The best investment allocation is the one that gives you the most amount of freedom to live the life of your dreams. Throughout 2016 I worked through my investment portfolio spread out across Roth IRAs, 401ks, and Brokerage accounts to come to my personal consensus for the optimal investment portfolio for the needs of pursuing the atypical lifestyle of early retirement.
When I first started investing, I had no idea what I was doing. That pretty much sounds like every other investor that starts out when they first get a paycheck. We just put money in and everybody says it will grow, grow, grow! I started with an allocation of only US Growth all in one high expense mutual fund. With my first $3,000 investment, I was not really able to tell what fluctuations really did to the balance because it did not rise and fall much at all.
For the first 4 years of investing, I pretty much had flat-lined investment growth. Where was my growth? Was I doing something wrong?
At the beginning of 2016, I decided to make a change in asset allocation to try and gain more growth. It had taken nearly 4 years to build up to where I had enough money saved in investments to actually have multiple mutual funds, all of which would be Admiral Shares at Vanguard. More in the future on Vanguard, expense fees, and mutual funds in general. Needless to say, Admiral Shares at Vanguard have a minimum investment of $10,000 each, so I needed at least $100,000 to have a 10% allocation in a certain area.
Arriving in 2016, I owned a smattering of different investments, some US Growth, some dividend, some all-in-one Lifestyle funds. With investments scattered all across the board and no real plan, I decided I needed to make a plan and start to follow it to achieve success in the confusing arena of investing.
Advice From Around the Web
I decided that the best way to go about this was to aggregate the recommendations from multiple sites together and look at them. I had no real idea of what a good allocation would look like. I had heard:
US stocks, but you need international exposure.
Don’t forget the bonds. Bonds are safe.
Bonds alone are not enough, don’t forget international exposure here.
Don’t put all your eggs in one basket, you need alternatives.
So what are all of these recommendations? Let’s first take a look at the recommendations I received from the Wall Street Journal, Wealthfront, Future Advisor, and Personal Capital.
Wall Street Journal from Paul Merriman
The Wall Street Journal was by far the most aggressive allocation that I found, with no allocation to bonds. Bonds are the “safe” bet in the investment arena because they are not tied to company value, therefore are much less volatile. While living in the US, I figured that more weight to the US was reasonable, however, the Wall Street Journal from Paul Merriman advocated for equal weight of foreign market mutual funds and US market mutual funds. With 10% weighting for emerging market, it brings it to 40/50 US to foreign market mutual funds. The 10% remaining was to be invested in REITs, or Real Estate Investment Trusts.
“REITs gives you exposure to the real estate market which has strong growth potential.”
That sounds very clique, but after enough people have said it, we really start to believe it. Here at Atypical Life, we try to take what people say and put it into perspective to what really matters for achieving freedom.
Wealthfront Recommendation for Mr. Atypical Life
Wealthfront is an investment advisor and one-stop investment management company. I made an account there, so they could give me their recommendation for best allocation. With this, there is no commitment to give them your money. The advice is free and they hope you will join them and let them do all of the “hard work” of investing and balancing.
Wealthfront gave an even more aggressive asset allocation, in my view, than the Wall Street Journal did. They said 35% in the US market, is good and that 50% should be held in companies outside the US. The remaining 15% were to be split 5/5/5 in dividends, bonds, and natural resources. The consolation on this split is that it is only 6 funds as opposed to the 9 funds recommended by Paul Merriman.
Future Advisor Recommendation for Mr. Atypical Life
Future Advisor is the same type of service as Wealthfront and many of the other investment management services that will manage your money that you give to them. They also give free advice when you open an account and connect your investment accounts to them. They analyze your portfolio and give recommendations based on your point in life and retirement goals.
Future Advisor had a shotgun approach to investing. More is better, right? I have simplified the recommendation for the table above, but they recommended 12 different mutual funds or ETFs with a maximum of 16% balance in any one investment. This seemed like a very complicated approach to me, especially when the goal is to gain freedom, not to weigh myself down with another responsibility of maintaining complicated investment accounts. For a do-it-yourself investor like me, the more funds the more complicated and difficult to manage. If you let an investment management firm manage your investments then there is no worries about more funds.
Of all the recommendations, Future Advisor gave me the highest allocation to bonds which is surprising, with the amount of funds they suggested. They suggested TIPS, which are US Treasury bonds, foreign and US bonds. The 3 bond funds together weighted to 20% of the allocation.
Future Advisor’s investment services and advice go far beyond asset allocation. They give helpful advice in fund location, taxable vs tax-advantaged, and fee minimization.
Personal Capital Recommendation for Mr. Atypical Life
Personal Capital is my personal favorite financial tool for account agglomeration and overall financial health monitoring. They allow you to see all of your investment accounts and bank accounts in one place and have the best interface for visualizing investment asset allocation. They also offer advice for free. If you want to give them the freedom to manage your accounts that is an option as well, though it is a paid option. The rest is free of charge and a wonderful service.
Personal Capital had a conservative approach to foreign investment with a 60/25 split for US / foreign market allocation. Since we are US citizens, albeit we don’t currently live there, I think it makes since to have a higher proportion of our money in the US economy. I believe in it and Personal Capital obviously also believes that foreign markets may be over rated.
