reasonable .25% expense ratio. This is a “balanced” fund, meaning it holds both stocks and bonds. So the road to that strong performance has likely been much smoother than with my favorite, VTSAX.
Going to the Vanguard site, there is a useful tool to compare funds:
https://personal.vanguard.com/us/funds/vanguard/compare?navigatingFrom=2
(just noticed the link above comparing the the funds I choose is not working. if it does’t work for you go here: https://personal.vanguard.com/us/funds/vanguard
select Wellesley, or any other fund, and when you get to it’s page on the upper right-hand side you’ll see a button marked ‘compare.’)
Using it I pulled up Wellesley, VBINX (the index fund equivalent benchmark) and VTSAX. Wellesley looks might fine. It consistently has outperformed VBINX and even has a slightly cheaper expense ratio.
In the 1, 5 & 10 year categories it soundly trounces VTSAX, taking a back seat only in the 3-year measure. It is important to think a bit about why.
The last 10 years have been exceptionally difficult for stocks. Since Wellesley in a balanced fund that also holds bonds, this outperformance makes perfect sense.
Within this 10 year period, stocks have been in a bull market coming off their bottom since 2009. So VTSAX taking the lead for the 3-year period also makes perfect sense.
So, to your question: Is Wellesley TOO conservative for the next 10-15 years? Nope. I think you’ve found yourself a great investment here. It is certainly more conservative than VTSAX, but with their track record you’d not be giving up much to get the smoother ride of a balanced fund.
Wellesley also pays a close to 3% dividend. Very handsome. But also taxable, if you are holding it in a taxable account.
Normally, Wellesley being an “actively managed” fund, I’d be steering you away. Outperformance is very hard to maintain and the past is no guarantee of the future. That said, like most things, Vanguard does “actively managed” differently, and better, than other fund companies.
The difference lies in the avoidance of star fund managers. Vanguard’s are managed by groups that focus on basic styles and principle that match the fund’s stated goals. Since these are consistent and not dependent on the acumen of specific individuals , fund performance is more likely to be consistent thru the years.
I have just read your article on MMM and found it a fantastic read,although parts of your life and investing styles do mirror my own strategy.
I started investing before I was 16 I have tracker funds for my wife and 2 children (although not Vanguard as it’s a newcomer here and not easy to access).
I have income from 3 properties that just give that stability that shares sometimes lack,but any spare money goes into the stock market at the moment including my dividends.
Financial freedom is a goal worth achieving!
Your advice to newcomers is probably the best I have seen
Wow, high praise indeed, Steve. Thanks!
Where are you located?
England,
Vanguard do operate here and I would have changed over to Vanguard but to start with you needed £200,000 for them to take you as a direct client, this has now dropped to £100,000 but is still quiet a lot,
You can invest in Vanguard trackers through platforms (alliance trust,Hargreaves Landsdown) but these have a monthly fee attached and that makes me feel like I would be at the mercy of there platform fee’s.
Vanguard have just introduced some low cost ETF’s in the uk and I might use these in the future FTSE 100 = VUKE, FTSE all world GBP= VWRL , USD=VWRD .
I am sorry to hear your property dealings didn’t turn out well,and many people here in the uk have been stung by buying to high or buy to let disasters but owning property can be a very good investment.
I was lucky and seemed to buy at just the right time, my properties were bought in the 1990s when property was bombed out and now the boom and bust has happened it has left a lot of owners with properties they have over payed for,but here in blighty, land is very scarce, planning permission isn’t given easily and property is still on very tight supply.
Property prices haven’t come down as much here as I expected but because of short supply and buy to let people paying to much for there property rental incomes/rates are very good indeed ,and I suppose the Bank’s asking for a 20% deposit helps.
Trackers are good but if you put £100,000 in a tracker at the top of the market then I suppose it would have the same effect as buying a house at the top of the market.
The good thing about trackers (and possibly essential thing) is that you can put monthly amounts in and use pound cost averaging to help you along.
Steve
Great info, Steve….
..thanks.
In answering a question for an Aussie reader I did some research and it seems the ETFs Vanguard offers are the way to go for interested non-USA folks.
I have had a couple of properties that worked out well, but I haven’t written about those.
My condo disaster seemed the more entertaining story.
In looking at the Vanguard funds, it’s apparent you need a minimum of $10,000 to invest in each. If a guy doesn’t have $10k like that, what is he to do?
Hi Jay….
The Vanguard funds I linked to, like VTSAX, are all “Admiral Shares.” Each has an “Investor Shares” version with slightly higher costs but a lower buy in of $3000.
VTSAX = https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT
VBTLX = https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT
VGSLX = https://personal.vanguard.com/us/funds/snapshot?FundId=0123&FundIntExt=INT
Once your fund grows to 10k+ you can convert it to the Admiral version at no cost and no tax consequence.
Cheers,
Jim
If I want to open up an account and start investing, do I open up an IRA?
My company doesn’t offer a 401k match or anything. (I work two part-time jobs). I make about $20,000 per year right now.
