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You are here: Home / Money / Stocks — Part XXIII: Selecting your asset allocation

Stocks — Part XXIII: Selecting your asset allocation

by jlcollinsnh 184 Comments

ying yang

Life is balance and choice. Add more of this, lose a little of that. When it comes to investing, that balance and choice is informed by your temperament and goals.

If I had it to do over, this blog would be likely named The Simple Path to Wealth after one of my very earliest posts and currently the working title of my upcoming book.

Financial geeks like me are the aberration.  Sane people don’t want to be bothered.  My daughter helped me understand this at just about the same time I was finally understanding that the most effective investing is also the simplest.

Complex and expensive investments are not only unnecessary, they under-perform.  Relentlessly fiddling with your investments almost always leads to worse results. Making a few sound choices and letting them run is the essence of success, and the soul of the simple path to wealth.

If you’ve read this far in the Stock Series you already know this. You also know that, with simplicity as our guide, we look at our investing lives in two broad stages using just two funds:

The Wealth Acquisition Stage and the Wealth Preservation Stage.  Or, perhaps, a blend of the two.

VTSAX (Vanguard Total Stock Market Index Fund) and VBTLX (Vanguard Total Bond Market Index Fund)

The wealth acquisition stage is when you are working and have earned income to save and invest. For this stage I favor 100% stocks and VTSAX is the fund I prefer. If financial independence is your goal, your savings rate in these years should be high. As you invest that money each month it serves to smooth out the market’s wild ride.

You enter the wealth preservation stage once you step away from your job and regular paychecks and begin living on income from your investments. At this point I recommend adding bonds to the portfolio. Like the fresh cash you were investing while working, bonds help smooth the ride.

Of course, in the real world the divisions might not always be so clear. You might find yourself making some money in retirement. Or over the years you might move from one stage to the other and back again more than once. You might leave a high-paying job to work for less at something you love. For instance, in my own career it was never about retirement and there were many times when I stepped away from working for months or even years.

But using this framework of two stages and two funds, you have all the tools you need to find your own balance. In determining that balance you’ll also want to consider two additional factors: How much effort you are willing to apply and your risk tolerance.

Effort

For the wealth acquisition stage an allocation of 100% stocks using VTSAX is the soul of simplicity. Further, most studies have shown that this allocation provides the best return over time. But not all. Some studies suggest that adding a small percentage of bonds, say 10-20%, actually outperforms 100% stocks. You can see this effect by playing with this calculator: Vanguard Retirement Nest Egg Calculator You’ll also see that adding too great a percentage of bonds begins to hurt results.

Now remember that these studies are not carved in stone and like all calculators this one relies on making certain assumptions about the future. The difference in projected results between 100% stocks and an 80/20 mix is tiny. How those results actually unfold over the decades is likely to be equally close and the ultimate winner is basically unpredictable. For this reason, and favoring simplicity, I recommend 100% stocks using VTSAX.

That said, if you are willing to do a bit more work, you could slightly smooth out the wild ride and possibly outperform over time by adding 10-25% bonds. If you do, about once a year you will want to rebalance your funds to maintain your chosen allocation. You might also want to rebalance anytime the market makes a major move (20%+) up or down. This means you will sell shares in whichever asset class has performed better and buy shares in the one that has lagged.

Ideally you will do this in a tax-advantaged account like an IRA or 401k so you don’t have to pay tax on any capital gains. Having to pay capital gains taxes would be a major drawback and another reason to focus on holding just VTSAX. This rebalancing is simple and can be done online with Vanguard. It should only take a couple of hours a year. But like changing the oil in your car, it is critical that you actually do it. If you like this idea but are unsure you’ll remember to rebalance or simply don’t want to be bothered, here are two fine options:

Betterment

Target Retirement Funds

Both allow you to choose your allocation and then they will automatically rebalance for you. They cost a bit more than the simple index funds you’d use doing it yourself — you are paying for that extra service — but they are still low-cost.

Risk

Basically, bonds smooth the ride and stocks power the returns. The more you hold in stocks the better your results and the more gut wrenching the volatility you’ll be required to endure. The more bonds, the smoother the ride and the lighter the results. If you are going to hold stocks you need to be mentally tough enough not to panic when they plunge. And make no mistake, over the decades you own them, plunge they will. Usually at the most unexpected times.

There is a major crash coming and you’ve got to…

tougher up cupcake

…because nobody can predict when, despite all those claiming they can.

Let’s be clear. Everybody makes money when, as it has now since 2009, the market is on the rise. But what determines whether it will make you wealthy or leave you broken and bloody at the side of the road, is your ability to stay the course and ride out the storms. If you have any doubt as to your ability in this regard, you will be better off avoiding stocks. Regardless of what the calculators say.

Factors to consider in assessing your risk tolerance.

Temperament. This is your personal ability to handle risk. Only you can decide, but if ever there was a time to be brutally honest with yourself this is it.

Flexibility. How willing and able are you to adjust your spending? Can you tighten your belt if needed? Are you willing to move to a less expensive part of the country? Of the world? Are you able to return to work? Create additional sources of income? The more rigid your lifestyle requirements, the less risk you can handle.

How much do you have? As we’ve discussed, the basic 4% rule is a good guideline in deciding how much income your assets can reasonably be expected to provide over time. If you need every penny of that just to make ends meet, your ability to handle risk drops. If, on the other hand, you are spending 4% but a big chunk of it goes towards optional hobbies like travel you can handle more risk.

Taking all these considerations into account, here’s what we do personally:

Our daughter is just beginning her career and her wealth acquisition stage. She wants things to be a simple as possible. She is 100% in VTSAX and likely will be for decades to come.

I am retired and my wife will be shortly. Assessing the three risk factors above our personal tolerance is very high. We hold an aggressive allocation of 75/25 stocks/bonds. The more common and conservative recommendation for our age would be 60/40 or even 50/50.

Our allocations very well might not fit your needs. But this post should give you an idea of how to approach the question and reading the Stock Series will help you understand just what you are dealing with when investing in the market. After that, you have to know yourself.

FAQ:

What if I can’t buy VTSAX, or even Vanguard?

What if I live in Europe?

What would the bursting of the bond bubble look like? (Thanks to Kenneth in the comments for this one)

When should I make the shift into bonds?

This is very much a function of your tolerance for risk and your personal situation.

For the smoothest transition you might start slowly shifting into your bond allocation 5 or 10 years before you are fully retired. Especially if you have a fixed date firmly in mind.

But if you are flexible as to your retirement date and more risk tolerant, you might stay fully in stocks right up until you make the change. In doing so the stronger potential of stocks could get you there sooner. But if the market moves against you, you’ll have to be willing to push your retirement date back a bit.

Of course, anytime you shift between the acquisition and preservation stages, you’ll want to reassess and possibility adjust your allocation.

Balance and choice. Yin and yang

Does age matter?

As you’ll note from above, I’ve divided investment stages by life stages rather than using the more typical tool of age.

This is an acknowledgment of the fact that people are living much more diverse lives these days. Especially the readers of this blog. Some are retiring very early. Others are retiring from higher paid positions into lower paid work that more closely reflects their values and interests. Still others, like I did, are stepping in and out of working as it suits them, their stages fluidly shifting.

So age seems not to matter. At least not as much as it once did.

But that said, age does begin to limit your options as it advances. Age discrimination is a very real thing, especially in the corporate world. As you get older you may not have all the same options readily available as in your youth. If your life journey involves stepping away from highly paid work occasionally, you’ll do well to consider this.

Further, as you age you steadily have less time for the compounding growth of your investments to work.

Both these considerations will influence your risk profile and you might well want to consider adding bonds a bit earlier if that’s the case.

Is there an optimal time of year to rebalance?

Not really. I’ve yet to see any credible research indicating a particular time of year works best. Even if someone were to figure it out, everybody would rush to it negating the effect.

I do suggest avoiding the very end/beginning of the year. It is a popular time for rebalancing and many are engaged in tax selling and new buying. I prefer to avoid the possible short-term market distortions might cause. Personally, we rebalance once a year on my wife’s birthday. Random and easy to remember.

I have some of my investments in tax-advantaged accounts and some in regular accounts. How can I rebalance across those?

This can be cumbersome and you’ll just have to work with what you have. While it is best to hold bonds in tax-advantaged accounts, it does complicate rebalancing.

First, you should be considering all your investments as a whole when figuring your allocation.

Next, as a rule it is better to buy and sell in tax advantaged accounts to avoid creating taxable events.

Unless you happen to have capital losses in a given year. Then it is best to take them in your taxable accounts when possible.

For instance, you might own VTSAX in both an IRA and in a taxable account. Should you need to sell to rebalance that year, sell in the taxable account to capture the loss. You can deduct it against any other gain you happen to have, including any capital gain distributions. You can also deduct up to $3000 against your earned income. Any loss leftover you can carry forward to use in future years.

Does more frequent reallocation improve performance?

Some contend it can over time. Betterment makes this case. I’m not sure I fully buy the premise, but I do like the way they use your new contributions and any dividends to make it happen efficiently. It is a bit more work, but if you like you can also do this yourself with your index funds.

What might my taxes look like in the Wealth Preservation/retirement stage?

While everybody’s situation will vary, here are two excellent posts from my pal Jeremy detailing his own tax strategy as he travels the world as an early retiree: Never pay taxes again and his actual 2013 tax return.

There you have it: The considerations you’ll need to review and the tools you’ll need to use to create the asset allocation that best fits your situation. I’d be very curious to hear what your asset allocation looks like and why. Please leave a comment if you are willing to share. Oh, and let me know if I missed anything that belongs in the FAQ.

Addendum: The Path to 100% Equities

Related

Important Resources

  • Talent Stacker is a resource that I learned about through my work with Jonathan and Brad at ChooseFI, and first heard about Salesforce as a career option in an episode where we featured Bradley Rice on the Podcast. In that episode, Bradley shared how he reached FI quickly thanks to his huge paychecks and discipline in keeping his expenses low. Jonathan teamed up with Bradley to build Talent Stacker, and they have helped more than 1,000 students from all walks of life complete the program and land jobs like clockwork, earning double or even triple their old salaries using a Salesforce certification to break into a no-code tech career.
  • Credit Cards are like chain saws. Incredibly useful. Incredibly dangerous. Resolve to pay in full each month and never carry a balance. Do that and they can be great tools. Here are some of the very best for travel hacking, cash back and small business rewards.
  • Personal Capital is a free tool to manage and evaluate your investments. With great visuals you can track your net worth, asset allocation, and portfolio performance, including costs. At a glance you'll see what's working and what you might want to change. Here's my full review.
  • Betterment is my recommendation for hands-off investors who prefer a DIFM (Do It For Me) approach. It is also a great tool for reaching short-term savings goals. Here is my Betterment Review
  • NewRetirement offers cool tools to help guide you in answering the question: Do I have enough money to retire? And getting started is free. Sign up and you will be offered two paths into their retirement planner. I was also on their podcast and you can check that out here:Video version, Podcast version.
  • Tuft & Needle (T&N) helps me sleep at night. They are a very cool company with a great product. Here’s my review of what we are currently sleeping on: Our Walnut Frame and Mint Mattress.
  • Vanguard.com

Filed Under: Money, Stock Investing Series

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Comments

  1. Jags4186 says

    June 10, 2014 at 10:09 pm

    Thanks to your wisdom I have slowly but surely moved most of my money to VTI and the available index fund in my 401k plan. I use VTI because my IRA and taxable account are located at TD and they offer that commission free and have free DRIP.

    I currently have about 20k (about 12%) of my portfolio sitting in a taxable account in individual stocks. These are all blue chip stocks (GE, VZ, AAPL, etc.) and I am hesitant to sell them and pay taxes on the gains in order to throw them in VTI. What’s your opinion on this? Should I just bite the bullet or keep them and watch just see how they turn out as they progressively become a smaller part of my portfolio. I am 28 years old.

    Thanks!

    Reply
    • jlcollinsnh says

      June 10, 2014 at 11:52 pm

      Welcome Jags…

      and thanks!

      You’re lucky to have VTI available in your 401k. Good move funding it.

      Since you’ve been reading the blog you know I’m not a fan of individual stocks. Without more info it is hard to answer the question as to what to do with yours. But here’s how I’d think about it:

      How big a capital gain am I sitting on? The larger it is, the more likely I’d be to let them ride.
      How high is my tax bracket? The higher it is, the more likely I’d be to let them ride.
      How well do I like these stocks today? The more I liked them, the more likely I’d be to let them ride.

      If you decide to hang on to them, 12% is a small portion of your portfolio and, as you point out, it will get smaller as you build your position in VTI. Not something you need to lose sleep over.

      If one of those factors above changes and creates the opportunity to exit, you can do it then.

      If you are still holding them once you start drawing on your assets, you can draw down on them first. That’s what I did with the cats and dogs I had left in my portfolio at the time. 😉

      Reply
      • Jags4186 says

        June 11, 2014 at 10:31 am

        Hi Jim,

        First off let me apologize for my not well edited first post! I was a little sleepy I think when I first wrote in.

        Just to clarify a few things:

        While I wish my 401k offered VTI or VTSAX it unfortunately does not. I currently have all $126k of my 401k invested in HBIDX which is the only index fund in my 401k and the only fund period with fees under 1.5%. Yes, my 401k plan is awful.

        I have 54k split between a taxable account and a Roth IRA. Both of these accounts are with TD Ameritrade. I know I should switch over to Vanguard, but laziness and the fact that VTI is a commission free ETF have kept me from doing so.

        I was a little pessimistic about my individual stock allocation when I wrote to you earlier. I currently have 12.5k worth of individual stocks with a gain of $3600–so really 7% of my total portfolio. All of this is in a taxable account. I am in the 25% tax bracket and also pay NJ state taxes. I own the following stocks–mostly with values mostly between 1k and 2k:

        AAPL, GE, JNJ, MRK, PFE, PG, VZ, and IRE (fully aware this ISN’T a “bluechip”). It will also cost me $10 each to sell these shares.

        Hopefully that gives you an idea of what I’m working with here. Not sure if it really makes much of a difference in the long run, but I can always use some “fine tuning” from an expert like you.

        Great blog, I full enjoy reading it. Doing my best to get my girlfriend to do the same :-). Keep the posts coming!

        Thanks,
        Jags

        Reply
        • Druid says

          November 18, 2014 at 9:31 pm

          Hello Jags4186,

          I am by means an expert, but I would look for opportunities to sell the individual stocks when one or more incurs a temporary loss. To the best of my ability I would then try to sell a different stock for a gain. You can offset up to $3,000 of capital gains with losses a year. It might be hard to find major losses, but you should be able to find some with the day to day fluctuations in stock prices. Obviously once you sell the stocks you should put them immediately in an index fund.

          Reply
          • Druid says

            November 18, 2014 at 9:42 pm

            by no means an expert..

          • Daniel says

            November 18, 2014 at 10:07 pm

            I wouldn’t wait for the stock to decrease in value before selling them. What sense does it make to sacrifice $.75 to save $.25 of every dollar your stocks go down in value. If you currently have some winners and losers that will offset them then that is ok. If you are comfortable with the stocks long term, or comfortable with them in relation to the size of your investments, then keep them. If not, sell them off and be happy with the $2,700 in after tax gains.

