My Personal Investment Plan

Photo courtesy of Caleb Roenigk

One of the most important posts on this site is a comprehensive guide to the investment philosophy I follow myself, and the one I recommend most often when my clients ask for advice. Here it is: The Beginner’s Guide to Index Investing.

That post has all the information you need to understand why that strategy works, and has important tips for helping you get started.

But I know that when I first started investing, it was helpful to see examples of how other people actually did it. Not because I wanted to copy them, but just because it can all feel a little abstract until you see it in action.

So today, I’d like to show you how my wife and I have implemented our own personal investment plan. This is not meant to be a recommendation for you, as everyone’s situation is different. My hope simply is that seeing how we’ve done it will be helpful as you come up with your own plan.

Quick note: For step-by-step guidance through creating YOUR personal investment plan, check out the guide Investing Made Simple.

What are we investing for?

The investment strategy I’m describing here is for our retirement savings. We have multiple short-term savings goals that are kept in much safer investments, primarily savings accounts. Retirement is our main long-term goal at this point, and therefore the only major goal for which we have an investment plan.

Our asset allocation

Our overall asset allocation is 70% stocks and 30% bonds.

The stock portion is split with 50% in the US stock market and 50% in the international stock market.

The bond portion is 50% intermediate-term nominal US Treasury bonds and 50% TIPS (Treasury Inflation-Protected Securities).

So the overall breakdown looks like this:

• 35% US stock market
• 35% International stock market
• 15% Nominal US Treasury bonds
• 15% TIPS

This allocation will not change throughout our lifetime except that as we get close to and into retirement we will keep a few years worth of cash on hand at all times. But the invested portion of our money will always maintain this same allocation.

Our investment selection

Our entire asset allocation is accomplished with just four funds, all of which are held at Vanguard.

The four funds we use are:

• VTSAX, representing the entire US stock market
• VTIAX, representing the entire international stock market
• VFITX, representing nominal US Treasury bonds
• VIPSX, representing TIPS

The expense ratio of each fund ranges from 0.05-0.20% and because we hold them directly with Vanguard, there are no commissions to buy or sell. These four funds allow us to achieve our desired asset allocation in a simple, low-cost manner.

The logic behind our asset allocation

The 70-30 split is extremely unscientific. Essentially we feel like it gives us good access to the stock market, which is where the majority of our long-term growth will come from. But we also have a significant enough invested in bonds that we should have some cushion whenever there is a big market downturn. There is no perfect allocation for achieving this kind of balance, but 70-30 is certainly in the ballpark and it feels right for us.

For the stock portion, we simply wanted to invest in as much of the global stock market as possible. In other words, we wanted to maximize our diversification. The 50-50 split between US and international is partially for simplicity and partially because it approximates the actual proportion of US to international markets (which is somewhere around 45% US and 55% international as I’m writing this).

The bond portion of our portfolio is not designed to provide us with maximum returns. Instead, its primary purpose is to provide reasonable protection during times when the stock market is falling. This is why we chose to invest in US Treasuries, which are as close to a guaranteed bet as you can get in the world of investing.

In theory (and often in practice, as witnessed in 2007 and 2008), when the stock market is tanking, investors flee to the safe haven of US Treasuries. This pushes the value of those bonds up, which gives the bond portion of our portfolio a nice return at exactly the time that our stock portion is declining. This helps balance things out so that we’re never too high or too low.

The 50-50 split in our bonds between nominal US Treasuries and TIPS is based on our desire to protect ourselves in different market conditions. We chose intermediate-term nominal US Treasuries because it’s a good approximation of the entire Treasury market. We’ve chosen to include TIPS because they will give our portfolio some protection against unexpected inflation while still providing the security a US government guarantee.

Why a static asset allocation?

I mentioned above that we plan on keeping our asset allocation steady all the way up to and even through retirement. The only adjustment we will make is keeping a few years worth of cash on hand at all times while in retirement. This approach is different than the conventional wisdom, which advocates a higher allocation to stocks when you are younger and a gradual shift to a more conservative allocation as you reach and progress through retirement. Though we are doing this in a way by increasing our cash reserves, it’s a slightly different method.

The logic is essentially that we feel like we’ve picked an asset allocation that balances our desire for long-term growth with our long-term risk tolerance. Even in retirement there will likely be a desire for long-term growth, as we may live well past our retirement date and will need assets to support us. We don’t see much of a reason why our long-term investment strategy should differ when we’re 65 and may need the money for 30+ years than when we’re 28 and need the money in 30+ years.

Having a few years’ worth of expenses in cash reserves will allow us to ride out any reasonable market downturns without having to sell at a significant loss. We certainly won’t be guaranteed to avoid big losses, but it will lessen the likelihood. And although cash will be a significant portion of our assets, I hesitate to include it as part of our asset allocation because it won’t be measured as a percentage of assets. Rather, we’ll have a target dollar amount that we want on hand and any extra money will be invested.

Keeping an open mind

I’ve said before that creating a “good enough” plan and sticking to it is investing priority number 1. We feel that our plan is certainly good enough and we have every intention of sticking with it for the long-term. Which should make the rest of our investment lives pretty boring, though hopefully profitable.

With that said, we will certainly keep an open mind to making adjustments if our circumstances change. Maybe we receive a big windfall and decide that we don’t need to be quite as aggressive with our allocation. Maybe some new research comes out that changes what we know about investing and forces us to reconsider our strategy. Whatever the case, while consistency is key, regularly checking in and re-thinking habits is an important part of financial success.

Summary

We’ve done our best to take all of the research-backed evidence available to us to make a plan that fits our needs. My hope is that this information helps you think about how to implement your own investment plan. Feel free to give me feedback in the comments or to let me know what you’re thinking for yourself!