How I Invest – Investments

Way back in the glory days of October I started laying out a description of how I invest.

Previously, we looked at the different accounts that I use – the buckets that hold my investments. Now it’s time to look at the investments themselves.

What you’ll find is that I don’t follow the traditional advice here. I don’t think I’ve seen my strategy advocated by anyone anywhere. I’ve honestly been a bit hesitant to lay it out because it feels a bit odd coming from someone who is all about optimizing.

But here is where I will admit to, explain, and defend, my investing strategy.

The Investments

My investments differ by account

Each bucket has access to different funds. This limited access has defined my strategy.

Instead of picking a single asset allocation (overall mix of local/international stocks/bonds/other investments) and aiming to match that across my whole portfolio, I have picked a single solid investment in each bucket and I plow all of the money in that account into that investment.

100% of the money in my 457(b) is in the Vanguard Target Retirement 2050 Fund (VFIFX).

100% of the money in my IRA and my taxable account is in the Vanguard Total Stock Market Index Fund (VTSAX).

100% of the money in my HSA is in the Schwab Total Stock Market Index Fund (SWTSX).

The percentage of my portfolio in each fund varies and is based entirely on how much money gets deposited into each of my accounts.

Index Investing

I am an index investor.

I know that the odds are that I cannot beat the market.

People spend all day every day studying how to beat the market and most of them still fail. I’ve got a full time job, some side jobs, and a family.

Recognizing that, I try to match the index rather than trying to beat it. I buy index funds.

Index funds are baskets of stock that are intentionally picked to move in tandem with a specific index. The Vanguard Total Stock Market Index Fund (and the Schwab Total Stock Market Index Fund) are designed to match the movements of the US stock market.

When the market is up, I am up. When the market is down, I’m down.

That works for me. Over time, the market has always gone up. I don’t need the money any time soon, so I’m not afraid of any short-term stock market crashes.

Minimizing Fees

When matching the market, the way to get the most out of your money is to minimize your fees.

Even when not matching the market the best predictor of returns is fees. The lower the fees, the higher the returns.

With that in mind, I made sure to find low fee funds for each of my accounts.

The Vanguard Target Retirement 2050 Fund has a 0.07% expense ratio.

The Schwab Total Stock Market Index Fund has a 0.09% expense ratio.

The Vanguard Total Stock Market Index Fund has a 0.04% expense ratio.

Always make sure to check the expense ratios of funds before you buy. The research shows that the expense ratio is a better predictor of performance than any other measure, including past performance.

Asset Allocation

Okay, so let’s address the asset allocation elephant in the room.

Most people recommend setting a target asset allocation.

This means looking at your goals and your risk tolerance and deciding on how you want to balance your portfolio between stocks, bonds, cash, and other investments.

There are a lot of benefits to sticking with a target asset allocation.

First, when done intelligently, a good asset allocation can lead you to better returns.

It can force you to buy low and sell high.

Let’s say you want to have 50% stocks and 50% bonds. If stock prices are rising rapidly and bonds are not, then soon you’ll find that your portfolio consists of 55% stocks and 45% bonds simply because stocks have grown faster than bonds. You then sell stocks that have performed well and buy bonds that have struggled to get back to a 50/50 portfolio. This is called rebalancing.

Without having that target allocation to fall back on, it is very hard for us to buy low and sell high. Our instinct is to ride the hot hand. There’s a party in the markets and we don’t want to leave early.

Similarly, nobody wants to buy a loser. It is hard to remind ourselves that these things are cyclical and that the losers and winners are going to flip sometime soon. A target asset allocation takes these decisions out of the realm of emotions and into the world of cold hard numbers.

The target asset allocation also helps us stick to our strategy when markets get crazy. If the stock market falls 50%, it’ll be really easy to convince yourself that it could fall further and you should get out. That this time is different. That everything is collapsing.

A target allocation allows you to remove emotion from the equation again. You’ve got your numbers and as long as you keep to them you’ll be fine in the end.