        • Cheruiyot says

          April 9, 2019 at 1:35 pm

          You have $10,000 to invest for four weeks (backtracking stocks/funds will be required).

          You are to “invest” this money in stocks or mutual funds and to track your investments on a weekly basis for four weeks (initial investment is 22 March – backtracking stocks/funds is required).

          Track your investments on an excel sheet or table in a word document.

          Pick five different stocks or funds to follow.

          Then write a 3-5 page report on:

          why you selected the investments you did
          whether any noteworthy company results, news events, or economic events impacted your investments during this period (show your gains or losses for the period)
          how your investments’ performance compared with the performance of the S&P 500 index during this period
          your tracking of the following three stock market indexes:
          Dow Jones Industrial Average
          S&P 500 stock index
          Russell 2000 index for small caps

          Reply
  2. SavvyFinancialLatina says

    June 10, 2014 at 11:37 pm

    What do you think about buying blue chip dividend paying companies. I feel like there’s a division between the pf world of investing all in index funds, or rental properties, or dividend paying companies. Thoughts?
    I almost want to do a 50/50 strategy. 50% dividend companies, 50% index funds in taxable accounts.

    Reply
    • jlcollinsnh says

      June 11, 2014 at 12:01 am

      Welcome SFL….

      Always nice to see you here!

      I’m not a fan of picking individual stocks to begin with, let alone a strategy the selects from a limited pool.

      The appeal is the idea that you can live on the dividends and not touch the principle. While I understand the attraction, this is an emotional appeal.

      The truth is paying dividends is only one of many things a company can do with its profits, and not necessarily the best.

      Fans of this idea like to think of the approach as having a tree that bears fruit you can harvest.

      Using that same analogy, VTSAX is a tree that not only bears fruit but one that grows robustly enough that you can also harvest some lumber along the way without damage.

      I actually wrote a post on this, if you are interested in more: https://jlcollinsnh.com/2011/12/27/dividend-growth-investing/

      Reply
  3. Richard says

    June 11, 2014 at 1:04 am

    Hi!

    I’m at a stage where a few months ago I had my finances scattered all over the place and no clear path (at least it was invested? :), but thanks to your blog I have been consolidating it all into Vanguard. The timing of this post is perfect for me because I’ve been trying to figure out what allocation would be best.

    You mentioned that it has been suggested that 80-90% stocks /10-20% bonds might outperform 100% stocks. Do you happen to know of any good links to articles or studies that discuss this?

    Playing with the vanguard calculator you linked to I used these values: 40 years, $1,250,000 balance and $50,000 expenses.

    It appears that the highest probability of survival is about 85-87%, which occurs with a bond percentage of 20-55%. Wouldn’t that suggest that 20-55% bonds would be best? (Also interesting to note is that the survival rate doesn’t go below 80% until the stocks are only 30% of the portfolio!)

    I’m trying to determine what percentage of bonds would be best for me….re-balancing is not a problem for me, it actually sounds like a bit of fun. And I haven’t had issues “staying the course”, so 100% stocks doesn’t sound scary to me. I want to try to maximize my returns….so any help you can give with this would be greatly appreciated!

    Thanks,
    Richard

    Reply
    • jlcollinsnh says

      June 11, 2014 at 9:26 am

      Well, I’ve already given you the Vanguard calculator. For more try The Intelligent Asset Allocator by William Bernstein. Or, as The Escape Artist suggests below, The Elements of Investing by Charles Ellis and Burton Malkiel and Wall Street Revalued by Andrew Smithers. Other readers might also offer some of their favorites. From there, Google is your friend.

      As for your comment:
      “I’m trying to determine what percentage of bonds would be best for me…give with this would be greatly appreciated!” This entire post is designed to give you the tools to do just that. Hopefully I didn’t fail completely. 😉

      Reply
      • Richard says

        June 11, 2014 at 7:53 pm

        Thanks for the referrals.

        I also came across this on the vanguard site that I figured I’d share:

        https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

        Reply
      • jlcollinsnh says

        June 11, 2014 at 10:39 pm

        Thanks Richard…

        I had forgotten Vanguard did those. Very cool!

        Reply
  4. Scott says

    June 11, 2014 at 2:33 am

    Something I’m trying is going higher duration and credit quality (VUSUX) in the bond allocation. Here’s the theory:
    * If I just wanted smoothing I could allocate to cash instead
    * I don’t want the parts of the bond market that correlate to stocks, since VTSAX (+ VTIAX) gives me plenty of that
    * Extra duration is like more leverage, so I can have more of the portfolio in stocks for the same smoothing.
    * Hopefully the higher beta will mean that I have more bonds to rebalance into cheap stocks next crisis, and as stocks go up everyone will be convinced the long bonds are a terrible investment so they won’t cost much

    It’ll probably take a decade to figure out whether it worked 😛

    (And I do the manual use-contributions-to-rebalance thing. It’s easy with a spreadsheet — certainly easier than the tax complications of filing extra lots from automatic reinvestment.)

    Reply
    • jlcollinsnh says

      June 11, 2014 at 10:04 am

      interesting approach.

      My concern would be VUSUX — https://personal.vanguard.com/us/funds/snapshot?FundId=0583&FundIntExt=INT — is a long-term bond fund with maturities averaging 24 years.

      Long bonds almost always pay higher interest rates to compensate for the higher interest-rate risk. And since interest rates have been dropping for the last 10+ years it is no surprise they have out-performed over that time.

      For the last few years the Federal Reserve has been actively trying to ignite a bit of inflation into the economy by lowering rates. Great for long bonds. But once they succeed and interest rates turn up again, those bonds will get killed. Seems to me very risky.

      VBTLX is a total bond index fund holding bonds of all maturities, thus spreading this interest rate risk.

      Reply
      • Scott says

        June 11, 2014 at 8:12 pm

        That’s why the smaller allocation. VBTLX is duration about 5 years, VUSUX is about 15 years. So when interest rates go up, I’d lose just as much with 30% VBTLX as I would with 10% VUSUX. But presumably the rates are going up because the economy is hot again, so I’ll be making more from my 90% VTSAX than I would from 70% VTSAX (tautologically).

        It’s probably not something to suggest broadly, but I don’t think it’s as risky as you imply.

        Did you really mean to report the maturity number in your post? I don’t think that’s the relevant one when discussing interest rate risk: https://en.wikipedia.org/wiki/Bond_duration#Modified_duration

        Reply
  5. The Escape Artist says

    June 11, 2014 at 5:08 am

    I am targeting a 75% equities, 25% bonds/cash allocation as well. This is based on my interpretation of The Elements of Investing by Charles Ellis and Burton Malkiel which I found a helpful book.

    Personally, I also still have a small % of gold in the portfolio which is a bit of a guilty secret that I am thinking of selling at some point in the future!

    Wall Street Revalued by Andrew Smithers has good data on why an 80% equities:20% bonds portfolio has a better risk adjusted return than 100% equities

    Reply
    • jlcollinsnh says

      June 11, 2014 at 9:35 am

      Thanks for the reading suggestions, EA.

      Just for that, your little gold secret is safe with us. 😉

      Reply
      • The Escape Artist says

        June 11, 2014 at 11:47 am

        Thanks Jim. Also, I forgot to say… great blog! We dont have much in the UK on the topic of FI and so your blog is really helpful because you have an international perspective e.g. the Vanguard Europe post

        Loved your podcast with the Mad Fientist. Helped me realise I was ready to quit my job!

        Reply
  6. John says

    June 11, 2014 at 9:32 am

    For instance, you might own VTSAX in both an IRA and in a taxable account. Should you need to sell to rebalance that year, sell in the taxable account to capture the loss. You can deduct it against any other gain you happen to have, including any capital gain distributions. You can also deduct up to $3000 against your earned income. Any loss leftover you can carry forward to use in future years.

    I’m having trouble understanding this in the context of rebalancing. If you have a loss in VTSAX and a gain elsewhere in your portfolio, wouldn’t you rebalance by buying more VTSAX? I think I understand the tax loss harvesting by replacing the VTSAX with a similar (but different enough for the IRS?) asset such as VFIAX. But how would you move a 70/30 stock/bond split back to 80/20 by selling some of the 70%?

    Reply
    • jlcollinsnh says

      June 11, 2014 at 9:41 am

      Hi John…

      I can understand the confusion. This would only come into play when both stocks and bonds took a loss and the stock loss was the greater of the two.

      I think I confused the issue in trying to make the point about when selling in a taxable account might make sense.

      Thanks for giving me the chance to clarify!

      Reply
      • June says

        August 12, 2018 at 7:09 pm

        Like John, I have trouble understanding this part. If the stock loss was the greater, then the percentage allocation of stock would be under 80%, so we should buy the stock, shouldn’t we?
        And another question. How about only the loss in stock fund? In this case, is it impossible to deduct it? Actually I don’t know about tax return.

        Reply
        • jlcollinsnh says

          August 13, 2018 at 3:27 am

          Hi June…

          Yes, if you want to maintain 80% in stocks and that percentage drops due to stocks taking a loss, you would by more of the stock fund to bring it back up to 80%. Because prices have fallen, this also means you are buying those shares at a lower price.

          You cannot deduct a capital loss on assets you hold in a tax-advantaged fund if they go down in value. This is why in the post I say:
          “Should you need to sell to rebalance that year, sell in the taxable account to capture the loss. You can deduct it against any other gain you happen to have, including any capital gain distributions. “

          Reply
          • Jared says

            December 13, 2018 at 1:19 pm

            I’m curious about TLH as well… if you sell VTSAX and buy, say, an S&P500-linked fund and it goes up, you won’t have an opportunity to leave that fund without creating a taxable event, right? So you might end up stuck holding this similar but not-quite-what-you-wanted fund for the very long term?

          • Kyoko says

            November 4, 2020 at 1:34 pm

            Hi, I’m still in the middle of reading your Stock Series. They have been really helpful and encouraging! Thank you.
            My question following June’s and your response is: If I need to buy more stocks to balance back to 80%, I’m selling bonds (e.g. with 80/20 allocation), correct?
            Somewhere in your article, your recommendation was to have stocks in both ordinary bucket as well as in tax-advantaged bucket, and bonds in the tax-advantaged bucket.
            Your other recommendation was to rebalance in the tax-advantaged bucket unless you have a capital loss in a given year, then buy and sell in the ordinary bucket.
            So, I should have bonds BOTH in the ordinary and the tax-advantaged buckets?
            I haven’t balanced my portfolio before so my question may sound super elementary. Thank you so much!

  7. Kenneth says

    June 11, 2014 at 10:51 am

    Wonderful addition to your Stock Series, Jim!
    I’m 64 1/4 and 1.5 years from retirement. I have a relatively small nest egg for my age (will finish hopefully at about $350,000) but have two paid for homes. I’ve been phasing into my retirement allocation which I see as 50/50 (currently I’m at 60/40). I perfectly understand your rational for adding bonds as you move into the wealth preservation stage. With a 50/50 mix, during a 50 percent market drop, you’d likely be down about 25 percent on your portfolio (bonds roughly even, stocks down 50 percent). I could live with a 25 percent drop in portfolio, I’m not sure I could bear a 50 percent drop, thus my reasoning for choosing a 50/50 mix for retirement.

    I’m going to take out 4.75% as my initial draw, then each year change my draw year over year by first figuring out what the new 4.75% would be, and then cap the change at 5 percent over the previous year’s draw if my portfolio is UP, and setting a floor of 2.5 percent under the previous year’s draw if my portfolio is DOWN. Vanguard says this method will give you an 89 percent chance of lasting 35 years. The link for this information is: http://www.vanguard.com/pdf/icrmda.pdf

    Reply
    • jlcollinsnh says

      June 13, 2014 at 5:11 pm

      Thanks Kenneth!

      I love the way you have taken these concepts and created an allocation that uniquely suits you and your needs.

      I had forgotten that Vanguard had created that withdrawal approach. I remember seeing it awhile back, but I need to take a closer look.

      Sounds very interesting and one of the future posts I have planned is going to be ideas on just how pull the 4% (or whatever percent) once living off a portfolio.

      Reply
  8. Alec says

    June 11, 2014 at 12:09 pm

    Thank you for the wonderful post, Jim! I have been a long time reader and your stock series has completely redefined my family’s thoughts on investing.

    I had a question about the idea of reallocating based on age. When I use FIRE sims (based on the trinity study) like cFIREsim, I get some interesting results when I tell it to reallocate my investments after retirement. While, at my current numbers, the success rate stays at 100% regardless of whether I tell it to keep 100% equities the whole time or to change allocations over the years, the ending values (value when we die) are drastically different.

    I know it’s not a rat race and ultimately how much money you die with is meaningless, but it seems to me like having a larger amount of money in your old age should be considered a good source of security, just like switching allocations as you age is supposed to provide.

    I guess what question I’m trying to ask is this: What are your thoughts on the idea that if you keep a 100% equity allocation past retirement, you’ll have more security (in the form of having more money) when you are older than if you reallocated?

    Reply
    • Alec says

      June 11, 2014 at 12:46 pm

      I did some follow up calculations after I made this post, to try to get a better picture of the effect. When I talk about reallocating, I am talking about reallocating to 75% equity, 25% bonds.

      When I increased my spending so that I was achieving a sub-100% success rate in all cases, I found that the earlier I started reallocating away from 100% equities, the lower the success rate became. The effect isn’t super drastic, but in between not ever reallocating and reallocating when I reach age 60, the success rate drops about 2%. And in between reallocating at age 60 and reallocating at age 35 (retirement year) it drops another 2%.

      Perhaps these results are specific to my particular financial situation (extremely early retirement).

      Reply
    • jlcollinsnh says

      June 13, 2014 at 5:29 pm

      Thanks Alec…

      Glad it has been useful!

      I’m not sure I entirely follow you here, but…

      For a portfolio to survive over the decades it needs to have the growth that stock provide and a modest withdrawal rate. It seems the sweet spot is around 75/25 stock/bond allocation and 4% withdrawal. Not perfect, but it works the vast majority of time.

      This is assuming people need to pull as much as they can with reasonable safety. If not, all kinds of other possibilities open up.

      What is most striking to me, looking at the Trinity Study, is not the ~4% of the time this fails, but the fact that the vast majority of the time after 30 years the portfolio has grown to HUGE proportions. Drop that withdrawal rate and the effect is even more dramatic.

      Certainly if we happen to retire at the wrong moment, the market plunging and our investments decimated, we’ll need to be flexable enough to reduce our spending or generate supplemental income.

      But more often it seems the challenge will soon be spending all the money the portfolio creates. This power of compounding continues into our retirements.

      This is one reason I don’t obsess about what if the worst happens. The odds are against it and flexibility is the solution if it does.

      As for 100% stock portfolio, it is an intriguing idea, especially if you are able to start with a ~2-3% withdrawal. After all VTSAX pays ~2% in dividends.

      Of course, for those using an allocation it is important to rebalance on a regular basis. That’s where most of the power lies.

