Today’s post may surprise you, scare you, or even enlighten you (maybe all three?), but I’m sharing it with you anyways because that’s what us financial bloggers do. We dish it out exactly how it plays out in our lives, and then we leave it open for every jackal with an internet connection to either praise us or kindly debate what big idiots we are.
And I love every moment of it :)
[This is the opposite of what financial planners are allowed to do btw - which is why I'll never be one. Sharing general investment advice online with you may be fine, but I'm not interested in generalities here - I want to show you specifics so you can get a real life example of how people manage their money, and then make your own decisions from there. It's what makes blogging so great - real life stories from real life people doing real life things! Just don't sue me*, okay? ;)]
The Background
If you recall, last month I decided to get off my ass once and for all and start paying attention to my investments again. There’s tons of stuff in this life that I’m good at (saving, hustling, getting the money TO invest somewhere), but the one area I’ve failed over and over again in is coming up with a robust investing strategy. Though I was never shy at getting creative.
Here were the last two strategies I used in maxing out my RothIRA:
The “Copy what Warren Buffett is doing” Strategy
The “Invest in the companies you love (and use)” Strategy
It’s literally been years (2? 3?) since I last paid real attention to all my investments (other than pouring in the money), so I finally pulled the trigger and made the switch from USAA to Vanguard, effectively ending my “all accounts under one roof” mantra I had lived all these years. That tells you how much I believe in this new strategy though. Or, more specifically, Vanguard.
I won’t go into all the details again as to why I
want to make sweet passionate love with them
chose them (you can read all about it here), but in a nutshell:
I wanted to simplify
I wanted to be lazier
I wanted extremely low fees
I wanted a place I could trust and love as much as I do USAA
And at the end of the day I didn’t want to think about it any more
These are the three main posts that eventually led to this “a-ha” moment:
Portfolio ideas to build and keep your wealth @ jlcollinsnh
How to make Money in the Stock Market @ Mr. Money Mustache
Thriftygal’s Money Strategy @ Thriftygal
Prior to this move I had a total of 5 separate investment accounts – A SEP IRA, a Roth IRA, and three Traditional IRAs (remember my crazy IRA Test??) – and I was finally done dicking around once and for all… I needed a plan that was much more aligned with my new found vision here, which was basically:
Find a smarter, lazier, way to grow my money
Meaning, set up a plan that EMBRACES laziness, but one that makes sense and fully allows you to “set it and forget it” while making a decent amount of money too. Keyword being, *decent*. I’m not out to become a billionaire over night (though that would be nice!) but I do want to make a fair amount over time and I’m totally fine being patient and waiting for it. The whole 80% type deal. I’ll gladly take 80% of a total 100% amount of money for minimal effort vs 90-100% and killing myself to get it. Which of course is never guaranteed since we all know you can’t time the market anyways (you do know you can’t time the market, right?).
So after all my reading and thinking, I came to the conclusion that it’s all about INDEX funds for me. No more fancy stock picking, no more weird strategies of picking out my favorite companies, just plain ol’ “you make money when the overall stock market makes money, and you’ll lose money when the overall market loses money.” (Which is when you pick up even MORE shares, btw!). And if you believe in the markets all around, as I do, then why not cast a wider net around it?
Here’s a graph on how the Dow has performed over the past 100 years, even though it needs to be updated (we’re now hovering around the 17,000 mark):
(Hat tip to Thriftygal / Wikipedia)
If you think it’ll continue going up in the long term, then you might like Indexing :) It certainly has its fair share of supporters not only from the personal finance blogger world, but also Vanguard itself (d’uh – they INVENTED index funds!) and even the main man himself, Mr. Warren Buffett. Who recently turned heads when he shared that he wants his own estate to go almost entirely to index funds once he’s outta here. And he’s the smartest investor of all time!
I called up my stock broker friend to get his advice on this too, and he just laughed at me. I asked if he hated Vanguard, and he said no. He hated how boring it was! I told him luckily I wasn’t in it to have fun (even though “fun” is in index FUNds – zing!), I was in it to win it ;) And according to everything I’ve read, statistically the odds are in your favor going this route than others long term anyways. Even my stock friend gets it wrong and he spends 60 hours a week researching this stuff!