When we analyze fees, for 2 equivalent funds, one in the US and one foreign market, the US fund is always cheaper in the US. My 2 favorite funds for this comparison are the Vanguard Total US Market Admiral Shares and the Vanguard Total International Market Admiral Shares. The US is 0.05% expense ratio while the International fund is more than double at 0.12%. It just goes to show that for a believed better return, investment companies charge a higher premium.
Although, Personal Capital advised 85% in the 2 above assets, the remaining 15% are in 3 additional. Bonds are split in 2 with foreign and US bonds along with 10.5% allocated to alternative investments. These could be REITs, gold, natural resources, etc.
Mr. Atypical’s Asset Allocation Decision 2016
Come March, I had done my research and decided on an asset allocation. Looking at the above recommendations, I did not understand the complexity of many. Why would they need 9+ funds to cover only 5 areas? I wanted to use the KISS method (keep it simple stupid). With an allocation allotted between 5 different areas, I can choose 1 fund that encompasses that area and then set and forget. Once I am invested in these funds I can just add money to them each month and then at the end of the year, I can rebalance to try and keep the asset allocation where I decided was the best target.
For me, I decided 50% US total market, 20% foreign market, 10% emerging market, 10% REIT, and 10% bonds was the best allocation. To arrive here, I looked at all of the recommendations and then averaged them together. I knew that the less funds the better for trying to balance my money, so I went with my favorite investment carrier Vanguard, and chose their Admiral funds for my allocation.
I bought into the marketing and put 10% in emerging markets, even though the total international fund includes those same businesses that are included in the emerging markets fund. This double weighted them and probably brought the allocation closer to 50/50. Hindsight is 20/20, and looking back now, owning both a International Total Market and Emerging Market Fund is useless. I also bought into the REIT craze and put my money here for a while. “REITs have higher dividends.”
Mrs. Atypical and I live abroad in an apartment that is supplied for us, so we wanted a safe investment in bonds to save for our house purchase when it comes to settling down back in the US. Who knows when this will be, but 10% of our money in bonds is more than enough to ensure a good buffer for volatility in the stock market when our time horizon for saving is long.
Thoughts on my Allocation Decision
After deciding on this asset allocation, it took a little time for adjustment to the new allocation. Since I track all of my investments manually with Gnucash as well as use Personal Capital, the more investments and accounts the more complex the picture.
Is complexity a good thing?
I began moving money around between funds trying to rebalance too often. When I added money to the Vanguard accounts, I was not sure which fund to put my money into. I already put a forecast together of end of year account balance with estimated contributions, so I knew where to put my money. However, when it came time to put money in different accounts and maintain the desired asset allocation, I was sorely inept. This ineptness caused multiple taxable moves from gains throughout the year, that brought my tax liability higher than needed since I should just be holding these funds until the time I need the money.
Then stepped in Mr. Jim Collins.
I read his blog, specifically the Stock Series, and after approximately 6 months of investing in my new asset allocation, I took a step back and looked at the learnings and explanations from the Stock Series.
Mr. Collins recommends the KISS method.
Keep It Simple Stupid. ~anonymous
His Stock Series is 30+ posts now, but condensed down to 4 bullet points, here are my takeaways from the Stock Series:
- According to Mr. Collins Vanguard is the best place for your funds. Check. Even my 401k got migrated there this year thanks to my company.
- People are emotional, and inherently stupid with money. Totally Agree.
- KISS. Invest in VTSAX. That is all you need to know. Will do.
- If you question this recommendation because everybody says “investing is complex”, refer to rule #3.
The Best Investment Allocation
VTSAX is the Vanguard Total US Stock Market Index Fund Admiral Shares and has an expense ratio of 0.05%. So for every $10,000 you have invested in this fund, the cost is $5 per year. It encompasses all of the asset sectors that are generally recommended to be invested in. This is the easiest way to get everything you need, minimize your risk, and minimize your time commitment all in one super low cost mutual fund.
But companies on the US Stock Market aren’t international?
Just look in the news to see Apple, Google, Exxon, and many others internationally. Just because a company is based in the US doesn’t mean you do not have international exposure. We have the US market covered, the international market covered, the emerging market covered, REITs covered, and alternatives covered. The only lack from VTSAX is in bonds. If you feel you need bonds in your portfolio for piece of mind, then do it.
The Trinity Study and many others show growth rate is barely effected with a bond allocation from 0-20% of total portfolio. I settled on an allocation of 90% VTSAX (or equivalent in 401k) and 10% bonds in the form of VBTLX, which is the Vanguard Total Bond Market Index Fund Admiral Shares. The 10% in bonds is to save for my home purchase in the future. Throughout the year, I will only contribute to VTSAX and then once per year I will rebalance to keep the bond percentage around 10%.
If you have made it this far, congratulations. The optimal investment allocation is:
80-100% Total US Stock Market
0-20% Total US Bond Market
Keep it simple. You will thank me later. We have more important things to worry about, like our freedom. Let’s lead the atypical life and invest with the optimal investment allocation.
For much more detail and my inspiration for this allocation and recommendation:
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