      Hopefully this in on the mark in addressing your questions and comments?

      Reply
  9. David says

    June 11, 2014 at 12:57 pm

    Useful advice as always. It helps confirm my decision to change my asset allocation. My allocation was 44/56 stock/bond. I am generally risk adverse and my financial advisor convinced me that I would lose sleep if I had a higher stock allocaction. However, I decided that I can and should accept more risk. In the last year, I increased my stock to 48 percent. I plan to slowly increase to 60/40. About half my investments are in taxable accounts so I have to be careful about tax consequences. Hopefully, I can toughen up and get through the next major stock market decline without back tracking. Thanks, David

    Reply
    • jlcollinsnh says

      June 13, 2014 at 5:35 pm

      Glad it helped, David.

      Playing with the calculator in the post might also help as it shows clearly that having much more than 30% in bonds actually reduces the chance of a portfolio surviving over the long-term.

      But, of course, all this goes out the window if you sell during the panics. 😉

      Reply
  10. Sai says

    June 11, 2014 at 1:04 pm

    Hi Jim,

    Great post as always. My allocation is 85% stocks,10% REITs & 5% p2p. I am 31 yrs old, & just started about an yr ago in to investing after reading your blog. Long way to go though. My concern is that I see you recommending Bonds during this time period where its expected to be performing terribly. I think its going to be even worse when the interest rates increase. The hard hit would be for the funds on bonds. Your comments pls….thanks & appreciate your work…

    Reply
    • jlcollinsnh says

      June 13, 2014 at 5:44 pm

      Thanks Sai…

      glad you liked it!

      Your point is well taken on bonds. I’ve said elsewhere I see them these days as the riskiest part of my portfolio. Interest rates are at historic lows and if/when they rise that will be bad for bond prices.

      That’s why I suggest VBTLX, the total bond market fund. It holds bonds of all maturities. Short to mid-term bonds will adjust more quickly to the rising rates, reducing the negative impact.

      Remember, too, that even the long-term bonds VBTLX holds weren’t all bought today. Many are already well into their term. The fewer years they have left, the less interest rate risk.

      Finally, I hold bonds (or stocks) not because I think the timing for them is good at the moment, but for the role they play in my allocation. I am no more inclined to try to time my bond purchases than my stock purchases. Market timing of any stripe, is a losing game. 😉

      For more one bonds: https://jlcollinsnh.com/2012/10/01/stocks-part-xii-bonds-and-a-bit-on-reits/

      Reply
      • Kenneth says

        June 14, 2014 at 8:54 am

        Here is a good article on what the bursting of the bond bubble would look like. Turns out it is nothing to fear. In my opinion they would still serve their purpose of cushioning the accompanying equities carnage in a major move.

        http://finance.yahoo.com/blogs/the-exchange/what-would-the-bursting-of-the-bond-bubble-look-like-165833587.html

        Reply
      • jlcollinsnh says

        June 14, 2014 at 5:46 pm

        Excellent article, Kenneth.

        In fact, I’ve added it as an FAQ in this post and as an addendum to this one:
        https://jlcollinsnh.com/2012/10/01/stocks-part-xii-bonds-and-a-bit-on-reits/

        Thanks!

        Reply
      • Teri says

        December 2, 2017 at 3:18 pm

        Have a quick question. I am in VBLTX (mid term returning 3.14%), you recommend VBTLX (long term, returns 7.70%) I understand about the long term risk but isn’t 3.5% worth the risk?

        Reply
        • Teri says

          December 2, 2017 at 3:19 pm

          Sorry, I got that sideways.
          Your’s (VBTLX) returns 3.14% mine (VBLTX) returns 7.70%.

          Reply
        • jlcollinsnh says

          December 2, 2017 at 5:46 pm

          Not to me, especially in this market.

          But that’s me. If you understand the increased risk in holding long bonds, only you can decide if it is worth to you.

          Good luck!

          Reply
  11. m says

    June 11, 2014 at 2:16 pm

    We are currently in 100% VTSAX in our Roth accounts, 100% in the Vanguard Total market in our 529’s(I’m assuming VTSAX or VTSMX, but there is some obfuscation here). For our 401k’s, there is no total market option, so for both accounts I have used the information here (http://www.bogleheads.org/wiki/Approximating_total_stock_market) to try and make something close to VTSAX. We also have a former home we are renting out, and as our retirement contributions get maxed we are going to be either plowing the remainder into more rentals or opening a taxable account, full of VTSAX.

    Reply
    • jlcollinsnh says

      June 13, 2014 at 5:47 pm

      Welcome, m, and thanks for sharing.

      Sounds like you’re in the Wealth Building phase. 🙂

      Reply
  12. Paul says

    June 11, 2014 at 3:10 pm

    I’m in the Wealth Accumulation phase, and am 80/20 stocks/bonds, for the Efficient Frontier reason you mention.

    While I agree with virtually everything I read on this blog, I’m a slicer/dicer. Meaning that the stock portion is spread out across 10 Vanguard funds, and the bond portion is spread across 3. The stock portion is 50/50 US/International, and has a small cap and value tilt (from the actual market cap of small cap and value companies). The basic list is here http://paulmerriman.com/pauls-mutual-fund-recommendations/. Paul Merriman is very much on the same page as you, except that he’s a slicer/dicer, and also recommends going with a DFA advisor for those that don’t want to do it themselves. (I ignore that part of his advice.)

    The slice and dice thing works for me. It appeals to me that when I add money every month, I’m buying the worst performing asset class.

    The effort thing you mention your post is certainly real. I simplify things for myself by creating a spreadsheet. Every month, I download a spreadsheet from the Vanguard website with my actual balances in each fund on that day. I then copy and paste that into a spreadsheet that I created that calculates the actual percentages in each fund. There’s another column that subtracts the target percentage from the actual percentage, and then I just make my contribution to the fund with the smallest negative number. Took me maybe an hour to set up the spreadsheet in the first place, then perhaps 3-5 minutes a month to do the calculation. It certainly wouldn’t work for everyone (as you say, financial nerds are not the sane ones in the room), but it works for me.

    As an aside, I have some desire to check and tinker with things, and this gives me something productive, or at least not harmful, to do every month to sate that need.

    Reply
    • Neil says

      June 13, 2014 at 10:14 am

      Wow Paul, we are like financial twins! I am also in the accumulation phase and keeping an 80/20 allocation with a bit of a slice-and-dice approach and a bit of a small cap and value tilt. Perhaps we’ve read the same books!

      Instead of a spreadsheet, I use a Java program that I have written to help with where to allocate new funds. But otherwise it works exactly the same as your spreadsheet. I enter the values in all of my accounts and the program tells me how far off each asset is from its target allocation in both dollar terms and percentage terms. The only hard part is figuring out how to add to the assets that are lowest across several taxable and tax-advantaged accounts while keeping the tax-inefficient assets protected from (current) taxation. It’s like a jigsaw puzzle.

      Since Jim asked in his blog, I’ll post my asset allocation:
      40% US Total Stock Market Index
      5% US Large Cap Value Stock Index
      5% US Small Cap Value Stock Index
      15% International Developed Markets Stock Index
      5% International Emerging Markets Stock Index
      10% US REIT Index
      10% TIPs Index
      5% US Total Bond Market Index
      5% Cash (CDs, Money Market)

      Cheers!

      Reply
      • Paul says

        June 13, 2014 at 3:31 pm

        Nice! If I’m feeling like a need a project one of these days, I’ll have to write a java program. 🙂

        The tax issue is definitely one to pay attention to. I deal with it by maintaining the asset allocation separately in each account (a roth each for my wife and I, a SIMPLE-IRA account each, a traditional IRA for me, and a joint taxable account), and also avoiding REITs and TIPS in taxable accounts entirely. Merriman has slightly different recommendations for taxable and tax advantaged accounts for this reason.

        When selling time comes along, the tax issue obviously gets more complicated, but that will be a happy problem to have.

        Reply
        • Jeremy says

          June 30, 2014 at 11:04 am

          “When selling time comes along, the tax issue obviously gets more complicated, but that will be a happy problem to have.”

          Depending on total cost of living, tax time could be even happier. We paid $0 in tax last year on $90k+ AGI (we are retired early)

          These posts might be of interest to you
          http://www.gocurrycracker.com/never-pay-taxes-again/
          http://www.gocurrycracker.com/the-go-curry-cracker-2013-taxes/

          Reply
        • jlcollinsnh says

          June 30, 2014 at 11:37 am

          Two excellent posts, Jeremy.

          In fact, I just made them part of the FAQ in this post and I’ve made them an addendum here as well:
          https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

          Thanks!

          Reply
      • jlcollinsnh says

        June 13, 2014 at 5:54 pm

        Thanks Paul and Neil for sharing your approach.

        While I now prefer The Simple Path to Wealth (and really should have named the blog accordingly!), 🙂
        back when I felt the need to tinker more I sure wish I’d used your ideas rather than my deadly attempts at playing the market with stock and actively-managed fund picking.

        As you say, Paul, it satisfies “desire to check and tinker with things, and this gives me something productive, or at least not harmful, to do every month to sate that need….”

        Know thyself! 🙂

        Reply
  13. Matt says

    June 11, 2014 at 3:13 pm

    There was an interesting study on how the frequency of portfolio rebalancing influences the outcome on market watch recently: http://www.marketwatch.com/story/the-right-way-to-rebalance-your-portfolio-2014-02-18?siteid=yhoof2

    They suggest that quarterly rebalancing leads to the best results.

    Reply
    • jlcollinsnh says

      June 13, 2014 at 6:01 pm

      Thanks Matt…

      interesting stuff. Seems that a little rebalancing helps but too much becomes counter productive. But overall the differences are modest.

      Since the study is over two very specific periods in market history, I think we need to be careful in assuming the results will replicate during other times.

      I still like the idea of rebalancing annually and when the market swings more than 20%+But for those who feel the need to tinker… 🙂

      Reply
  14. Joy says

    June 11, 2014 at 3:32 pm

    Jim,

    Thanks for the post. 🙂 Timely too! Since you and, MMM have slowed down the frequency of postings, I have taken to entertaining other financial bloggers. Now, this does help keep me focused on saving/investing. BUT, all of the conflicting information can be troubling for someone who has only been at this game @ 2.5 years.

    As per your advice we are 80/20 in an SEP IRA Target Retirement fund with Vanguard.
    Too, taxable accounts are 75% VTSAX, 25% VFIAX. I purchased the VFIAX after reading
    MMM. Then I found you 🙂 MMM has since recommend VTSAX too.

    I would love for you to express the difference in these two funds? Is it simply that VTSAX has a broader market of funds? Or, do you like it for other reasons too?

    If we stay focused and, the markets allow we will retire in 2.5 years. Using MMM’s thoughts on enough and, his post on the shockingly simple math behind early retirement.

    I am looking forward to your book. 🙂 MMM’s too. You both have been great teachers and, motivators. Buying your books will be a pleasure! I want to give them as gifts to my adult children. Sadly, they are in much need of a financial education. My fault. But, you can’t teach what you don’t know.

    Oh, just so you know. I did hear you, our retirement budget will have plenty of wiggle room.
    And, unless our health fails we have the option to work if need be. Our house is paid off.
    We are debt free. Our plan is to keep two years living expenses in the bank, this to smooth out the ride as need be.

    Thanks again!

    Reply
    • jlcollinsnh says

      June 13, 2014 at 6:32 pm

      Hi Joy…

      Congrats! Sounds like you are well on the path and doing great! It’s great that you are building in some flexibility to your path.

      I’m also glad I now have at least two, with Mark, potential buyers for my book! 😉

      For my take on VTSAX v. VFIAX please see my reply to his question below.

      Oh, and not only can’t you teach what you don’t know, and that’s certainly true, you also can’t teach what you do know to those not ready to learn. 🙂

      Reply
  15. Mark says

    June 11, 2014 at 5:41 pm

    Hi Jim, Glad to know you’re writing a book, which I will surely purchase.

    I am with you on VTSAX and it has been a solid core holding for us for decades to good results that I can hardly believe when I look at them. Still, Mr. Buffet got my attention a couple of months ago when he revealed that his exceedingly simple plan for his wife’s trust is 90% S&P 500 Index Fund and 10% tax-free municipal bond fund. That made me go “Hmmm, what does he know that I don’t (a LOT but that’s not my point).” I have since compared VFINX with VTSMX (VTSAX’ older Investor shares twin) on the Morningstar site and, over long periods of the last 2 decades since , they have identical returns. That surprised me because I always assumed the small stocks in VTSAX would give it a boost and edge. VFINX also seems to be a tad less volatile than VTSMX, which also surprised me because it’s less diverse.

    I’m not ready to pile into VFINX but, if it is good enough for Mr. Buffet’s wife, it might be worth pondering over a beer in Ecuador together, where I’m really looking forward to meeting you, sir!

    Reply
    • jlcollinsnh says

      June 13, 2014 at 6:26 pm

      Thank you, Mark!

      Between you and Joy above I might have to print as many as a dozen. 🙂

      For anybody listening in, let’s define the funds. Using the Admiral Shares versions:

      VTSAX is Vanguard’s Total Stock Market Index Fund and, as the name suggests, it holds virtually every publicly traded stock in the USA -3690 companies as of today.

      VFIAX is Vanguard’s 500 Index Fund and, as the name suggests, it holds the stocks that make up the S&P 500. These are the largest companies in the USA.

      As you point out, over time, their performance is strikingly similar. This is one of the reasons that when readers tell me the only option in their 401k is an Index 500 Fund, my response is “no worries. That will work just fine.”

      I prefer VTSAX when possible, simply because I like the idea of the broader diversification 3690 offers v. 500.

      As to why Mr. Buffett chose VFIAX I can only guess. That guess would be that he has spent his career investing in large-cap stocks. When you have billions to deploy, that is really your only option. So they are what he knows and where his comfort level lies.

      While you didn’t ask, I’m much more confident that I know why he prefers a tax-free municipal bond fund to the taxable total bond market fund I suggest. 🙂

      Because of the large amount of money his wife’s trust will hold, almost all of it will be in taxable accounts. Tax free munis are the clear choice in that situation.

      As for me, what I have is modest enough I can hold all my bonds in my IRA. Since taxable bonds pay more interest than munis the choice is equally clear for me, and my guess is for most of my readers. 😉

      So you are coming to the Chautauqua? Very cool! I look forward to hanging out with you! 🙂

      Reply
  16. Jonathan says

    June 12, 2014 at 1:55 am

    As a disciplined saver but a lazy investor, I’ve been more than happy to follow your advice and put everything (my 403b and Roth IRA) into Vanguard’s Total Stock and Total Bond Market Indices. With respect to the 403(b), I’m lucky to have an employer that gives me access not only to Vanguard but also to its amazingly low-cost institutional shares.

    My asset allocation is 80/20. I chose this AA because I want to be aggressive and am willing to to ride the ups and downs, but I’m comforted by the “smoothing” action of the bonds. If you told me that 100% in equities was demonstrably better for someone in the wealth-building phase than an 80/20 AA, I’d bite the bullet and go all in. But since the difference, if any, seems to be subtle, I’m sticking with 80/20 for (admittedly irrational) reasons of personal comfort.

