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.
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 large US 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
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.
But keep in mind the actual amount will depend on your net worth and projected needs.
5% of a million is $50,000 after all, and that might be excessive.
5% of $10,000 is $500, and that might not be enough.
Understand your potential needs and aim for that amount, rather than a fixed percentage.
25% = Real Estate. VGSLX This is an Index Fund that invests in REITs (Real Estate Investment Trusts). Please note — I no longer hold VGSLX. Please see Addendum #1 below.
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.
Update: HAINX, CGMFX and all individual stocks are now gone.
Addendum 1: Please note — I no longer hold VGSLX. Please see Stepping away from REITs for a discussion as to why.
Addendum 2: What if you can’t buy VTSAX? Or even Vanguard?
Addendum 4: The Path to 100% Equities