It helps you stick to your strategy.

Abandoning Target Asset Allocation

As you can see from my account-based strategy, I don’t have a target asset allocation. 

I don’t rebalance.

But I will stick to my strategy.

My investing is automated and I won’t touch the money for many years.

I’m not at risk to buy high because I buy based on when paychecks hit my bank account rather than based on what I see the markets doing.

I’m not at risk to sell low because I’m not going to sell anything for a long time.

I’m not at risk to panic and change my investment strategy because I know I don’t need the money. I am working in a very stable job that is not at risk to disappear in an economic downturn. There is minimal risk of unemployment coinciding with a market crash.

Plus, I’m part of a two income household in which we both make similar money. We also keep our expenses pretty low. If one of us lost a job, we could lean on the other’s income and emergency funds for quite a while as we search for new employment.

Conclusions

It is certainly possible that I could eek out higher returns with a better asset allocation. Probable, even.

I’m very heavy in US stock, so maybe I should have more money in international stock. On the other hand, maybe I should be entirely in the Vanguard Total Stock Market Index Fund.

I’m very heavy in stock, so maybe I should have more bonds. On the other hand, maybe I should have no bonds.

Right now I spend zero time researching these things and managing my money. I have a good, simple portfolio with low fees and no time commitment.

I did a lot of research when choosing my investments originally, and none since. I have a lot of other projects on which I would rather spend my time.

Maybe (probably) at some point in the future I will reassess my allocation and rebalance my portfolio into something more structured and strategic. Maybe at some point I’ll have enough money in my accounts to feel like seeking out that extra return is worth the extra time and effort.

But not yet.

So what do you think? Am I doing it all wrong? What are you invested in? Let us know in the comments below!

Also, please note that this is simply a strategy that works for me. I know my own risk tolerance, goals, and timeline. Please don’t take this post as advice suggesting that this plan would work for everyone.

9 thoughts on “How I Invest – Investments”

  1. Love your strategy! It’s simple. It’s very equity based but I think that’s okay based on your savings rate and age. You have some bonds and automatic rebalancing in the target retirement fund but that should not bring you down much. Of course you can always tinker with your investments but I think you 80/20 this one well. Good luck.

    Side note – I can’t get comment luv to work. Any idea why?

    1. Yeah, I think index funds are a great place to go heavy in stock because the risk of being so stock-heavy is offset by the security of buying the whole market. As long as you have a long time horizon, this definitely seems worth it to me. At some point in the near future I probably should put in the research on International and decide how I want to move forward on that front. It just hasn’t been a priority.

      Thanks for the comment!
      Matt recently posted…When is More Money Worth Your Time?My Profile

  2. I love the simplicity!

    I’m curious about the target date fund. Not sure of your age, but a target date of 2050 is 30+ years away. Personally, I’d also have that 100% stocks. Over suck a long timeframe, dropping those bonds could make a big difference. [That fund currently holds about 10% of bonds, which will increase over time.]
    Brad – MaximizeYourMoney.com recently posted…6 Important Lessons For Starting a Business You Need To KnowMy Profile

    1. I picked the 2050 because it was the farthest out that was available, so it would be the most aggressive. I wanted that bond drag to be minimal. The target date funds just happened to be the best low fee option with the provider. Depending on my situation when I leave this job I will consider switching that over to an all stock fund.

      Thanks, Brad.
      Matt recently posted…When is More Money Worth Your Time?My Profile

  3. My strategy has changed over time and while I like index funds, I started off with an individual stock from my grandmother and it has done so well that it’s hard to get away from my tendency to want to make a few high dividend paying individual stock choices. And I have some bonds and I’m holding some cash, but then we’re trying to pursue our semi-retired life, so we’re in a different situation. Real estate, nontaxable bonds, and dividends are all part of our mix.
    Emily @ JohnJaneDoe recently posted…State of the Blog: October 2017My Profile

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