    I’m 43 years old and planning to retire in some quasi-mustachian fashion at age 50. My portfolio will become more interesting in 2015, as I’ll be opening a taxable account for the first time. My plan, based on what I’ve gleaned from your blog and others, is to hold only VTSAX in the taxable account while continuing to maintain my 80/20 AA across my whole portfolio. I’ll try my hand at harvesting gains and losses when the time comes.

    Thanks Jim! Looking forward to the book. Do you have a publisher or are you doing this on your own?

    Reply
    • jlcollinsnh says

      June 13, 2014 at 10:14 pm

      Hi Jonathan…

      Sounds good to me. I’d only add to your comment: “As a disciplined saver but a lazy investor…”

      This: “As a disciplined saver but a lazy investor who wants the best results…” 🙂

      I’m planning to self publish. From everything I’ve read, this is the most desirable path these days. But we’ll see as the time gets closer.

      Reply
      • Jonathan says

        June 13, 2014 at 11:27 pm

        Indeed! Given my lack of aptitude for the details of investing, I find it pretty convenient that the simplest path also appears to be the best one.

        Best of luck with the book. If you need an editor or proofreader or just want some feedback on your draft, let me know.

        Reply
        • Stephen J Pasquini says

          November 16, 2019 at 7:38 pm

          Hi! I apologize for my ignorance but I am a bit confused by what type of taxable account I should invest in? P.S I have just finished your book and am a convert!!! Is this just a Vanguard brokerage account outside of my IRA holdings also at Vanguard? Could you link me to the taxable account you use at Vanguard? Thanks 🙏

          Reply
          • Kimberly Santiago says

            March 8, 2020 at 7:10 pm

            Hi Stephen!
            The account is a Brokerage account, in comparison with a Traditional IRA, or other retirement accounts. Any account that is not a retirement account is a taxable account.

  17. Jags4186 says

    June 12, 2014 at 9:53 am

    Do you treat money in tax deferred accounts differently than money in taxable/Roth accounts? Money in tax deferred accounts is worth less than after-tax money when you consider 15%+ of that is most likely going to go to Uncle Sam upon withdrawal. Does/should this affect your allocation within those accounts? Or is that not a consideration when rebalancing?

    Reply
    • jlcollinsnh says

      June 13, 2014 at 10:19 pm

      Hi Jags…

      You raise a good point. Money in traditional IRAs has a tax obligation hanging over it.

      Further, if you are as successful as many readers here are likely to be, it could be a big one. Once we all hit 70.5 years old we must begin taking taxable withdrawals based on our life expectancy.

      Because everybody’s tax situation is different and somewhat unpredictable, I tend to ignore the issue. And I don’t try to calculate it in my allocations.

      It would be more precise to do so, but for me it would be more trouble than it’s worth.

      Reply
  18. Kenneth says

    June 12, 2014 at 12:18 pm

    Here are the 8 biggest stock market crashes since the great depression, as measured peak to trough with the DJIA:
    1929-1932 90%
    2007-2009 54%
    1937-1938 52%
    1973-1974 46%
    1939-1942 39%
    1968-1970 36%
    2000-2002 34%
    1976-1978 27%

    Other than the big ugly, the Depression, there is nothing to be scared of here. In the past 85 years we had one big ugly, and that may never happen again with the way our Treasury and Fed conducts business.

    Reply
    • jlcollinsnh says

      June 13, 2014 at 10:22 pm

      Thanks Kenneth…

      Very interesting review.

      Here’s my take on the Big Ugly: https://jlcollinsnh.com/2012/04/29/stocks-part-iv-the-big-ugly-event/

      Reply
  19. Tom says

    June 12, 2014 at 2:11 pm

    Jim – what are your thoughts on Peer-to-Peer lending? Does that have a place in your asset mix? It is a nice way to invest that is likely not correlated very much with your other investments. Have searched on your site to find your opinion on this and didn’t see any references.. interested to hear your thoughts.

    Also – your site is fantastic.. love the stock series!

    Reply
    • jlcollinsnh says

      June 14, 2014 at 6:21 pm

      Hi Tom…

      I’m afraid about all I know about Peer-to-Peer lending is what I’ve read over on MMM:
      http://www.mrmoneymustache.com/?s=Peer-to-Peer+lending

      I was tempted for awhile until this post: http://www.mrmoneymustache.com/2013/08/26/the-lending-club-experiment-at-one-year-the-gravy-train-grows-crowded/

      Seems the juicy returns that made this approach attractive have gotten harder to come by.

      It isn’t hard to see the appeal and I like the idea of individuals getting a better deal both on the lending and borrowing side. But I would be concerned as to how these loans might hold up during very hard times.

      More importantly, these seem to be beyond asset mix of the Simple Path discussed here.

      Glad you like the site and the Series! Thanks for the kinds words!

      Reply
  20. Big Guy Money says

    June 14, 2014 at 6:02 pm

    Hi Jim,

    We target an allocation of 80% stocks/20% bonds. I chose this because of:

    1) Risk Adjusted Returns: I fortunately stumbled upon Bogleheads early in my research, and like the possibility of very similar returns with less risk.

    2) I’m a very new investor: Because of ignorance and stupidity in our 20’s, we didn’t open our 401k’s until we were around 28 or 29 (32 now). I missed out on the learning opportunity of the market crash in 2008-2009, and until I’ve been through a downturn I don’t think I’m comfortable being more aggressive. I also always remember Benjamin Graham’s advice to not own more than 75% in Bonds, but never less than 25% in Bonds. I stretch a little and go 20%…

    Since we’re 80/20, I really like Vanguard’s VASGX. Complete global market coverage in both stocks and bonds. Once we max our tax-advantaged accounts and open a taxable account I’ll likely move to even lower cost funds and focus on tax efficiency.

    For my 401k, I try to mimic VASGX with the funds available in the account (I have Vanguard index funds, but no total market funds.

    Thanks – I like talking about this stuff 😉

    BGM

    Reply
    • jlcollinsnh says

      June 14, 2014 at 6:31 pm

      Hi BGM…

      Nice to see you over here! I’ve spent some time on your site and like it.

      VASGX is a fine choice and it matches your goals perfectly and a good one to mimic in your 401k.

      I wish I’d been smart enough to go with something like it when I was 32!

      Don’t feel bad. We all have a right to some ignorance and stupidity in our 20s. 🙂

      My only thought is, and I’m sure you know this, 80/20 is still a very aggressive allocation and you should be prepared for a wild ride!

      Reply
      • Big Guy Money says

        June 14, 2014 at 9:31 pm

        Wow – thank you for the compliment! You made my day. Maybe someday we’ll get a chance to meet in person?!

        Yep, I realize 80/20 is still aggressive. I’ve diverged of the Boglehead ‘set it and forget it’ philosophy – I track everything daily. It’s my way of conditioning my brain to get used to larger and larger dollar gains/losses, and also lets me see visually whether the market is volatile or not via custom charts (yep, I’m a nerd!).

        I go back and forth – I’d like to stay aggressive since I feel we got a bit of a late start. At the same time, the more I think about it, the more I’m convinced as we move into hyper-savings mode in several years that we should even further decrease our risk.

        Reply
  21. Steve says

    June 27, 2014 at 4:53 pm

    John:

    Not sure if this is the right place to put this, but I am thinking of doing some 1099 work in the coming months for a company and was trying to decide what would be the best method to minimize my tax burden. Is there anyway that I could limit or eliminate the SE tax I would pay for the work? If not, would it be worth it to set up a SEP-IRA or Solo 401(k) or should I just contribute to an IRA or taxable account?

    Thanks,

    Steve

    Reply
    • jlcollinsnh says

      June 27, 2014 at 6:45 pm

      Hi Steve…

      I’m not sure who John is, but here’s my take…

      It depends on how much you’ll earn and how much of it you want to put an IRA. If the answer is $5500 or less – the annual limit — a regular IRA should work just fine.

      If it is more, you’ll want a SEP.

      Reply
      • Steve says

        June 27, 2014 at 7:21 pm

        Sorry, meant to put Jim, but John came out.

        So if I put it in a traditional IRA, I would still need to pay both sides of SE, is that correct? I could not write the IRA contribution as a business expense. I am guessing that that would be the case with SEP and solo 401(k) as well.

        Reply
        • jlcollinsnh says

          June 27, 2014 at 7:25 pm

          No worries, Steve…

          Yep. You always have to pay FICA tax and being self employed you get to cover both sides.

          IRAs only provide a deduction against your income tax.

          Reply
  22. Anne says

    July 26, 2014 at 8:21 am

    Hi Jim,

    Really enjoy reading your blog, especially the Asset Allocation topic as it has been my concern for my super fund ( i am in Australia- it is a retirement fund) for the last 6 months. I have booked to see a Financial Advisor next week but i thought i could do my own research.

    I am 42 and work full time, intend to stop working in 8 years.In Australia we could have up to 30k/year of contribution paying 15% tax.

    In 2008 after reading investment books recommending a High growth option (100% stocks) i chose 100% stocks, and late last year with the recovery of the market i pulled back to 50% at 70%/20%/10% stock/bond/properties and 50% at 50%/30%/10%/10% stocks/bond/properties/infrastructure.

    Given the US market keeps going up i feel that there could be correction in the future and therefore i switched to a more conservative option: 30% Aus stock, 20% International stocks, 30% bond, 20% others. I do this to preserve my current balance if there was a correction.

    However reading your post you recommend to have 80/20 or even 100% in stocks, which makes me think more about whether i should put back my allocation to 80/20 stocks/bonds.

    Would appreciate your comment.

    Thank you,

    Anne

    Reply
    • Jonathan says

      July 26, 2014 at 10:50 am

      Anne, what you’re talking about is market timing: changing your asset allocation based on your best guess as to whether the market is going up or down. I don’t think you’ll find much support for that practice here. Your asset allocation should be based on your risk tolerance, age, time to retirement, etc., not on whatever the market happens to be doing in a given year or month or day.

      Reply
    • jlcollinsnh says

      July 26, 2014 at 2:43 pm

      Hi Anne….

      First, let me commend you on doing your own research before talking to an advisor. I hope as part of that research you’ll also read this post: https://jlcollinsnh.com/2012/06/06/why-i-dont-like-investment-advisors/
      This doesn’t mean you should cancel your meeting, but it does mean you should go into it with eyes wide open.

      Second, Jonathan is exactly right. What you are doing now with your allocation is market timing. That’s a mistake. For more on why read this post: https://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/

      Among other things, in it I say: “Market timing is an un-winable game over time. How can I be so sure? Simple: The person who could do this would be far richer than Warren Buffett and twice as lionized. Nothing, and I mean nothing, would be more profitable than this ability. That’s what makes it so seductive.”

      Third, not only will there be a correction in the future, https://jlcollinsnh.com/2012/04/15/stocks-part-1-theres-a-major-market-crash-coming-and-dr-lo-cant-save-you/.

      Also ugly bear markets and, since you are a young woman, very likely at least one more major crash along the lines of what we had in 2007-8, although probably for new and unexpected reasons.

      The bad news is that I can’t tell you when. Nobody can.

      The good news is that as long as you are investing for the long-term and don’t panic and sell when they come, they won’t matter.

      Finally, as to exactly what your allocation should be, only you can decide. But base that decision on the guidelines in the post and those Jonathan provided, not your fear of a market drop.

      And that, since you asked, is my comment. 🙂

      Reply
      • Anne says

        July 28, 2014 at 8:00 am

        Thank you Jonathan and Jim for your comments. I think you are right. Today i did the risk profile questionnaire and it turned out i am quite an aggressive investor ie. i should invest in growth option and thinking of investing for the long term. I have been through the GFC where it dropped 50% of my managed fund and did not sell out.

        The advisor will give me the recommendation next week. It was only for advice on asset allocation for my super fund so the cost wasn’t high.

        Regards,

        Anne

        Reply
  23. MMMjr. says

    August 27, 2014 at 3:19 pm

    Hi jlcollinsnh,

    Thank you for providing and sharing your knowledge. It is invaluable information to me and I plan to use it as I invest more. You describe many step by step processes that are truly helpful that many other websites don’t for a newbie like me. I did have one question though. Are you recommending that during the wealth building stages (years 20-65) I should be investing all in stock? And then once I retire at 65, I should start adding bonds to my portfolio? That sounds like going against the norm when most people recommend adding bonds a lot earlier than that. Thank you!

    Reply
    • jlcollinsnh says

      August 27, 2014 at 3:57 pm

      Yep. For reasons I explore in this Stock Series, I prefer and suggest for my daughter 100% stocks, idealy in the form of VTSAX, during the wealth building years. And, yes, this is against the norm.

      Reply
  24. Daniel says

    November 9, 2014 at 11:44 am

    The bulk of my retirement savings to this point is in my 401k. My options aren’t horrible, and the fees are reasonable. However, I do not have an option for total stock market fund. I do have some target funds, however in general I am not a fan due to bond exposure and the changing allocation. I intend on staying 100% stocks well into my retirement because frankly I can live of less than $10,000 per year.

    My question is this. I do have access to and S&P 500 fund, as well as a mid-cap and small- cap fund. What proportion of these would beat mimick the total stock market?

    What are your thoughts on substituting VPMAX https://personal.vanguard.com/us/funds/snapshot?FundId=0559&FundIntExt=INT) instead of the S&P 500? The ER is about 25 basis points higher with the Vanguard fund.

    Reply
    • jlcollinsnh says

      November 10, 2014 at 11:53 am

      Hi Daniel…

      Because the total stock market index is weighted by market cap, the S&P 500 makes up about ~80% of it. So if you had the other 20% in mid-small cap index funds you’d be pretty much there.

      But personally I’d just hold the S&P 500; keeping it simple. The performance of the Total v. the S&P tracks very closely, such that the difference could be just so much noise. Over the last ~20 years the advantage has gone to Total. Over the next 20, who knows?

      VPMAX is an actively managed fund and active management has been proven to underperform. Plus the premise of using multiple managers strikes me as silly. Even most actively managed funds with one manager have teams behind him/her supporting the effort.

      Index and Save the 25 basis points.

      Reply
  25. Sean says

    November 16, 2014 at 4:27 am

    Dear Sir, your website is a wealth of knowledge. I have $110K in my company 401k which I will be looking at closer to ensure it is properly allocated.

    I currently have $30K in VTSAX and $30K in VFORX (Roth IRA). Outside of that I have $140K which I foolishly have had it accumulate in an online savings account which earned me less than 1% over the past few years 🙁

    Would you recommend I use the $140K and distribute it to 50% (VTSAX) 25% (VBTLX) and hold 25% cash? I am in my late 30’s and started my career 10 years ago – I know I have a long way to go… Any advice will be highly appreciated. Thank you sir!

    Reply
    • jlcollinsnh says

      November 17, 2014 at 3:08 pm

      Hi Sean…

      Glad you found your way here.

      From my perspective, your 50% (VTSAX) 25% (VBTLX) and hold 25% cash is very conservative for a guy in his late 30s, unless you plan to retire very soon. If you plan to work for 10+ more years, I’d tilt more heavily to stocks. Wilder ride but stronger long-term returns.