I mainly just want to start saving that 50%, putting it in a reliable fund, and being able to retire early. When I went to sign up on Vanguard I got a little confused with all the options.
I have a Checking account with a local bank, ING Savings account, and Charles Schwab Checking/Investing (Don’t use it, but if I travel I’ve heard good things about Schwab).
Hi TJ…..
I’m going to guess you’re a young guy and this money would be invested for the long term.
At 20k per year your tax bracket is already low and so the tax benefits of a regular IRA or 401k don’t offer much to you.
A Roth IRA is perfect for you. No immediate tax benefit (which you don’t need) but it and everything it earns for you will be tax free when you’re a geezer like me. But you can only put in 5k per year and there are early withdrawal penalties and taxes.
If you have more to invest, you can open a regular account.
Oh, and I’d use Vanguard.
Hey Jim,
Great posts, excellent and entertaining stuff. I think I followed Jacob of ERE fame and MMM over to your site. Given your penchant for sound advice I’m keen to get your thoughts on market timing.
I know, stupid question, but here it goes.
I’ve been 90% cash for 2 years, over 100K losing to inflation everyday. Reason being I thought I should be picking stocks and have had… less than stellar luck with that so far (15% down). Now you, MMM, and others have very convincingly converted me over to indexing, and I want to jump in. I can buy admiral shares in VTSAX and other indexes no problem. I work outside the US but am a citizen so my tax situation is a little different (for example I don’t get access to Roth contributions) but my taxes are nil since I make less than the exclusion trigger.
The question is, I’ve been sitting out for this run up from 700 to 13000. It seems that re balancing from cash to the whole market right now would be “buying high”, same for RIETs, same for bonds. I’ve thought of dollar cost averaging but wince when I look at the run up for all these classes. Is there an asset class that is down to take advantage of? Should I just accept I’ve missed the boat and jump on one that is riding high now, or wait for a 8-10% pull back… I have a good track record for waiting.
Please be harsh,
Thanks
Zero
Hi Zero….
Welcome and thanks for the kind words.
Yours is an excellent, and tough, question. We are sitting at the top of an extraordinary bull run from the crash bottoms. I can appreciate your concern. Truth is, no one knows what the next year or two will bring. But the next decade or two will be further up. So….
A lot depends on your age and time horizon. If you are young and looking a decades ahead, I’d just drop it into VTSAX (stocks) and plan to add more as I could. Even at these high levels my daughter is about to make her annual Roth contribution to VTSAX. Will it dip after she does? Who knows? Will it be higher decades from now? You bet!
As I’ve said elsewhere, as a geezer, I now hold 50% stocks, 25% bonds and 25% REITs. In fact I just rebalanced. With this recent climb in stocks, that meant selling some VTSAX and buying more bonds.
Sorry. I couldn’t think of anything to be harsh about….
BTW, where is your overseas posting?
Probably too late to this discussion but it appears VGSLX is closed to new investors. Is simply buying Vanguard REIT Index the same thing? Help, I really like the idea of working on the bounce back this way but dont want to jump in with two feet and have missed something important!
Hi Andrew…..
As far as I can tell, VGSLX is still open to new investors, but it does require a minimum investment of $10,000.
VGSIX is the same fund with a $3000 minimum and a slightly higher expense ratio. You can switch to VGSLX when you balnace gets large enough.
You can also buy it as an ETF. Ticker: VNQ
Ha! I also got killed in the CGM Focus Fund. One year, 80% return. The next, I’m curled up in the fetal position and chanting “Say it ain’t so, Ken.” In fact, very few of my well known managed funds have beat my index fund (VTSAX).
Hi JC,
First of all many thanks for this wonderful blog which I only recently discovered. What I like most is the fact that it is not “just” a personal finance blog, but covers the entire concept of life. I am a young father in his mid-30s and I find a lot of your shared experiences inspiring.
I am stopping by from Europe and as I empathise a lot with your comments and investment “advice”, I wonder if you can help me out with the implementation of the strategy over here.
Unfortunately, Vanguard has a tiny offering over here and their solution for my equity bit that I would like to be covering the MSCI World is not very compelling.
ishares has the much broader and better offering here in Europe. Would you recommend to avoid them due to the reasonson mentioned in your post?
Thanks so much for your reply!
All the best,
D
Welcome D….
As it happens I’m in Europe at the moment: Prague.
I very much appricate your comment about enjoying the non-finacial parts of the blog. I struggle with this. While I enjoy writing those pieces I do sometimes wonder if my readers are saying “yeah, yeah, but where’s the $$$ stuff I came for??” So your thumbs-up is welcome.
As to your question, when I started this blog I never dreamed it would enjoy the international readership that has developed. In fact a full 18% are from the UK. Very cool, I think.
In the comments section you’ll find, especially in the Stock Series, numerous comments and repies addressing your concerns from European readers who are figuring out the same things. Unfortunately, I have no expertise to offer in the unique aspects of investing outside the USA, but many readers do.
