What we own – portfolio details
I’ve covered a couple of the ways that Grizzly Mom and I are hacking away at our spending levels and I’ll continue to detail MANY more in the coming weeks. But I thought I should take some time to detail exactly where we’re putting all of this excess cash and start of a series of posts on the stock market and investing. The bottom line – simplicity!
Many people think investing is complicated. Or that they don’t want to deal with the hassle of it. But it’s not complicated and it’s not a hassle. If your investment portfolio takes longer than about 1-2 hours per year to manage you’re doing something horribly wrong. Stop! And reduce everything down to a dirt simple portfolio.
First – Index Funds! Index Funds! Index Funds!
Say it with me! We love Index Funds! I had the VERY good fortune of having as my introductory finance professor in undergrad a nice old guy named Burton G. Malkiel. Burton Malkiel along with John Bogle are seen as pioneers in the advanced field of “Investment Advisers and Mutual Funds are ripping you off”. It’s a long and storied area of research dating back to the 60s. The basic premise is that anyone who tries to convince you that they can beat the stock market on a consistent basis is either A) stark raving mad or B) A liar and a crook. But instead of the very logical responses of locking A up in a padded room and locking B up in a cell, many people have instead decided to hand over large portions of their wealth to them. This is not a smart decision. Instead, we invest only in index funds, and only with Vanguard for what is outside our 401k accounts.
I’m planning a much more detailed post on why index funds are great and why any sort of asset management is awful, but for now just take it as a given that I won’t be suggesting anything that includes a fee above 0.12% per year. Additionally, I plan on a longer discussion for each asset listed below, but here is the overview.
Our Entire Portfolio in Five Funds
30% Vanguard SP500 Index fund – The SP500 is essentially the 500 largest US corporations. The index is weighted by the total $ value of each company. The Vanguard Fund simply tracks this index and they do it for dirt cheap. Stocks are historically the best-performing asset class there is and so we dump most of our money here.
30% Vanguard Extended Market Index Fund – Similar concept to the SP 500 except the extended market is every public company in the US except for those in the SP500. Having an equal distribution over-weights towards these smaller stocks relative to the actual value of the total US stock market. We’ve over-weighted this way simply because these smaller companies, while slightly riskier have typically had a higher average return than the SP500.
20% Vanguard International Index Fund – All the publicly owned companies in the world outside of the US. I have a fundamental belief that there is going to be rapid growth coming from global markets over the next decades. As a result, we put some of our money into international stocks.
10% Vanguard Total US Bond Index Fund – All the investment grade bonds in the US packed into one fund. Bonds serve as a bit of risk hedge to make the entire portfolio slightly more stable, particularly in down markets.
10% Vanguard REIT Index Fund – Basically another big index of real-estate companies. Essentially serves as a hedge against rapid inflation, and as an asset class that offers a hedge against other movements in the stock portfolio.
If we wanted to get crazy simple we would bring it down to just the following
60% Vanguard Total US Market Index Fund
30% Vanguard International Index Fund
10% Vanguard US Bond Index Fund
That’s it, nothing more. One question that will probably arise if we do any re-balancing to our portfolio. Answer – sometimes, if I remember, but overall I don’t really pay that much attention to it. If it get’s really far out of whack I’ll just change where I’m diverting any inflows at this point. All in, I take about 2 hours a year to manage our investments, and that’s all I need.
The accounts and where it all sits
All of our accounts except for the 401k’s at our current employers sit with Vanguard – which is our #1 recommendation for ANY investing outside of a 401k.
Taxable Accounts – All the international funds + any leftovers from the extended market fund. This is primarily because of tax implications. You can deduct the taxes you paid to the foreign country from your own income tax returns here in the US.
401ks/Traditional IRA’s – All the bond and REIT funds + any of the SP500 or extended market not held elsewhere. Bond funds and REIT funds, due to relatively high interest and dividend payments, should never be held in a taxable account if you can avoid it.
ROTH IRAs – Extended market and SP500 funds. Basically everything else not covered.
So that’s it. Every investment we currently own in less than 800 words. Here is the current breakdown.
|SP500 Index||Extended Market Index||International Index||Bond Index||REIT Index||Sum|