      In VTSAX and VBTLX you’ve chosen two of my favorite funds, but you’ll want to hold VBTLX in a tax advantaged account if at all possible.

      Also, holding 35k, 25%, in cash seems very high to me unless you have plans to spend this in the next five years or so. With interest paid on cash at less than 1% and inflation running at ~3%, every year you’ll be loosing ~2% on your cash.

      But before you move money into VTSAX, or any other stock fund, be absolutely sure you won’t panic and sell when the downturns come. If you do, you’ll wish for the good old days when you only lost 2% a year. 🙂

      But if you invest in VTSAX and forget about it for ~20 years you’ll be amazed at your results.

      Reply
      • Sean says

        November 17, 2014 at 3:47 pm

        Thanks a ton for your prompt response. Yes I am looking for a long term return, atleast 10-15+ years. I didn’t understand what you meant by a tax advantaged account (could you elaborate please?).
        If my allocation is conservative the I may reduce the cash on hand and move pretty much all of it to VTSAX.

        Reply
        • jlcollinsnh says

          November 17, 2014 at 5:44 pm

          This is all about tax-advantaged accounts: https://jlcollinsnh.com/2012/05/30/stocks-part-viii-the-401k-403b-ira-roth-buckets/

          Since you are asking that question, my guess is this is all pretty new to you. Before investing, I strongly urge you to read thru these posts: https://jlcollinsnh.com/stock-series/

          Good luck!

          Reply
  26. Dave says

    November 21, 2014 at 1:58 am

    Hey jlcollinsnh!

    Thanks for taking the time to write some excellent articles with good, sound advice! I used to be an individual stock investor (some may call it speculation) but more recently I gave myself a financial makeover and and trying to make things a little more simple in life… I moved both mine (27) and my wife’s (26) Roth IRA’s from USAA mutual funds over to Vanguard. The combined value is ~$32K with a 80/20 ($25k/$7k) allocation of VTSAX/VGTSX. I’m excited to watch it grow with the low ERs! I sold my individual shares of stock that were at a profit in order to pay off some debt and now all that we have left is our mortgage and a small car loan. I will soon be getting a promotion (I’m a military officer) and will thus make more per month. Between my wife and I, we were able to save/invest ~$15k this past year and I am expecting to be able to save/invest closer to $20-$25k this year. We have an emergency nest egg saved with 3-4 months covered.

    Before getting to the bottom line, I want to give you a more clear picture. I plan on leaving the military in 2yrs 10months when my commitment is up. At this time both myself and my wife will have to find new jobs. We plan on moving back East and selling the house we currently live in. Neither of us have jobs lined up yet but I do not expect that to be too much of an issue. I have an engineering background and will have completed my MBA (entrepreneurial focus) by then and she is a very seasoned event planner.

    So my question….. what do you deem to be an appropriate AA for saving for a house downpayment? I just don’t enjoy the idea of renting (although I am open to it for a short-term option). I have looked into Betterment and like their goal-based investing function with projections, but I’ve read articles that recommend just saving for it in a regular savings account – I also don’t enjoy the idea of my “little slaves” not working for me either. That being said I would like to use a vehicle to help me grow that downpayment faster with the expectation that I’ll be using it in the next 4-5 years. Would you recommend using a Vanguard fund to do this, or Bettermet, or play on the safe side an leave it in the bank earning nothing? (But not losing anything either).

    FYI I am an aggressive investor and as mentioned earlier I have 100% stocks in my portfolio now. I’m not adverse to bonds for near-term investing since it limits my downside.

    Thanks for all the help!
    – Dave

    Reply
    • jlcollinsnh says

      November 21, 2014 at 6:33 pm

      Hi Dave…

      Your question is a little like asking: “OK, I want to get into the swimming pool. Should I dive in off the edge, the diving board or that platform way up there?” 🙂

      Well, it depends.

      If you absolutely want to buy a house when you move back East in 2yrs 10months, saving what you’ll need in a cash savings account is the only way to go.

      But, if you are an aggressive investor more interested in maximum returns and not worried that if the market were to move against you in the short term forcing you to delay the house purchase, you could invest in VTSAX. It might well get you there sooner and/or with extra money.

      If you are somewhere between these two extremes, Betterment provides the ability to precisely select the allocation that fits the balance you want. Here’s my take:
      https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/

      Only you can decide.

      That said, let me comment on what you didn’t ask.

      I gather that you don’t have enough equity in your current house to allow you to buy the next? That should give you pause.

      If your goal is FI, and you don’t say that it is, you might want to read both these posts:

      https://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
      https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

      I am not against owning houses. In fact I’ve owned them for 28 years. But I do see them as an expensive indulgence. That’s fine if that’s what’s important to you. Just be sure it is. 😉

      Good luck!

      Reply
  27. J1981 says

    December 10, 2014 at 11:03 pm

    To-date (10 years) I have been investing into a “guaranteed fund” that my employer sponsors for our 401K. What this means is each year they set a rate and that rate is guaranteed until the next year. I currently have approx. $100K fully invested in that fund. The return rate has been slowly declining each year from 7% 10 years ago to about 5.2% now. We use Vanguard so I am debating switching to VITSX for ongoing investments at 80% and 20% in the guaranteed fund as my “bond” allocation. I’m also curious if I should rebalance the existing 100K to an 80K VITSX and 20K guarenteed (or VBTIX). Any thoughts?

    Reply
    • jlcollinsnh says

      December 10, 2014 at 11:54 pm

      Welcome J1981…

      VITSX (total stock market index) and VBTIX (total bond market index) are the institutional versions of VTSAX and VBTLX, institutional meaning even lower cost. You are fortunate to have them in your 401k.

      I’d use them to create the allocation that works best for you. 80/20 sounds good to me, but I’d need to know a lot more about you to say it is good for you. And you are the best judge of that anyway.

      As for ongoing v. existing — I’d decide on my allocation, adjust the existing money accordingly and set up the ongoing money to follow suit.

      make sense?

      Reply
      • J1981 says

        December 11, 2014 at 11:31 pm

        Thanks for the insights! It does make sense and 80/20 is an allocation I feel comfortable with versus 100% stocks (age 33).

        Reply
  28. gocanada says

    December 14, 2014 at 2:03 pm

    Hello, is do you recommend a rule of thumb for how much cash to keep on hand? A percent of overall portfolio or months of living expenses? Thanks!

    Reply
    • jlcollinsnh says

      December 14, 2014 at 5:30 pm

      mostly I’d say base it on your anticipated needs, rather than a percentage.

      Just starting out you might have 10k in assets and need 5k cash on hand: 50%
      Later with 100k, that same 5k is only 5%.

      Reply
  29. JD says

    January 8, 2015 at 11:01 am

    Hello! My 401K is through Vanguard and I wanted to know how you would recommend allocating my funds. thanks!

    Reply
    • jlcollinsnh says

      January 8, 2015 at 5:08 pm

      Hi JD…

      As it happens I’ve written a series of posts answering just that! Start here: https://jlcollinsnh.com/2012/04/15/stocks-part-1-theres-a-major-market-crash-coming-and-dr-lo-cant-save-you/

      Reply
  30. AG says

    May 23, 2015 at 9:38 pm

    Hi Jim,

    Thanks a lot for the great blog and knowledge that you share with your readers! Truly inspiring and it prompted me to look at my situation and re-asses the way my money were working for me.

    Morningstar used to manage my 401K and E-Trade my taxable account. Not anymore. I followed your advice and selected VTSAX and VBTLX in my 401k at 90/10 ratio (I am lucky enough to have these two funds offered through my 401K plan).

    Now I have a question on asset allocation among multiple accounts. Here the quick breakdown on what I have:

    I am 42 years old. I have $200,000 in my 401K; $110,000 in Betterment taxable account (90% stock/10% bonds) and $30,000 in Wealthfront taxable account. So I figured that my perfect allocation for now is 90% stock and 10% bonds. Does the following plan look good to you?

    1. Look at all my accounts and rebalance them to get to 90/10 allocation
    2. I would commit $34,000 to VBTLX in my 401K (that is 10% of $340,000 I have across all accounts)
    3. Invest the rest of the money to VTSAX in my 401K ($166,000)
    4. In my Betterment account I would select 100% stock strategy to make sure I do not have any bond positions there
    5. I would do the same in Wealthfront

    After all that I would have ~90/10 allocation and would rebalance it once a year or when the market goes down/up by more than 20%.

    Does this sound like a good strategy?

    Thanks!

    AG

    Reply
    • jlcollinsnh says

      May 25, 2015 at 5:43 pm

      Thanks AG…

      ..and welcome.

      Yes, I think you’ve put together a sound stratgey and are thinking about it correctly.

      My only suggestion is that if you are going all stocks in Betterment and Wealthfront, why bother using them?

      The main advantage to them is the automatic rebalancing of stocks/bonds. So if you are not going to hold bonds with them, you’ll be rebalancing from various stock funds.

      Since VTSAX holds virtually every publicly traded stock in the US, you’d only need this if you intend to hold international stock funds. I don’t feel the need for reasons I describe here: https://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/

      But if you do, it would be cheaper to hold them in a Vanguard fund. You are already willing to rebalance with your stock/bonds. If you can do that, rebalancing US/International should be no problem for you and you’d save a bit on fees.

      Also, see my reply to Rob below.

      Reply
      • AG says

        May 25, 2015 at 10:08 pm

        Thanks, Jim! I wish I saw your blog before I went with Betterment or Wealthfront but it is never too late to re-think my strategy 🙂

        AG

        Reply
      • jlcollinsnh says

        May 25, 2015 at 10:19 pm

        My pleasure, AG…

        BTW, here’s my post on Betterment: https://jlcollinsnh.com/2013/12/16/betterment-wants-to-give-you-25/

        As you’ll see, I think they have a roll to play in some cases and for those I like them just fine.

        Reply
        • AG says

          May 28, 2015 at 10:39 am

          Jim,

          I forgot to ask – I will be doing backdoor IRA conversion to Roth IRA. Does it make sense to buy 100% bond (VBTLX) in Roth IRA or go with 100% stock (assuming I will rebalance to make sure my 90/10 still holds true)?

          Based on what I read on your blog it appears that bonds are not tax efficient and should be held in tax-advantaged accounts.

          I already have my 10% allocation to bonds in my 401K so does it make sense to rebalance again to count Roth IRA or just go with 100% stock in Roth?

          I hope this is not too confusing.

          Thanks!

          Reply
        • jlcollinsnh says

          May 29, 2015 at 7:04 pm

          Yes, I prefer to hold bonds in a tax-advantaged account.

          Whether that should be your Roth depends on how you plan to use your Roth.

          In retirement many people chose to draw from their Roths as the money is tax free. In this case, bonds fit well.

          But I see our Roths as our longest term money that we will likely pass untouched to our heirs. There are tax advantages to them doing this. This long-term perspective means I keep VTSAX in ours.

          Reply
  31. Rob says

    May 25, 2015 at 5:06 pm

    One thing I’m wondering though: how can an 80/20 mix outperform a 100% equity mix when equities produce better results over long periods?

    I’m a bit in doubt if I should get a stock/bond mix. But I’m only 25 years old so if I look at a 10-20 year time frame until retirement I guess 100% stocks should theoretically outperform an 80/20 stock/bond mix. Plus, stocks are more tax efficient here in Belgium (no capital gains tax/no tax on non distributed dividends vs a 25% tax on interest). Is this a correct assumption?

    Reply
    • jlcollinsnh says

      May 25, 2015 at 5:50 pm

      Hi Rob…

      My guess is the better results come from periodic rebalancing that results in selling high and buying low as you make the shifts. I do rebalance myself but I don’t think of it as critical. Jack Bogle is on record saying he doesn’t bother at all. He points to research suggesting that the rebalancing advantage is >.5%, just so much noise.

      If I were 25 I’d go 100% stocks. The only drawback is the volitility and since I’d be in the Wealth Building Stage my continuing investments from my earned income would take advantage of that and smooth the ride.

      When I no longer had that income to invest, I’d turn to bonds to smooth the ride instead.

      So, yes, I think your thinking is correct.

      Reply
      • Rob says

        May 26, 2015 at 4:21 pm

        Thanks for your fast reply Jim and all the info you make available on your blog. I am glad I found your blog at such a young age. Hopefully everything turns out well in a few decades. Guess I’m a bit scared of bonds with the current low interest rates. And a bit scared of stocks with its relatively high valuations :). But none of that should matter in 15-20 years time I guess.

        Reply
      • jlcollinsnh says

        May 29, 2015 at 6:54 pm

        My pleasure Rob.

        Investing will always be a bit scary and the drops, when the come, terrifying.

        As one reader told me, “We stay the course with a large side helping of fear.” 🙂

        Reply
  32. Andrew says

    June 17, 2015 at 11:56 am

    Dear Jim,

    Thank you for all of the great articles you write. I have never invested before, but I am planning to do so in about 4-5 months after eliminating my outstanding student loan debt.

    Regarding asset allocation, I have read in several places, including your site, that one can rebalance a portfolio by selling assets that have performed well and then using the proceeds to buy the assets that have performed less well. For example, if a target allocation is 80% stocks and 20% bonds, after 6 months of a high performing stock market, maybe the allocation becomes 85% stocks and 15% bonds. Over the long run, because I am a relatively high earner (28% marginal tax bracket), a majority of my investments will probably be in taxable accounts. Thus, rather than sell anything and have to pay capital gains, would it not be better to simply buy more of the asset class that has performed less well, and buy less (or none) of the class that has performed well? In my example, if I want to return my 85% stocks/15% bonds back to 80/20 stocks/bonds, then for a quarter two I would just buy mostly bonds until the desired allocation is again achieved. Are there any problems with this strategy, or something I’m missing?

    Reply
    • jlcollinsnh says

      June 17, 2015 at 11:38 pm

      Hi Andrew…

      Your thinking is spot on and while you are in the wealth accumulation phase the new money you are adding both helps to smooth the ride by taking advantage of dips and allows you new investment money to use to bring your allocations back into line.

      Be sure you are fully funding all of your tax-advantaged opportunities before investing in your taxable accounts; especially in your tax bracket. Doing so also allows you to rebalance without tax considerations.

      Reply
  33. Hamish M says

    June 18, 2015 at 1:49 am

    Hi Jim,
    Loved your article series. Before I read Bogle’s “Little Book of Common Sense Investing” and then your own site I had never heard of index funds, and now I want to sell all my individual stocks. (But I’ll do it slowly to avoid the tax hit.) Not to mention firing my financial advisor.

    Anyway, Paul Merriman argues at http://www.marketwatch.com/story/why-vanguard-total-stock-market-isnt-the-best-fund-in-the-fleet-2014-12-03 that you can do better than VTS and the S&P 500 by also using large-cap and small-cap index funds. While I’m inclined to think this is just another variant of trying to pick stocks / pick sectors / pick fund managers, his data shows that for 1930-2013 those other classes did a few points better than the S&P 500.

    Sorry if this is addressed elsewhere on your site, but do you have an opinion on this approach? Obviously choosing an asset allocation using these is going to be more complex as will keeping it balanced, but maybe it’s worth it?

