My Personal Investment Plan

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 my book: Smart Investing for Your 20s and 30s.

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!

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27 Comments... Read them below or add one of your own
  • DJ Wetzel June 5, 2013

    Keeping 30% invested in bonds will definitely give you a stable base for your investments should the stock market take a wild swing. I am curious about how your international investments have performed recently, and what you anticipate the future to hold for these. I have heard a lot of people recently pull back their international investment allocation because the global economy scares them. How often do you anticipate looking at performance and possibly reallocating?

    • Matt @ momanddadmoney June 5, 2013

      I don’t give any thought to short-term possibilities. I’m well aware that the market will move up and down over time, and there will always be a new scare or some new hot investment area. Trying to chase those short-term movements is a losing game and not something I’m interested in. So to answer your question, my international allocation will remain at 35%. The stable allocation is based on a long-term track record of diversification providing great benefits.

      But just to satisfy your curiosity, since 7/10/2012, which is when my wife and I really combined things and I started tracking this well, our IRR on just the international portion has been 22.27%. But this return isn’t indicative of any kind of skill, it’s just a reflection of what the markets as a whole have done.

  • Andrew June 5, 2013

    I’m also a big fan of Vanguard and was considering consolidating all my investments there for simplicity’s sake. But I get a little paranoid that it’s ALL in one company. Do you think there’s any risk with having all your assets in just one company?
    As to keeping your allocation static…that is an interesting approach. I have my most of my IRA in a target fund as of now so it will gradually become more conservative, but I think I might consider your approach. I have plenty of time to think about it!

    • Matt @ momanddadmoney June 5, 2013

      I think there’s some level of risk, sure, but it’s incredibly small. This link can explain it better than I can, so I’ll just defer to it: http://www.bogleheads.org/wiki/Vanguard_safety

      I think target date funds are a great choice, providing you understand that they’re not magic, just a systematic way of maintaining a reasonable asset allocation. If you ever want to talk in more detail about a static allocation approach, feel free to reach out. I don’t necessarily think it’s better, it just makes sense to us.

  • Grayson @ Debt Roundup June 5, 2013

    Thanks for breaking this down. I am currently very aggressive with a 90/10 allocation, but that will change as I grow older. I can handle the ups and downs of the market at this point. I have not heard of many going with a static allocation, but you do whatever works for you. I have a few Vanguard funds in my Betterment account.

    • Matt @ momanddadmoney June 5, 2013

      Seems like a lot of people are using Betterment these days. From what I’ve seen it looks like a pretty solid option. At some point you should compare the costs of Betterment with a target date fund from someone like Vanguard. I haven’t done a real comparison, but it seems like Betterment might range from .25-.5% more in fees per year. That sounds small but it can really add up over time.

  • John S @ Frugal Rules June 5, 2013

    Great breakdown Matt. We’re closer to a 90/10 mix, but you have to find what works for you as an individual investor. That’s great you’re taking advantage of Vanguard, so many overlook the role of fees in their investing and that can take a real bite out of your portfolio. How have your bond holdings been doing lately in light of the furor over rates?

    • Matt @ momanddadmoney June 5, 2013

      Since 7/10/2012, which is when I really started tracking things well, the IRR on the intermediate term treasuries is -0.62% and on the TIPS it’s -4.15%. So that part of the portfolio has certainly been dragging us down a little bit, but the stock markets have been on a tear. So really it’s going pretty much exactly as expected. I’m well aware that our bond holdings will take an even bigger hit once interest rates start rising, but again that’s all part of the deal. I’m not at all interested in playing the market timing game.

  • Matt @ momanddadmoney June 5, 2013

    Hi Ree! I’m glad you found me. 1500 Days is a great site so I’m flattered that you wandered over here too.

    The cash reserves is our method of making our allocation more conservative. It’s just a slightly different take on the concept. Rather than changing our asset allocation, we’re simply deciding how much of our money we want “invested” and how much we want on hand. But I do think the standard advice based on 30 years of retirement could start to be outdated fairly soon, if it isn’t already, and while I wouldn’t advocate a more aggressive allocation simply because you need your money to grow faster, capturing more long-term growth may become more of a consideration.

  • DC @ Young Adult Money June 5, 2013

    Well it certainly seems like you have thought through your investing strategy. To be completely honest, almost all my time and energy has been focused on making money/increasing income and cutting down expenses through couponing and other strategies, so I haven’t given as much thought to investing. I’m sure once the debts get paid down and the savings start stacking up I’ll look into it more. Thanks for such a thorough explanation!

    • Matt @ momanddadmoney June 5, 2013

      Always good to start early! Increasing income is a really powerful tool, so it’s great to focus on that. But don’t neglect investing for too long. The only way you’ll have money later is if you start saving, not matter what your income is. But I will say that there is probably too much emphasis on cutting spending to save and not enough on increasing income, so in a way you’re really ahead of the game.

