Simple is good. Simple is easier. Simple is more profitable.
What I’m going to share with you in these next couple of articles is the soul of simplicity. With it you’ll learn all you need to know to produce better investment results than 80% of the professionals and active amateurs out there. It will take almost none of your time and you can focus on all the other things that make your life rich and beautiful.
How can this be? Isn’t investing complicated? Don’t I need professionals to guide me?
No and no.
Since the days of Babylon people have been coming up with investments, mostly to sell to other people. There is a strong financial incentive to make these investments complex and mysterious.
But the simple truth is the more complex an investment the less likely it is to be profitable. Index Funds out perform Actively Managed Funds in large part simply because Actively Managed Funds require expense active managers. Not only are they prone to making investing mistakes, their fees are a continual performance drag on the portfolio.
But they are very profitable for the companies that run them and as such are heavily promoted. Of course, those profits come from your pocket. So do the promotion costs.
Not only do you not need complex investments for success, they actually work against you. At best they are costly. At worst, they are a cesspool of swindlers. Not worth your time. We can do better.
Here’s all we are going to need: Three considerations and four tools.
The Three Considerations.
You’ll want to consider:
- In what stage of your investing life are you: The Wealth Building Stage or the Wealth Preservation Stage? Or, mostly likely, a blend of the two.
- What level of risk do you find acceptable?
- Is your investment horizon long-term or short-term?
As you’ve surely noticed, these three are closely linked. Your level of risk will vary with your investment horizon. Both will tilt the direction of your investing stage. All three will be linked to your current employment and future plans. Only you can make these decisions, but let me offer a couple of guiding thoughts.
Safety is a bit of an illusion.
There is no risk free investment. Don’t let anyone tell you differently. If you bury your cash in the back yard and dig it up 20 years from now, you’ll still have the same amount of money. But even modest inflation levels will have drastically reduced its spending power.
If you invest to protect yourself from inflation, deflation might rob you. Or the other way around.
Your stage is not necessarily linked to your age.
You might be planning to retire early. You might be worried about your job. You might be taking a sabbatical. You might be returning to the workforce after several years of retirement. Your life stages may well shift several times over the course of your life. Your investments can easily shift with them.
F-you money is critical.
If you don’t yet have yours, start building it now. Be relentless. Life is uncertain. The job you have and love today can disappear tomorrow. Nothing money can buy is more important than your fiscal freedom. In this modern world of ours no tool is more important.
Don’t be too quick to think short-term.
Most of us are, or should be, long-term investors. The typical investment advisor’s rule of thumb is: subtract your age from 100 (or 120). The result is the percent of your portfolio that should be in bonds. A 60-year-old should, by this calculation, have 40% in conservative, wealth preserving bonds. Nonsense.
Here’s the problem. Even modest inflation destroys the value of bonds over time and bonds can’t offer the compensating growth potential of stocks.
If you are just starting out at age 20 you are looking at perhaps 80 years of investing. Maybe even a century if life expectancies continue to expand. Even at 60 and in good health you could easily be looking at another 30 years. That’s long-term in my book.
Or maybe you have a younger spouse. Or maybe you want to leave some money to your kids, grand kids or even to a charity. All will have their own long-term horizons.
The Four Tools.
Once you’ve sorted thru your three considerations you are ready to build your portfolio and you’ll need only these four tools to do it. See, I promised this would be simple.
1. Stocks. VTSAX (Vanguard Total Stock Market Index Fund) You’ve already met this fund in earlier posts of this series. It is an index fund that invests in stocks. Stocks, over time, provide the best returns and with VTSAX, the lowest effort and cost. This is our core wealth building tool. But, as we’ve discussed, stocks are a wild ride along the way and you gotta be tough.
2. Bonds. VBTLX (Vanguard 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 the US into the Great Depression. Very scary. The downside for bonds is that during times of inflation and/or rising interest rates they get hammered.
3. Real Estate. VGSLX (Vanguard REIT Index Fund) REITs (Real Estate Investment Trusts) invest in real estate. They provide an inflation hedge and, typically, dividend income. REITs allow us the benefits of ownership without the headaches of actively buying and managing properties. But during periods of deflation real estate prices plummet. That’s exactly what’s been happening to home prices these past few years.
REITS are in a sense the Ying to our Bonds’ Yang.
4. Cash. Cash is always good to have in hand. You never want to have to sell your investments to meet emergencies. Cash is also king during times of deflation. The more prices drop, the more your cash can buy. But idle cash doesn’t have much earning potential and when prices rise (inflation) its value steadily erodes.
We tend to keep ours here: VMMXX This is a Money Market Fund and time was they offered higher yields than banks. These days, with interest rates near zero, not so much. Now we also keep some in our local bank. If you prefer, an on-line bank like ING works fine too.
So that’s it. Four simple tools. Three Index Mutual Funds and a money market and/or bank account. A wealth builder, an inflation hedge, a deflation hedge and cash for daily needs and emergencies. Low cost, effective, diversified and simple.
You can fine tune the investments in each to meet the needs of your own personal considerations. Want a smoother ride? Willing to accept a lower long term return and slower wealth accumulation? Just increase the percent in VBTLX.
Next time we’ll talk about a couple of specific strategies and portfolios to get you started.
Meanwhile, a brief note on….
You will have noticed Vanguard is the company that operates all of these funds. It is the only investment company I recommend, and the only one you need (or should) deal with. Vanguard’s unique structure means that its interests and yours are the same. Vanguard the company is owned by the Vanguard funds. In other words, by us, the fund shareholders. This is unique among investment companies.
Awhile back a commentator on Reddit, referring to one of my posts, said: “This really just looks like a commercial for Vanguard.” I can see his point, although I wish he’d made it directly on here.
I am a huge Vanguard fan, but I am not on their payroll and I have no financial interest in the company other than owning the funds I describe.
You might find an index fund in another investment company that is a bit cheaper. They create some as “loss leaders.” But you can’t trust these other companies long-term. Their interests are not your interests. Their interests lie in making money for their owners.
If you play with snakes, to quote Dave Ramsey, you’ll eventually get bitten.
Don’t bother. Stick with Vanguard.
Disclaimer: Like everything on this blog, this is only sharing ideas. You are solely responsible for your own choices.