    In fact your own site is mentioned in the Q&A on this topic over at Paul’s own site – http://paulmerriman.com/can-learn-asset-class-performance-history/ .

    thanks!

    Reply
    • jlcollinsnh says

      June 18, 2015 at 3:46 pm

      Hi Hamish…

      Please check out this post: https://jlcollinsnh.com/ask-jlcollinsnh/

      Specifically this part:

      “The investment ideas of others:

      “Occasionally in the comments I am asked to read some book, article and/or blog and dispute the ideas in them. I simply don’t have the time or inclination to do this.

      “If you read my blog you’ll soon have a very clear idea of my views. You can then read other sources, compare and decide for yourself what resonates.”

      Thanks.

      Reply
  34. Melissa says

    September 30, 2015 at 3:21 pm

    Hi Jim, I loved your stock series and consequently I hold 100% VTSAX in my taxable account. Should I consider tax loss harvesting? According to Vanguard, I have an unrealized loss of $1910 in my taxable account. MadFientist recommends exchanging VTSAX to VLCAX. Your thoughts on tax loss harvesting? I’m a new investor and a little nervous to try…. Thanks!

    Reply
    • jlcollinsnh says

      September 30, 2015 at 7:36 pm

      Thanks Melissa…

      Sure.

      When you sell and show a capital loss, you can use that loss to offset any capital gains you have in the same year. Once those are offset, you can use the loss to deduct up to $3000 against your ordinary income. If your losses exceed that you can carry them forward to use the next year and beyond.

      The reason MF suggests exchanging into VLCAX is to avoid the “wash-sale” rule which says you can’t sell at a loss, take a deduction and invest in the same thing immediately. You have to wait 30 days.

      By exchanging into VLCAX you avoid this rule and avoid being out of the market for 30 days.

      The only catch is that if you return to VTSAX after 30 days and have a gain in VLCAX it will be a short-term gain taxed at the higher ordinary income tax rate. So you might want to stay in VLCAX for a year to qualify for long-term capital gains.

      When I do this I personally move to VFINX, the S&P 500 index fund and if need be I am happy to hold it for a year.

      Reply
  35. Rob says

    October 27, 2015 at 8:39 am

    Jim,
    Thanks for all the incredible information. I do have a specific question.
    I am 45 years old and my wife and I have an a aggressive savings plan for the next five to try to retire in 2020. We plan on bridging the gap to her pension (15 years from now) with our investments. We are maxing out our work contributions, her 401k my simple IRA. We also plan on investing the rest in a vanguard account. We already have a 80/20 mix in a brokerage account with Charles Schwab.
    What asset allocation do you suggest for the next 5 years? We hope to be able to invest 30-50 thousand per year after taxes.
    Thanks.

    Reply
    • jlcollinsnh says

      November 10, 2015 at 5:28 pm

      Hi Rob…

      As I mention in the post above, choosing an AA is a very personal decision related to your goals and risk tolerance. Only you can evaluate those factors.

      Personally, if I was striving to retire by 2020 I’d stay aggressive, understanding that should the market move against me it might set me back a few years. But it might get me there sooner. Plus the 3050k per year would serve me well should the market fall and offer better prices. But that’s me.

      Five years is a short time frame.
      –Stocks = greater potential, more volatility
      –Bonds = smoother the ride, less growth

      Good luck!

      Reply
  36. Luke says

    June 3, 2016 at 3:10 am

    Hi Mr Collins,

    I’m very new to this whole Financial Independence thing, but over the past 4 months or so I’ve become heavily invested in it (pun kind of intended). I’m 30 and since reading excellent blogs from people like yourself, MMM and ERE, I’ve gone from having over $5000 in credit card debt and $4000 in student debt to having no student debt and less than $3000 credit card debt. I can’t thank you enough for the advice you’ve given!

    I’m in Australia, which luckily has Vanguard to invest with. Since Australia is quite a small place economically, I was thinking of investing a large portion of my share investment (when I get to investing stage) in Total US market shares as well as Australian shares. The US market fund isn’t hedged though. Do you think the currency difference risk is sufficient enough to either reduce the percentage or go with a global shares hedged fund? The plan is to reinvest everything earned until required, and then get rid of the US shares and replace them with bonds in AUD when the time comes.

    Any assistance would be most appreciated. Thanks again mate!

    Reply
  37. Krys says

    September 3, 2016 at 2:53 am

    “Rebalancing” is something you talk about so so many times on here… You sold me on the index, you sold me on the simple plan to wealth.. but shouldn’t part of your stock series be on what rebalancing is and how to do it? Google searching seems more vague than the focus I want: how to rebalance the index I’ll be pouring money into… I see it in every Vanguard post without having any real idea what it is I’ll be doing with this once a year endeavor.

    Reply
    • jlcollinsnh says

      September 4, 2016 at 4:23 pm

      Hi Krys…

      Rebalancing is simply the process of bringing your selected allocation back in line as it drifts with the rise and fall of the stock and bond markets.

      For instance, my chosen allocation is 75/25 stocks/bonds. But, since the stock market has been rising lately, the actual current allocation has drifted to 78/22.

      To bring it back in line, I would sell some of the stock fund shares and use the proceeds to buy some of the bond fund shares in an amount that would return the allocation to 75/25. That process is called “rebalancing”

      Voila! My portfolio is rebalanced to my chosen allocation.

      Make sense?

      Reply
  38. Travis says

    October 7, 2016 at 4:55 pm

    As everyone has already said I can’t thank you enough for this site!

    My question is, I am still back and forth with how to handle our existing accounts and if an additional IRA is needed. I am leaning toward maxing my wife’s 401K (invested aggressively as a 7 on Schwab’s scale of 1-7). Then moving my IRA to vanguard and purchasing all VTSAX, maxed yearly. Finally, opening a taxable account with VTSMX (until we reach 10,000) and contributing 10% of our gross income to that account.

    Does this sound right? We make about $190,000 yearly as a couple so we don’t qualify for a tax deduction at her salary level so does having an IRA in her name and doing a back door roth make sense or would we be served as well to put that toward our taxable account?

    I am afraid I am giving myself paralysis by analysis and would love your opinion. I am ready to have a plan in place and “put all the eggs in the basket and leave it!”

    Reply
    • jlcollinsnh says

      October 11, 2016 at 3:17 pm

      Hi Travis…

      Sounds like you are on target: Max out your tax-advantaged opportunities and then build up your taxable accounts.

      I’m not an expert in back-door Roths, but they do add some complexities if you have other IRAs. Google and read before you act.

      Reply
  39. CoachJ says

    December 21, 2016 at 12:04 pm

    Love the blog. Been reading yours and a few others and trying to formulate my steps to early retirement. The one thing I can’t seem to figure out/wrap my head around is, if I want to retire before legal retirement age in the US, the only account where I would not get penalized on early withdrawals is an individualized account, but this does not offer any tax breaks. Any help would be greatly appreciated.

    Reply
    • jlcollinsnh says

      December 21, 2016 at 3:51 pm

      Thanks Coach!

      Here you go: https://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

      Reply
  40. Aaron says

    January 31, 2017 at 9:58 pm

    Hello, Jim. My wife and I are longtime followers and very much enjoyed the stock series!

    My wife is a stay-at-home mom. I am employed and earn roughly $120k gross. My company is small and offers no retirement plans, so I have a Roth IRA that I opened a few years back. My wife rolled over her 401k from her former employer and now has an IRA (spousal, as contributions come from my income). Both of these funds are invested in VTSAX, with the max contribution of $5500/yr going into them. Current balance in each is about $80k. The limits to contributions however are slowing our growth.
    Our question is what best to do next…do we open a regular taxable account at this point and put remaining cash in VTSAX in that account? I am 41 and my wife is in her 30s. We want to stay aggressive and are not looking at anything but stocks at this stage. If we never touch it, do we still pay tax on any capital gains? We will be able to put at least $20k per year in that account, which should help grow our nest egg much faster than the low limits on the IRAs.
    Any feedback would be greatly appreciated. Many thanks!!

    Reply
    • jlcollinsnh says

      February 1, 2017 at 12:01 am

      Hi Aaron…

      Yes, absolutely fund a taxable account once your tax-advantaged options are fully funded. You will owe tax on any dividends and capital gains distributions (CGDs are very rare with VTSAX), but capital gains on your shares are only taxed when you sell. And you won’t have to worry about RMDs: https://jlcollinsnh.com/2014/07/27/stocks-part-xxiv-rmds-the-ugly-surprise-at-the-end-of-the-tax-deferred-rainbow/

      At your income level you might also consider making future IRA contributions to a traditional rather than the Roth for the immediate tax deduction.

      See this for more on Trad/Roth, especially the hierarchy I provide in it: https://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/

      Reply
      • Aaron says

        February 1, 2017 at 9:30 am

        Many thanks, Jim. We will open that taxable account and start funding it promptly.

        If you don’t mind a follow-up question, I am having trouble understanding concretely how to treat my contributions to my wife’s IRA. I started contributing to this rollover account in 2016. I contribute after-tax money into this account from my bank account. Does this mean I should deduct these contributions on my 2016 tax return? Since the money is out of pocket (taxes withheld prior receipt), I am not sure how to treat it. Thank you.

        Reply
        • jlcollinsnh says

          February 2, 2017 at 8:48 pm

          You’ll report any IRA contributions on your 1040, regardless of where the money comes from. Assuming you file “married and filing jointly.” If not, your wife will get the deduction on her 1040.

          The investment firm with which you have your IRA will send you and the IRS a form detailing your contribution.

          Reply
  41. Bri says

    June 25, 2017 at 12:57 pm

    Mr. Collins

    Thank you for all of your wonderful advice. This is my first year earning an income. I’ve funded my Roth IRA account with Vanguard for FY2016 but have yet to invest. Part fear. Part not ready. I’m reading through your blog, several others you’ve mentioned, and Investopedia to learn some basics before I get into it.

    My question to you is this: you clearly advocate use of VTSAX (I’ll be using VTI as I don’t have enough for VTSAX) but looking on the Vanguard site, I see that an equal blend of large / med / small cap stock ETFs would average out to a higher avg return rate when using long term numbers (since inception) – so, why use the former?

    Thanks!

    Reply
    • jlcollinsnh says

      June 25, 2017 at 5:05 pm

      The equal blend you describe would overweight small and mid-caps, thus increasing volatility over VTSAX – and there is no guarantee that over-performance will continue.

      Plus, this is The Simple Path to Wealth. 😉

      Reply
  42. Dawn says

    January 22, 2018 at 2:39 pm

    Hi Mr Collins
    Dawn from the UK here
    Whats your thoughts on holding cash instead of bond funds? particulary at this moment in time. 2018 Im 60/40 equities/ cash probably 3/4 yrs from drawing from my stash.
    Your thoughts much appreciated , love your site.
    Thanks in advance.
    Dawn

    Reply
    • jlcollinsnh says

      January 22, 2018 at 6:36 pm

      Hi Dawn…

      Cash is the more conservative approach and avoids the potential capital loss when/if interest rates rise.

      However, bonds give you a bit more income.

      The call is really about your temperament.

      This post might help:

      https://jlcollinsnh.com/2017/12/20/the-bond-experiment-return-to-vbtlx/

      Reply
      • Dawn says

        January 23, 2018 at 3:44 am

        Thankyou mr collins. Youve echoed my thoughts on holding cash instead of bonds. Also, whats been concerning me….
        When theres a big drop in equitites its advised to have a 2- 3 year cash buffer to draw from while equities recover. Does this mean 25 x my annual income plus 3 yrs in cash required for FI ? Thanks in advance.

        Reply
        • jlcollinsnh says

          January 23, 2018 at 9:45 pm

          Traditionally, the 25x covers both. Having 3+ years worth of cash in addition is the more conservative way to go.

          Again, depends on your temperament, and how long you are willing to work to build your stash.

          Reply
          • Dawn says

            January 24, 2018 at 5:31 am

            Big thanks. Im slowly working my way through your site and reading all your responses to questions .

  43. Justin says

    March 14, 2018 at 12:04 am

    Would you say the Fidelity equivalent of the VTSAX would be comparable or would it be worth it to get a Vanguard account to invest in what it offers… I am extremely new to all this.

    Reply
    • jlcollinsnh says

      March 14, 2018 at 11:00 am

      Yes, both Fidelity’s total stock market index fund and VTSAX hold basically the same portfolio.

      However, there are reasons to prefer Vanguard:

      https://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/

      Reply
      • Justin says

        March 15, 2018 at 5:51 am

        Thank you for your quick reply and the information.

        Reply
  44. Kevin Phipps says

    May 13, 2018 at 10:17 am

    Jim,
    Thank you for the information and discussion on asset allocation. I am age 63 and retired. My current AA is 80% stocks ( VTI and VXUS) and 20% money market and CD’S. I do not currently own any bonds. The 20% MM and CD’S represent 7 years of living expenses. I currently have no other income. However, my wife will be taking SS at her full retirement age in 4 years and I will take SS at age70. At that point the combined Yearly SS will represent 40% of our yearly living expenses.Since retiring at age 50, I have always determined my AA by first allocating 7 years of living expense to liquid non-stock, then the remainder into stock. In others words, I do not determine AA by % of total portfolio value. This has allowed me to feel comfortable with a more aggressive AA. My question is: Is my thinking flawed?

    Reply
    • jlcollinsnh says

      May 13, 2018 at 12:55 pm

      Hi Kevin…

      You thinking seems very clear to me and you have taken an interesting approach.

      While cash, in the form of MM funds and short term CDs, provides less yield than a bond fund like VBTLX, there is also less interest rate risk. So lowering that risk does provide the potential opportunity to have a greater allocation to, and the ability to accept more volatility on, the stock side.

      As does the fact that you and your wife are closing in on taking SS.

      While your second comment doesn’t change this assessment, it does tell me that you have placed yourself in a very strong financial position. That, too, allows the opportunity to be more aggressive in your allocation choices.

      Well played! 🙂

      Reply
  45. Kevin Phipps says

    May 13, 2018 at 10:30 am

    Jim,
    One other data point may be necessary for you to evaluate my situation. At current valuations, 4% of my stock portfolio represents 98% of yearly expenses. Approximately 20% of expenses include non- fixed costs such as travel, eating out, etc.
    Thank you in advance for your thoughts.

    Reply
  46. Don says

    July 19, 2018 at 5:10 pm

    I am completely new to investing. My company has Vanguard Target Date Funds and a few Index funds available. I am not sure how I should be allocating my investments. I am young and married and have a VA pension that brings in non-taxable cash.

    The fund available are the Vanguard Target Date funds, Fidelity 500 Index Fund – Institutional Premium Class, T. Rowe Price Institutional Large Cap Growth Fund, Dodge & Cox Stock Fund, Fidelity Extended Market Index Fund – Premium Class, Wells Fargo Discovery Fund – Class Inst, DFA U.S. Targeted Value Portfolio Institutional Class, Fidelity® Global ex U.S. Index Fund – Institutional Class, MFS® Institutional International Equity Fund. There are also a few bond funds.