  • What are you investing for is probably the single biggest factor. And not in the point that you brushed on of retirement vs savings, vs passive income.
    What I mean is that that the whole exercise is pointless if you don’t have a concrete goal. A goal requires two things. A specific target and a date. Requiring a million dollars in 10 years is going to require a different strategy than needing a million dollars in 40 years. Needing $5 million is going to require a different strategy than needing $1 million.
    My retirement savings goal is $1 million because that is the number I’ve come up with necessary to pay for expenses over the 5 year period I expect to live after retiring, after adjusting for inflation.

    • Matt @ momanddadmoney June 6, 2013

      Couldn’t agree more. Both the mount you want to save and the time period you have to save it in are crucial to forming a plan. Just out of curiosity, how does your plan work where you only expect to live for 5 years after retiring?

  • We’re not planning a static investing plan, but we’re more heavily weighted in stocks right now than you are. We’re about 88:12 stocks:bonds in our retirement accounts, so a bit riskier, but with the plan to adjust that down as we get older. (We’re just 30 right now so feel we’re okay taking a decent amount of risk.)

  • Laurie @thefrugalfarmer June 6, 2013

    Matt, sounds like you have a good plan here. I’ve been reading from others about the Vanguard stuff and it seems to be a good choice. Thanks for sharing your thoughts here!

    • Matt @ momanddadmoney June 6, 2013

      Sure thing Laurie. I think Vanguard’s a great choice, though there are certainly others out there. But they basically invented indexing and they’ve consistently created great funds at a low cost. It’s tough to beat.

  • Kim@Eyesonthedollar June 6, 2013

    I have most of my investments with Vanguard and really love the company for ease of use and low fees. My allocation was 100% stocks up until less than a year ago and now I’m very similar to you with 75/25. I don’t think it has to be rocket science, but you need to find what works for you and stick with it.

    • Matt @ momanddadmoney June 7, 2013

      Perfect summary. It definitely doesn’t have to be rocket science. You can keep it very simple and still be successful. Just out of curiosity, what made you change your allocation in the past year?

  • MyMoneyDesign June 17, 2013

    This is such a simple portfolio, and yet it will admittedly probably out perform most of our portfolios. Plus for a lot less!

    Forgive me if you’ve already covered this in a previous post, but how much do you plan to stash away each year and what your timeline for these goals?

    • Matt @ momanddadmoney June 18, 2013

      So far I’ve refrained from specifying dollar amounts on here, and I’m going to continue to do so for now. I have to say that until recently, I hadn’t given much thought to the early retirement goals that many people seem to have. But it’s an attractive goal and I really like the way a lot of people think about it. It’s something my wife and I have started talking more about, but we haven’t taken the time to sit down and hammer out details. Once we do, I’ll see what I can share on here.

      I do think the simplicity is one of its biggest strengths. People often think simple is below-average, but I think the evidence says otherwise in the world of investing. I’ve tried to maximize the efficiency of the things I can control while keeping everything easy to maintain and rebalance going forward. We’ll see how it works out!

  • JNEW April 15, 2014

    I a interested why you do not have an allocation to international bonds? Vanguard has now added them to most o their recommendations.

    • Matt @ momanddadmoney April 15, 2014

      Basically, the bond portion is only meant to serve one purpose: provide a hedge for when the stock market falls. I think that US Treasuries will do this best, because they are considered some of the safest investments in the world and are typically a safe-haven during rough economic periods. Adding international bonds would increase my expected return, but at the cost of the hedge I’m looking for.

      Now, with that said, this is all an inexact science. My portfolio would be just fine with international bonds, it’s really just a matter of personal preference. But I do toy with the idea of just switching over to one of Vanguard’s lifestrategy funds just to make things even simpler. I still may do that at some point.

      • mcnater April 28, 2014

        Good points. I’m in your boat with the 70-30 split. I’ve just gone with 2 Lifestrategy funds, the “Growth Fund” and the “Moderate Growth” fund. I just deposit the same amount in both every paycheck to achieve the split. Set it and forget it.

  • Abby January 15, 2016

    Hello! I am very new to investing and am curious: when you are talking about your retirement funds do you just pull a portion of your paycheck to these funds? Are you dividing each paycheck into these four categories, or overall (annually) the percentages match your description? Do you use a 401k? In addition or is your 401k through Vanguard? Sorry for so many questions, trying to make my own way!

    • Matt Becker January 15, 2016

      Great question Abby! The short answer is yes, each contribution to my account is generally split between these 4 funds. You can set that up to happen automatically with both a 401(k) and an IRA.

      The flip side is that you don’t have to do it that way. The goal is really to make sure that your investments are continually meeting your overall investment strategy, allowing for small fluctuations here and there. That’s done through a process called rebalancing, which you can generally do once per year.

      As for what accounts I use, I have not personally had a 401(k), either through my previous job or my business, though I will be setting one up this year! With multiple accounts, the goal is for the combined money across all accounts to match your desired strategy. But each account does not have to match it individually.

      Hope that helps! Let me know if you have any more questions.

I’d love to hear from you, please leave a comment