I am planning a post on this very subject, but in short I’d offer these guidelines:
1. Use only low-cost index funds. While I favor Vanguard, other companies have good examples.
2. Look for broad-based funds that track a large index. Were I outside the USA I’d be looking at a World Fund. By definition it would have solid coverage of the US market as well as the EU and other parts of the world. As the world becomes more global the wiething of large internationals will serve well.
3. Use as few funds as possible. I have only three: Stock, Bond & REIT.
4. Because I don’t know the opportuities available with REITS internationally, I might go with an even simpler stock/bond mix. Maybe 75/25% for an agressive investor like me. Add more bonds if you want a smoother ride.
Hope this helps!
Hi Jim -
I’m late to this blog and late to investing. But I hope it’s never to late to start. I’m going to follow up on a question I saw..well, somewhere. Between you and MMM, I’m starting to absorb a lot and become a bit overwhelmed.
The gist was..Cody asked when to start diversifying. And your reply, in short was, when you want to start living off your dividends (and you can’t contribute as much)…take it Vanguard admiral stocks and begin with the bonds/REITs at that point. If I understood you right.
Here is my question for you along those same lines regarding my situation:
What if you are a bit late to this party and do not have your “eff you” money as yet? Would you still be as aggressive and sink it all into the big stock admiral fund (the acronym is escaping me).
My situation, at present, is as follows:
1. I’m 45.
2. No debt save for a house and a car.
3. I’ve got a Principal 401k that I presently contribute 16% of my income to worth about 66k (need to reallocate I’ve now realized)
4. I’ve got a Fidelity IRA (not a Roth) woth about 92k at present (They manage it for me)
5. I’ve got a bare bones Money Market savings sitting at 3k
6. I just opened a Vanguard investor account at 5k (their stock account that I can flip to the Admiral account when it reaches 10k)
The main question I have is, given my age, would you still invest so aggressively? i.e., I’m considering if I should flip that account to the Admiral account and stay with the stocks or begin diversifying now with the bonds/REIT (and not reallocating those 401k and roths for that matter). I can get it up to the 10k fairly quickly given that I save around 600 to 1000 a month from my paycheck right now. There is also the option of paying off more debt (the car) then worrying more about investing.
For what it’s worth, I would retire tomorrow if I could.
Hi Tammy….
..and welcome!
No, it’s never too late to start and, at 45, you are still very young. With good health you could easily have 40+ more investing years ahead. Plus you’ve already built a nice base of around 166k so you are not starting from scratch.
How aggressively to invest is more tied to your goals and tolerance for risk. Very personal considerations.
Since you say you’d like to retire tomorrow, that speaks to a high risk/reward strategy of all stocks in something like VTSAX. But only if you are absolutely sure you can handle gut wrenching drops without panic and selling out at the bottom if they happen. For more on this, if you haven’t already and before you do anything, please read the stock series on this blog. Once you understand the principles in it, you can decide if you can tolerate the ride.
If I were in your situation, I’d have your same goal. Understanding that I have a very high tolerance for risk and know I’ll stay the course, here’s what I’d do personally:
1. Get rid of the car debt.
2. Unless your mortgage rate is around 4% or less, I’d either refinance or pay it off as my top priority. Maybe even sell the house.
3. I’d cut my expenses to the bone to free up as much money as possible to earn my financial freedom. 50% minimum.
4. I’d pour this money into VTSAX each month.
5. I’d celebrate market increases as they get me closer to my goal.
6. I’d celebrate market declines as they allow my dollars to buy more shares.
7. I’d make sure my Fidelity IRA was in one of their low cost total stock market index funds.
8. Once 4% of my assets could cover my expenses, I’d consider myself FI.
9. At that point I’d start living off that 4%.
10. At that point I’d decide if I wanted to keep working. If I did, I’d invest 100% of my salary to increase my assets.
11. As those assets continued to grow, so would the dollar amount the 4% represents. With this I’d feel free to expand my lifestyle and spending.
12. When I decided I was done working, I’d diversify into 25% Bonds and 25% REITS.
If I had less tolerance for risk, I’d follow the same plan but using an allocation of 50% stock, 25% bond and 25% REITS from the start.
Hope this helps! Please keep us posted!
Thanks very much for your reply. That helps a lot.
Re: #1 and #2 and the house and car.
Paying off the car earlier is definitely something I can work on now.
As for the house…I did refinance when the rates plummeted and I’m now sitting at 3.5%. That’s the good news. The bad news is, much like other owners, there is no equity and selling now would result in a considerable loss of money. I’m also in the DC area so I’m looking at around a 250k payoff at the moment. Paying it off early seems like a momentous task to me (I should mention it’s just me and we are looking at a single income here). So I have a hard time picturing this.
I do not have a hard time picturing cutting my debt a bit more and putting more into the fund when I can however. Thanks again for your thoughts.
My pleasure, Tammy…
That’s a tough one with the house. The good news is housing does seem to be recovering. Maybe you can hold on until you can sell without loss and unload it then. For a single person disciplined in saving, renting is the better option.
Good luck and stay in touch!
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