    The Vanguard Target Date funds throw me off because the 30%+ investment into International stock. I am not sure how I should allocate my funds. Any tips?

    Reply
    • jlcollinsnh says

      July 19, 2018 at 10:39 pm

      Here’s my take on TRFs:

      https://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/

      Reply
  47. Jeremy says

    July 29, 2018 at 11:53 am

    Hi Jim,

    I’m 40 years old with an 60/40 stock/bond allocation, mostly because I believe this shelters me from large losses in an inevitable recession and the returns over a decade or more will be end up being similar to a more aggressive stock weighting. Am I being too conservative and setting myself up for underperformance?

    Thanks!

    Jeremy

    Reply
    • jlcollinsnh says

      July 29, 2018 at 8:00 pm

      Hi Jeremy,,,

      Over the decades, stocks have a high probability of outperforming bonds. So, the more bonds you have the lower your expected performance will be.

      But that is only part of the equation. If, when the market plunges, the pain causes you to panic and sell, you will be left bleeding by the side of the road. If a greater percentage of bonds gives you greater piece of mind and prevents that panic sale, you will be far better off.

      Reply
  48. Rick says

    August 3, 2018 at 12:06 pm

    Jim:
    I’ve read your series and love it. Please help, I am totally lost on bonds. I am recently retired and am preparing to roll my 401K into a Vanguard IRA. I was planning to buy into a bond fund with 50% of my 401K balance with the other 50% going into VTSAX.
    Here is where I’m getting confused. Looking at the last year of returns on VBTLX, they are negative. Does this mean even with the interest they pay, you would have lost money? I thought they paid interest in the 2-4% range. If they are in fact having negative returns, why would I not want to place my “ballast” in the money market which is paying 2%, a 2 year treasury or even some of it in a 3 yr cd paying 3%. I have 2-3 years cash sitting in a saving account so immediate withdrawals are not a real concern in the near future.
    The fed is planning to raise interest rates higher so from what I understood from your bond article, this will drive bond returns even lower? I agree on not trying to time the market but looking at VBTLX 3 year returns on the Vanguard site it shows a 2.17% return. I feel I must be missing a piece of the puzzle when it comes to bond investing. Thanks

    Reply
    • Ladyaurora says

      August 3, 2018 at 12:29 pm

      Hi Rick Im with you on this. I’ll in the UK same thing going on. Interest rates slowly rising. Im 53 yes and FI 60 /40 equities/ cash. No bonds. I feel safer with cash than bonds. I think it’s what your comfortable with. I’ll be looking FWD to what Mr Collins has to say.

      Reply
    • jlcollinsnh says

      August 4, 2018 at 12:50 pm

      Hi Rick…

      Actually, you don’t sound confused at all and your thinking is sound.

      VBTLX certainly has the potential to have a capital loss and that loss could be larger than the interest it pays. You are correct that this happens when interest rates rise.

      You are also correct that interest rates have risen of late and there is talk of them rising more. The Fed would love to see rates higher, if only to have the ability to lower them again when times get tough.

      But that said, predicting interest rates is even more challenging than predicting the stock market. So, it is important to remember that when you hear people saying interest rates are going up, they are only guessing. People have been predicting interest rates climbing for at least two decades and they have mostly fallen. I have no idea what they will do from here. Neither does anyone else, including (maybe especially) those who claim they do.

      VBTLX is a total bond market fund. This means it holds bonds of all different maturities and that means that it really averages out to be a mid-term bond fund with about 5-7 year average maturities. So while it certainly has more interest rate risk than a money market fund, the risk isn’t in my view all that high those kinds of average maturities.

      Add to that the fact that VBTLX holds thousands of bonds and some are always coming due. This means, when rates are rising, there is always the opportunity for VBTLX to buy new bonds at the higher rates.

      So, in my view…

      The fund may be down in a given year or two, but it is still paying interest and I am reinvesting that interest in lower priced shares. Plus if I compare the chart to that of VTSAX, the ride is very smooth. It serves my desire for ballast just fine.

      All that said, the alternatives you listed are fine as well.

      VBTLX currently yields ~3.14%
      VMMXX currently yields ~2.06%

      VMMXX is the money market fund I use and like all money market funds it is designed to hold very short term instruments and to have zero variation from its $1 share price.

      Using it, you give up ~1% in yield for zero volatility. But I am going to be holding VBTLX forever so the small volatility it has doesn’t concern me.

      Hope this helps!

      Reply
      • Rick says

        August 4, 2018 at 9:42 pm

        Thanks Jim:
        I appreciate your patience explaining this. You have cleared it up, I think. I apologize for my lack of knowledge on this but I am grateful for your site where I can ask such questions. See if I’m getting warmer as far as understanding this.

        I know the values aren’t exact but using the example I gave of a VBTLX slight negative yearly return and your comment that the current yield is 3.14%. Due to capital losses, if I had invested $10,000 in the fund last year, my current balance would be around $9,950 and not $10, 314. But I would own a few more shares from that 3.14% interest than I had from my original $10,000 investment.

        Reply
        • jlcollinsnh says

          August 5, 2018 at 2:12 pm

          Again, Rick…

          …your understanding is good. And, of course, some years it will also show a capital gain.

          Reply
          • Rick says

            August 6, 2018 at 8:17 am

            Thanks for clearing this up for me Jim. It definitely makes VBTLX much more attractive.

  49. Charles B. says

    August 5, 2018 at 2:42 am

    I have a silly question… if the minimum amount to invest in VBTLX is $10,000, but the max IRA contribution is 5,500$, how does one create a VBTLX (or VTSAX for that matter) IRA?

    Situation: I’ve got 150k in a VFIFX IRA and another 150k in a VFIFX 401(k), but I recently decided I’m not a huge fan of the international allocations here (35% stocks, 3% bonds). I’m trying to figure out how to split that all up. Any advice/help would be very much appreciated. Your series has been great help!

    Reply
    • jlcollinsnh says

      August 5, 2018 at 2:19 pm

      Not silly at all, Charles.

      You just start with the “investor shares” versions:
      VTSMX
      VBMFX

      or the ETF versions:
      VTI
      BND

      https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/

      Reply
      • Jeff Jewell says

        September 25, 2019 at 3:26 pm

        Isn’t that VTI and BND (vs. BMD?)

        Reply
        • jlcollinsnh says

          September 26, 2019 at 2:32 am

          Yes.
          Good catch.
          Thanks!

          Reply
  50. Aaron says

    August 20, 2018 at 3:20 pm

    Hi jlcollinsnh,

    I’m loving the series as I’ve mentioned in a couple other comments on pages. I’ve got a question for you that I’d like your personal advice on. I am currently maxing out my 401(k) annual contributions and planning on putting whatever excess investment money I have left over in my VTSAX account.

    Is this smart? Would you instead invest a large portion into the VTSAX and just contribute enough to get the company matching 401(k) instead? Obviously, the 401(k) has higher expense ratios but is tax advantaged so I am at a loss at which direction to take this.

    Your input is greatly appreciated, and I’m loving the site.

    Reply
    • jlcollinsnh says

      August 20, 2018 at 9:03 pm

      Hi Aaron…

      Depends on how valuable the 401k deduction is to you, and that depends on your tax bracket.

      Reply
  51. Andrea says

    August 21, 2018 at 1:21 am

    Hi Jim,
    I am struggling with the asset allocation of my traditional IRA that I had rolled over from a 401K from a previous employer. I do not contribute to it anymore as I stay home with my kids and we are using my husband’s 401K as the main retirement fund. We have 25-30 years until retirement, and I do not plan to contribute to this IRA at all (currently valued at $168k). I’ve heard you say that when you are young and contributing, that when the marker dips you’ll be able to afford the losses since you’re buying at a discount price. Since I won’t be contributing should I do a more conservative mix of 70% or 75% stock and 30% or 25% bonds? Or should I still be more aggressive and have more stocks since I have such a long time until I’ll need the money? What do you recommend for my situation? Thanks!!

    Reply
    • jlcollinsnh says

      August 21, 2018 at 7:06 am

      Hi Andrea…

      It all depends on your tolerance for the stock market’s (potentially extreme) volatility.

      –Add bonds and you smooth the ride, but lower the long-term performance.
      –Fewer bonds, and you have more volatility, but potentially better long-term performance.
      –The longer your time horizon, the more attractive investing thru the volatility becomes.

      But, most importantly, whatever percent you hold in stocks: Be sure you don’t panic and sell when the next bear bites.

      Finally, in deciding on your allocation, you should look at your assets and your husbands as a whole.

      Hope that helps!

      Reply
  52. Scott says

    October 12, 2018 at 8:37 pm

    Hi Jim,

    First, let me say thank you for creating this blog and especially for staying active in answering questions on posts now 4+ years old.

    My wife and I are in our early 30s, and are looking to pull the trigger on exiting corporate life and entering FI in 3-5 years. With FI this close, I’m starting to plan out the specifics on retirement allocations (we are currently 100% stock during the wealth accumulation stage). I’ve yet to see an argument for the lower earnings of bonds other than smoothing out the ride. If I know I’m disciplined enough to not pull out during downturns and also given that I’m in FI for the long haul, I can’t come up with a reason to choose a smoother rider over a higher long term return.

    Rather than the 75 stock/25 bond allocation you advocate, I’ve been strongly considering a 92 stock/8 cash allocation. If I’m following the 4% withdrawal rule, 8% cash is a 2 years supply of cash. That 2 year supply of cash means that 1) I’m not forced to sell off stocks during a downturn to pay for living expenses and 2) I have money on hand to take advantage of the buying opportunity a downturn provides. And as you’ve pointed out in previous posts, because VBTLX contains corporate bonds, it will still see some price decay during a downturn.

    Assuming 7% stock return, 3.5% bond return, and 0% cash return (could probably actually get at least 1% in a money market), a 75 stock/25 bond portfolio has a net return of 6.1% whereas a 92 stock/8 cash has a 6.4% net return, so it seems like I’m getting a better return during good times but also having the advantage of money that is (using your analogy) more well rested than bond money when times are bad.

    That said, lots of smart people like you still advocate bonds. What am I missing?

    Scott

    Reply
    • jlcollinsnh says

      October 13, 2018 at 4:55 pm

      Thank you for your comment, but it appears you missed this post:
      https://jlcollinsnh.com/2018/10/04/on-twitter-gone-for-chautauqua-and-dark-on-comments-till-november/

      If you are asking a question, please re-post after November 1st and I will try to respond.

      Meanwhile, try using the search button or take a look at the posts listed here:

      https://jlcollinsnh.com/stock-series/

      Most questions I am asked these days have been asked and answered many times before. Perhaps yours has as well.

      Reply
  53. Amit says

    November 9, 2018 at 1:17 pm

    Dear Mr Collins

    A warm hello from London U.K
    I’m 100% invested in vanguard US total market index in pension account and 90/10% stock/bond in non taxable account which can be withdrawn anytime.
    90/10 asset allocation advice taken from Warren Buffet television interview

    About me:-
    -34 year old clinician
    -0 knowledge about any of this 6 months ago( I admit, a little tear in my eyes for not doing anything all these years, my biggest regret in life)
    Maybe 20% knowledge now( trying hard to keep it that way, never thought this can be interesting)

    My understanding so far: –
    My Only friend in this game is “Time” and my only defence against insanity is “ Dumbness ” And “ not checking my portfolio for next 4-5 years”

    Now My Question is:-
    Why do you rebalance your portfolio on your wife birthday every year ? Are you withdrawing funds for consumption ?

    I have 90/10 asset allocation and trying to understand why I should do the same?
    Why can’t I just withdraw from my 90% stock allocation in 5-10 years time every month for daily consumption like dollar cost average but in reverse! Just withdraw whatever I need every month regardless of what markets are doing and rebalance to reflect 90/10 split.

    My bond holding of 10% which is my insurance should only be to Touched in the event of 2009 like crash! At that stage I will not withdraw anything from 90% stock pile.

    Rebalancing every year might give me same growth in my portfolio over ten years or slight less or slightly better! It would be wise to act dumb and don’t check portfolio that often in my view.

    If the ultimate goal of this exercise is to withdraw money for day to day living ( of course holidays etc) then what’s a point being greedy and just sell the units every month regardless! And enjoy!

    Your views will be appreciated
    AJ.

    Reply
    • jlcollinsnh says

      November 9, 2018 at 4:20 pm

      Hi Amit…

      Let me start by saying I agree with Dawn. Were I anywhere other than the US, I would look at a fund like https://investor.vanguard.com/mutual-funds/profile/VTWSX
      as I discuss in this post: https://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/

      In fact, as the world continue to grow and prosper and the US share of the ever larger pie drops, at some point I too will go that route. Especially as Vanguard continues to lower the ER. It is now down from .35% to .19%

      We rebalance to bring our portfolio back to our target allocations. As the market rises or falls, these tend to drift. We chose my wife’s birthday for this just because it is easy to remember.

      Reply
  54. Dawn says

    November 9, 2018 at 2:21 pm

    Amit. If you live in UK why is all your equities in the US stock market? I’m confused
    You need to spread you equities globally. As US is massive investors who live there can have all Thier money in the US market, but not if your from the UK. Please enlighten us.
    Dawn from UK

    Reply
    • Amit says

      November 9, 2018 at 2:58 pm

      Hi Dawn,
      The reason I have all my money in US stock is because you cannot bet against US and win. They are $19 trillion economy and we here in U.K.
      $ 2.9trillion.
      In the past decade US equity returned nearly 350% and U.K. 110%
      Even though I’m a proud British and my heart says invest in U.K. My mind is telling me invest all in US.
      They will keep buying business all over the world including U.K. And you will be the part of the it.

      Good about investing in stock is the that you don’t have to live in the country to invest in . Doesn’t matter where you live, only matter is what you are investing into! In my view US is a great bet and largest diversification.
      Amit

      Reply
      • Dawn says

        November 9, 2018 at 4:06 pm

        Amit. Your new to investing. You need to understand diversification. Don’t put all your eggs in one basket. No one knows how the future will pan out. Which counties will do well and which will lag. Some believe all the big future gains will come from emerging markets? Maybe? That’s why it’s best to spread your money globally. And not concentrate your risk . Also you have currency risk, if the exchange rate works against you as a UK resident ,any gains from the US market could be wiped out when converted from dollars to £,s . If you had some UK exposure you would be shielded from this. IMHO you need to read up on diversification. Read monevator site or the escape artist blog. These are UK based sites full of information . See what Mr Collins says but I think he will agree with what I’ve said.

        Reply
        • Amit says

          November 9, 2018 at 5:14 pm

          Dawn, I have thought about buying into other markets. I’m interested in China however I can only buy CHINA via emerging market index and CHINA is only 30 % of the index. Rest of 70 % is other countries.
          I can buy world index you can’t get bigger diversification than that. World index is still made up of 50 % US equity and other 50% is rest of the world.
          China would be a great buy but you can’t really buy Chinese company unfortunately and this the problem with emerging market. You can’t really trust them. Lot of corruption, government influence on the companies, poor accounting etc etc. It’s not like free economy the one we have in the west.