But I digress…
Here is what I used to be invested in:
To put things in perspective, here are all the stocks I used to own as of a month ago. $350,000+ invested, and I couldn’t tell you what half these funds consisted of, nor their expense ratios (partly because I never paid attention, and partly because it’s confusing as hell):
USEMX — USAA Emerging Markets Fund
USAAX — USAA Growth Fund
USHYX — USAA High Income Fund
USAIX — USAA Income Fund
USISX — USAA Income Stock Fund
USIBX — USAA Intermediate-Term Bond Fund
USIFX — USAA International Fund
USAGX — USAA Precious Metals and Minerals Fund
USRRX — USAA Real Return Fund
USSPX — USAA S&P 500 Index Fund Member Shares
USSBX — USAA Short-Term Bond Fund
USCAX — USAA Small Cap Stock Fund
IIBWX — Voya Intermediate Bond Fund Class W
UCAGX — USAA Cornerstone Aggressive Fund
USCRX — USAA Cornerstone Moderately Aggressive Fund
USSPX — USAA S&P 500 Index Fund Member Shares
URFFX — USAA Target Retirement 2050 Fund
USAWX — USAA World Growth Fund
ABEYX — American Beacon International Equity Fund Class Y
DDVIX — Delaware Value® Fund Institutional Class
SGOIX — First Eagle Overseas Fund Class I
HLMIX — Harding Loevner International Equity Portfolio Institutional Class
HNVIX — Heartland Value Plus Fund Class Institutional
HWSIX — Hotchkis and Wiley Small Cap Value Fund Class I
EMBIX — Lazard Emerging Markets Equity Blend Portfolio Institutional Shares
LISIX — Lazard International Strategic Equity Portfolio Institutional Shares
LKSMX — LKCM Small-Mid Cap Equity Fund Institutional Class
MFEIX — MFS® Growth Fund Class I
PTTRX — PIMCO Total Return Fund Institutional Class
SEMNX — Schroder Emerging Market Equity Fund Class Investor
TGEIX — TCW Emerging Markets Income Fund Class Institutional
AMZN — Amazon.com INC
PNRA — Panera Bread Company Class A
SBUX — Starbucks Corp
TGT — Target Corp
TJX — TJX Companies INC New
ALLE — Allegion Public LTD
AXP — American Express Company
T — AT&T INC
CSCO — Cisco Systems INC
KO — Coca-Cola Company
COP — ConocoPhillips
ETN — Eaton Corp PLC
GE — General Electric Company
IR — Ingersoll Rand PLC
WFC — Wells Fargo & Co NEW
XLP — Sector Consumer Staples Select Sector SPDR ETF
47 total stocks/funds. Ridiculous.
And here’s what I’m Invested in now:
VTSAX — Vanguard Total Stock Market Index Fund Admiral Shares
Just one kick-ass fund :) And I know exactly what’s in it (3,671 stocks), and exactly what the expense ratio is (0.05%, lower than 95% of similar funds out there). And the beauty is it holds all my favorite stocks too, like the Amazons and Targets, and even more so Warren Buffett’s Berkshire Hathaway! UPDATE: It also has a dividend of 1.84% – forgot to mention that earlier (thanks commenter, Whiskey).
Here’s more about the fund according to Vanguard:
Created in 1992, Vanguard Total Stock Market Index Fund is designed to provide investors with exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks. The fund’s key attributes are its low costs, broad diversification, and the potential for tax efficiency. Investors looking for a low-cost way to gain broad exposure to the U.S. stock market who are willing to accept the volatility that comes with stock market investing may wish to consider this fund as either a core equity holding or your only domestic stock fund.
(Vanguard has an “Investor shares” version of the fund too, fyi, for those who can’t invest $10,000 or more into the fund (VTSMX). The expense ratio is a tad bit higher @ 0.17% (still drastically better than 87% of the competition) but the stocks you hold here are exactly the same)
Now it may look dumb/scary to “have all your eggs in one basket” here – which was my first concern – but the reality is it isn’t just one stock. It’s one stock ticker, but over 3,600 stocks (ie companies). When you invest in index funds you invest in itty bitty fractions of hundreds/thousands of companies. If any one of them die out at any time, it doesn’t kill your money. But on the flip side, it doesn’t grow your money as fast either like, say, if one of them takes off like Apple. It’s an average person’s game, with better than average results over time (and by “average” I mean compared to most of those day traders and probably your friends).
There are, however, downsides to this VTSAX strategy, specifically you’re not invested in bonds or international markets at all. But at this stage and age of my life I’m okay taking on more risk (ie no bonds), and most, if not all, stocks in VTSAX does business around the world anyways. So from my understanding you still do have exposure to the foreign markets, just not directly like, say, by investing in funds that hold actual foreign companies.
This is one area I’d like to learn a lot more about, though, so if any of you care to chime in with thoughts I’d love to hear them! I’m definitely learning as we go here.
VTSAX vs. VASGX
The other fund I was considering, if you’re interested, was VASGX (Vanguard LifeStrategy Growth Fund). This is the fund Mike Piper from Oblivious Investor has every one of his retirement pennies in (see, I’m not the only crazy one!), and which is still aggressive’ish, but less so than VTSAX. I debated hard going this route instead -which would still be just ONE fund, only diversified more, but ultimately chose the more aggressive route – at least for now.
(And btw “aggressive” in index funds is much different than “aggresive” in stock picking :) With one you’re invested in hundreds or thousands of companies and the other you’re invested in a single company. So “risk” here is different)
Here’s the quick bio on this fund:
The LifeStrategy Funds are a series of broadly diversified, low-cost funds with an all-index, fixed allocation approach that may provide a complete portfolio in a single fund. The four funds, each with a different allocation, target various risk-based objectives. The Growth Fund seeks to provide capital appreciation and some current income. The fund holds 80% of its assets in stocks, a portion of which is allocated to international stocks, and 20% in bonds, a portion of which is allocated to international bonds. In addition to stock market risk, the fund is also subject to currency risk and country risks. Investors with a long-term time horizon who are looking for growth of principal over time and who can accept stock market volatility may wish to consider this fund.
And here is what VASGX holds:
56.1% — (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares
24.0% — (VGTSX) Vanguard Total International Stock Index Fund Investor Shares
16.0% — (VTBIX) Vanguard Total Bond Market II Index Fund Investor Shares
3.9% — (VTIBX) Vanguard Total International Bond Index Fund
So as you can see, almost half of the fund covers international exposure along with bonds, and only 56% of the fund I’m currently invested in (again, I’m in the “Admiral Shares” version of VTSMX since I have more than $10,000 invested taking advantage of the lower fees). And this VTSMX has a low expense ratio too of only 0.17%.
When I asked my good blogging friend Jim Collins what he thought between the two, whom I trust heavily since he’s been retired for over 20 years and only invests in index funds & Vanguard himself (he’s in a few vs one due to his age and phase in life), he told me this:
VTSAX is the total US stock market index: 100% US stocks. Holding VTSAX is very aggressive. Recommending it as a sole holding, as I do, is very much an outlier concept. In fact I am aware of no other financial writer who does. So Mr. Piper definitely has the majority opinion on his side.
Holding VASGX is also very aggressive at 80/20, but less so than VTSAX. Moreover, it will become steadily more conservative — adding more bonds — over the years. That’s the idea behind TRFs. That’s also why, along with it being a fund of funds, the ER is a bit higher. You are paying for that automatic rebalancing and the multiple fund diversification.
It is certainly not a dumb choice. As you know, personally my preference is VTSAX. But I am Very aggressive in my investing and have proven my ability to stay the course during crashes. That’s absolutely critical, with either of these actually.
Looking 20+ years out, VTSAX will very likely make you richer, unless we go the way of Japan. But the race will be close and your savings rate will be the more powerful element in the mix than your fund choice.
I then asked what he would do if he were me and he responded with:
Yep, if it were my money I’d do VTSAX. In fact I do, 75% and the other 25% in bonds. Then I just rebalance occasionally to keep the percents where I want them, Easy peasey and cheaper ERs than with a TRF.
If I were still working and adding new money it would be 100% VTSAX. The new money has the same kind of smoothing effect as the bonds do for me now.
It was at that point I pulled the trigger :) I don’t have a problem with risk(ier) – I’m young and have plenty of time to ride the waves! Plus you can always tweak it later as life changes.
In conclusion…
So, in a nutshell I used to be invested in over 45 stocks/funds across 5 different retirement funds, and now I’m only invested into ONE fund across 2 accounts: my SEP Ira and my ROTH Ira.
(Did you know you can merge Traditional Iras with SEP Iras btw? According to Investopedia, “The only difference is that the SEP IRA is allowed to receive employer contributions. Therefore, you can combine the SEP IRA into the Traditional IRA without any ramifications. When doing so, move the assets as a (nonreportable) trustee-to-trustee transfer.” I had no idea!)
And now, instead of all my investments under USAA’s roof where my other 10+ accounts are sitting, it’s all under the roof of Vanguard. And with a much better peace of mind too. It sucked to research everything and figure out what’s best for our family at this stage of the game (again, this stuff doesn’t interest me one bit!), but it had to be done and now we can go back to doing what we do best – MAKING money vs investing it ;) Or rather, finding the best place to invest it. Now we’ve got a solid foundation!
I know this post was pretty damn long, and I probably forgot a few things along the way, but I DO hope it helps :) Even if just a little. Remember that there is never a one-strategy-fits-all here with investing (just like with managing your money), but there are templates that get you close. And I hope this gives you another idea to either love on or hate on depending on your own style .
Let me know what you think in the comments below! Was this a smart move? Would you have done something differently? Are you doing something similar now? Please share any and all thoughts with us (even your OWN portfolio mix!) so we can all learn more… Most people get more out of the comments here than they do my posts anyways (hah!) so if not for me, do it for them ;)
Here’s to financial freedom!
———-
* Seriously, I’m not a licensed profession. Please take all this as informational purposes only and do your own research before investing in anything. I love you and want to keep blogging transparently but I can’t if it becomes a problem :)
PS: Btw, for anyone who’s making the switch to Vanguard, make sure to ask them the best way to xfer your funds from your old account to theirs – specifically with “cashing out” of your old funds and into new Vanguard ones… There’s ways you can save the selling fees that they can help you with – the one question saved me at least $400 when doing all the trades at the end. And fyi you can also just move your same funds to theirs too and then pick the new funds later. Just ask them what’s best as they’re customer service is killer :)
PPS: I have no affiliate with Vanguard at all and certainly not getting paid to say kind words – I’m just their newest fanboy!
[Funny cat canoe by Elvis Weathercock]