          The way I’m looking at is this – are the company I’m investing in will around for another 30-40 years or not ? The answer is most likely Yes! Facebook, Amazon, Microsoft, Google, Apple, Netflix will be here. They are in our life’s right now and they will keep selling their products and give me little dividend too.
          Now my view on currency risk. I’m exposed to currency risk no matter where i invest.
          Even if I invest in U.K. FTSE 100, their earnings are valued in US $. The ftse 100 index had gone up due pound depreciation. So I’m not immune. However if I invest in local FTSE 250 stock then yes i am more less covered against the currency risk as earnings are locally in pounds.
          Again by investing in US there is nothing to be worried about as you are buying half of the world available equity also most importantly you know what you are buying because lot of those products are in life. Lastly expenses ratio is the cheapest too compare to other assets class.

          Reply
          • Dawn says

            November 10, 2018 at 4:00 am

            Hi Amit. I feel sure you can buy a China ETF.
            A world index is the way to go. Then you got all bases covered. Anyway you need to do what you are happy with. As for myself. I’m uncomfortable holding to much in the US , due to the fact it’s at an all time high. It just makes me pull back ABIT. So my equity allocation as a UK based invested is 15 percent EM, 9 percent Japan 6 percent Pacific. 15 percent Europe ex UK. 15 percent US. And the rest in the UK. That feels right for my temperament. Best wishes.

  55. U.A says

    January 31, 2019 at 11:27 pm

    I’m a little confused by that calculator. I put in 600,000 savings, 24,000 annual expense, 30 years.

    And, it gave me 45 stocks 55 bonds, as best. Why is this.

    I thought you wrote more stocks power the results.

    Reply
  56. EJS123 says

    March 1, 2019 at 10:32 am

    Hi Jim, thank you for all this great information, I just bought your book and will devour it in the near future. I seek your opinion in the following situation:
    Im a Federal govt employee. I want to retire in 10-12 years.
    – TSP allocation is: 65% C, 25% S, 10% I . Value is approx $400k.
    – Roth IRA, 100% VTSAX, approx value $20k
    – Taxable account, VBIAX which is 60/40, value $60k.
    – I will continue maxing TSP, IRA and will attempt to save approximately 50k per year into taxable account.
    – I am eligible for a pension in 10 years
    – I am eligible to make TSP withdrawals in 10 years

    When taking everything into consideration, my allocation works out to be close to 75/25. However, after reading a bit of your stock series, I realized that 1. I am in the wealth preservation stage and should be in the accumulation stage 2. I should not be holding bonds in the taxable account. Therefore, I am thinking of buying VTSAX on the taxable account and keep about 10% cash in My Vanguard Money Market account. I’ll use the cash if the market is down upon my retirement.

    Given that I am 10-12 years away from retirement, would this strategy be too risky? Also, is keeping cash and earning interest more tax efficient than holding VBIAX in a taxable account?

    Respectfully,
    EJS123

    Reply
    • jlcollinsnh says

      March 1, 2019 at 6:51 pm

      Hi EJS123…

      Only you can decide what is too risky for you and your temperament.

      After you read the book, you will be better equipped to decide.

      Reply
  57. Alex says

    April 22, 2019 at 2:23 am

    Hi Jim, thanks for a really helpful article -just like your podcast interviews and the Google talk.

    Regarding the topic of allocation, my question is what happens if there is some existing real estate ownership in the picture, should this have any impact on the final allocation choice (e.g. gives space to further increase the stocks % )?

    Reply
    • jlcollinsnh says

      April 22, 2019 at 10:40 am

      When I have had RE, like now, I include it as an AA category.

      Then I look at my stock/bond balance without it to determine if those are still in my preferred range of 80/20.

      Reply
  58. Jeff says

    May 2, 2019 at 11:37 am

    Hi Jim,

    Post-retirement, would you continue to reallocate, or would you sell off the higher percentage asset for living expenses?

    For example for a desired 80/20 allocation, if stocks went down and it was 77% stocks 23% bonds, would you sell off some bonds to live off of? Or would you sell off more bonds not just for living expenses, but to buy some discounted stocks to bring it back to 80/20?

    Thanks,
    Jeff (pulling the RE trigger soon!)

    Reply
    • jlcollinsnh says

      May 4, 2019 at 11:38 am

      Hi Jeff…

      Yes, I continue to reallocate. Using your withdrawals to facilitate that is a great idea and I do that as well.

      Good luck on your RE!

      Reply
      • Jeff says

        May 6, 2019 at 8:38 am

        Hi Jim,

        Thanks for your reply.. in the following few months when you sell off some shares for living expenses, and if the taxable account is 100% VTSAX and the IRAs are a split of VBTLX and VTSAX to keep the desired allocation. Would you sell off the VTSAX from the taxable then reallocate in the IRA every time to stay with the desired 80/20? Apologies and please let me know if this is too in the weeds to be concerned about.

        Regards,
        Jeff

        Reply
        • jlcollinsnh says

          May 6, 2019 at 10:47 am

          Yes, that is it exactly.

          But also, I don’t obsess about keeping the allocation exactly at 80/20. Unless it “drifts” by at least 5% I just leave it alone.

          Indeed, Jack Bogle was of the opinion that you could just set it and forget it.

          Check out: https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/

          Reply
  59. Amir Sarosh says

    June 9, 2019 at 9:48 pm

    Hi Jim,

    Thank you for the wonderful collection of articles. They are very informative, simple and action oriented. I have also started listening to your book The Simple Path to Wealth on Audible and I am enjoying every bit of it!

    I have a quick clarification on my 401K plan. I know you recommend VTSAX however my 401 K plan from Vanguard does not offer that. It however offers Black Rock Life Path index funds which is a balanced funds using the indexing strategy with the composition of US stocks(Russel 1000), International Stocks(MSCI ACWI ex US), US Real Estate Equities and US Bonds all based on indexing strategy. The fund has an expense ratio of 0.13% which is not high however more than the VTSAX of 0.04%.

    My 401K plan from Vanguard also offers another index fund by the name Northern Trust S&P 500 Index Fund – DC – Non-Lending – Tier One with an expense ratio of 0.03%. This fund has pretty low expense ratio however is not as diversified as VTSAX and given that it is not a Vanguard index fund I am not sure about its credibility or any hidden costs etc. that may not be apparent right now.

    Would you recommend the NT S&P 500 Index over the Black Rock Life Index fund ?

    Regards,
    Amir

    Reply
    • jlcollinsnh says

      June 10, 2019 at 1:43 pm

      Hi Amir,

      Thanks for your comment!

      Mr. Collins is currently traveling and unable to respond just now.

      We find for most questions, he has already covered the topic. Using the Search button might very well provide your answer. If not, please post your question again after October 15, 2019.

      Reply
  60. Sue says

    September 11, 2019 at 6:03 pm

    I read your book and have set up a Vanguard account and bought $3,000 shares of VTSAX in a taxable account so far. I am self-employed and never had a job that offered a 401k. I have only $10K in a traditional IRA. I am planning to setup an individual 401k.

    I have at least $100K that I can move from a savings account into my taxable and tax-deferred accounts. I’m 48 and would like to retire in 12 years.

    My question is I’m not sure how to divide the 100K into the taxable and tax-deffered accounts? And, for example, if I decide to buy $50K of VTSAX in a taxable account, should I do it all at once? I know you said you don’t like dollar cost averaging, so I assume I should just throw it all in the account tomorrow and not worry about the current share price?
    Thanks for you book. It has helped a lot!

    Reply
  61. Samuel says

    December 23, 2019 at 5:24 am

    Dear JL Collins,

    My name is Samuel, an immigrant from Cameroon. I’ve been in the State for just about 7years now, currently reside in NC.
    Started looking into investing few months ago and I stumbled into your blog, it felt like I discovered a gold mine! I have read the Simple Path to Wealth, I spend much time on this blog and of course I’ve watched your Google talk video on YouTube and a bunch of your podcasts.

    I am truly grateful for people like you who make this stuff simple and fun.
    This is almost 2020 and your work is still changing lives literally
    I really hope you read this comment.

    Thank you!

    Reply
    • jlcollinsnh says

      December 25, 2019 at 11:41 am

      Welcome Samuel…

      …and thanks for the very kind words! 🙂

      Reply
  62. Jake Turner says

    November 12, 2020 at 9:58 pm

    Hi Jim,

    Just found your book this year and it has changed my life. I’m 39 and was planning to retire at 55 “early” but now realize 45 (hopefully 44) is possible.

    Question: I’m nearly 100% equities now and wondering at what point I should be shifting some into bonds. You mention at wealth preservation stage, which is 5 years away for me. I don’t plan to reallocate, but could start some of my VTSAX weekly investments into VBTLX as we get closer to the FI date. Do I wait and rebalance in 5 years? Or start slowly allocating some income now into bonds?

    Thanks!
    Jake

    Reply
  63. Jason Roberts says

    November 22, 2020 at 2:01 am

    Hi Jim,

    Not sure how regular you still come to your blog replay’s, but was curious. Say we renting, and saving for a deposit. Would it be best to keep this deposit in a bank account (even though it may take 2 or 3 years before we buy) or instead let it rest in a bond account, at least its earning something then? I want to put all of it in shares, but my luck, the day we decide to buy something, the share plummet?

    Thanks for great advice,

    Reply
  64. Karla says

    March 11, 2021 at 9:50 am

    Hi Jim….Not sure if you accept new posts here anymore. I am a single 55 year old who has JUST found your book and your Simple Path. I am self employed and not a high income maker. I have IRA’s that I am wanting to employ in VanGuard as you suggest.
    If I have only 10 – 15 years to ride this wave, (is there anyway to turn back time???) is investing aggressively with VTX still viable? I will be working for awhile. Not so set on a retirement date. But I do want to grow my wealth that I have. Also, what would you advise for buying into VTX products at the time of my post (March 2021). We are on a rise…but word on the street is we are heading for a recession. Thanks.

    Reply
  65. Ashok says

    June 4, 2022 at 7:18 pm

    Hello Jim,

    I am new to rebalancing and would like to know what would constitute a 20% (up or down) move in the market? Is it the S&P 500 Index or other index funds? Does it refer to 20% movement in a single day or over a period of certain days? Please let me know.

    Reply

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      • Greetings from Prague & a computer question
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      • Meet Mr. Money Mustache, JD Roth, Cheryl Reed & me for a Chautauqua in Ecuador
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      • Consignment Shops: Best business model ever?
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    • ► January (5)
      • Social Security: How secure and when to take it
      • Fighting giraffes, surreal landscapes, dancing with unicorns and restoring a Vanagon
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      • See you next year....until then: The Origin of Life, Life on Other Worlds, Mechanical Graveyards, Great Art, Alternative Lifestyles and Finding Freedom
      • Stocks -- Part XV: Target Retirement Funds, the simplest path to wealth of all
      • Stocks -- Part XIV: Deflation, the ugly escort of Depressions.
      • Stocks Part XIV: Deflation, the ugly escort of Depressions.
      • Stocks -- Part XIII: The 4% rule, withdrawal rates and how much can I spend anyway?
      • How I learned to stop worrying about the Fiscal Cliff and you can too.
    • ► November (2)
      • Rent v. owning: A couple of case studies in Ecuador
      • So, what does a month in Ecuador cost anyway?
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      • See you in December....
      • Meet me in Ecuador?
      • The Podcast: You can hear me now.
      • Stocks -- Part XII: Bonds
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      • Stocks -- Part XI: International Funds
      • The Smoother Path to Wealth
      • Case Study #I: Putting the Simple Path to Wealth into Action
      • Tales of Bolivia: Calle de las Brujas
      • Stocks -- Part X: What if Vanguard gets Nuked?
      • Travels in South America: It was the best of times....
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      • Yellow Fever, closing up shop for the summer and heading to Peru y Bolivia
      • I could not have said it better myself...
      • Stocks -- Part IX: Why I don't like investment advisors
      • Happy Birthday, jlcollinsnh; and thanks for the gift Mr. MM!
    • ► May (6)
      • Stocks -- Part VIII: The 401K, 403b, TSP, IRA & Roth Buckets
      • Mr. Money Mustache
      • The College Conundrum
      • Stocks -- Part VII: Can everyone really retire a millionaire?
      • Stocks -- Part VI: Portfolio ideas to build and keep your wealth
      • Stocks -- Part V: Keeping it simple, considerations and tools
    • ► April (6)
      • Stocks -- Part IV: The Big Ugly Event, Deflation and a bit on Inflation
      • Stocks -- Part III: Most people lose money in the market.
      • Stocks -- Part II: The Market Always Goes Up
      • Stocks -- Part 1: There's a major market crash coming!!!! and Dr. Lo can't save you.
      • You can eat my Vindaloo, mega lottery, Blondie, Noa, Israel Kamakawiwo 'Ole, art, film and a ride on the Space Shuttle
      • Where in the world are you?
    • ► March (7)
      • How I lost money in real estate before it was fashionable, Part V: Sold! and the taxman cometh.
      • How I lost money in real estate before it was fashionable, Part IV: I become a Landlord.
      • How I lost money in real estate before it was fashionable, Part III: The Battle is Joined.
      • How I lost money in real estate before it was fashionable, Part II: The Limits of the Law.
      • How I lost money in real estate before it was fashionable, Part I: Impossibly Naive.
      • You, too, can be conned
      • Armageddon and the value of practical skills
    • ► February (6)
      • Rent v. Owning Your Home, opportunity cost and running some numbers
      • The Casanova Kid, a Shit Knife, a Good Book, Having No Regrets, Dark Matter and a bit of Magic
      • What Poker, Basketball and Mike Whitaker taught me about Luck
      • How to Give like a Billionaire
      • Go ahead, make my day
      • Muk Finds Success in Tahiti
    • ► January (5)
      • Travels with "Esperando un Camino"
      • Beanie Babies, Naked Barbie, American Pickers and Old Coots
      • Selling the House and Adventures in Staging
      • The bashing of Index Funds, Jack Bogle and a Jedi dog trick
      • Magic Beans
  • ► 2011 (22)
    • ► December (1)
      • Dividend Growth Investing
    • ► November (2)
      • The Mummy's head, Particle Physics and "Knocking on Heaven's Door"
      • "It's Better in the Wind" or why I ride a motorcycle
    • ► October (1)
      • Lazy Days and School Days
    • ► July (2)
      • The road to Zanzibar sometimes goes thru Ecuador...
      • Johnny wins the lotto and heads to Paris
    • ► June (16)
      • Chainsaws, Elm Trees and paying for College
      • Stuff I’ve failed at: the early years
      • Snatching Victory from the Jaws of Defeat
      • The. Worst. Used. Car. Ever.
      • Top Ten reasons your future is so bright it hurts my eyes to look at it
      • The Most Dangerous Words Your Customer Can Say
      • How not to drown in The Sea of Assholes
      • What we own and why we own it
      • The Ten Sales Commandments
      • My ever so formal and oh so dry CV
      • How I failed my daughter and a simple path to wealth
      • The Myth of Motivation
      • Why you need F-you money
      • My short attention span
      • Why I can’t pick winning stocks, and you can’t either
      • The Monk and the Minister

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