Back to Basics: Simplify and Automate Your Savings

automateLet’s take a step back and focus on some actionable tips to simplify and automate your savings. Think of it as knocking out your New Year’s Resolution in just 10 minutes or less.

New Year’s resolutions fail because willpower is like a muscle. If you keep having to choose the “right thing” that does not provide immediate gratification, your willpower muscle starts to fatigue. Eat the healthy kale thing instead of the nachos? Yes for a few times, but after a month no no no. Take 15% of your paycheck and set it aside? You’ll forget. The key is to take away the decision = no willpower fatigue.

First, consider your paycheck. Is it bi-weekly, semi-monthly, or monthly? Let’s say it is biweekly and you get paid this Friday, January 9th. That means you know you’ll get paid on January 23rd, February 6th, and so on. You just need to schedule a transfer for 15% of your paycheck for each of those days directly into an online savings account. Here are screenshots and tips for some specific providers:

Auto-save with your 401(k) plan.
This allows you to get any company match, grow your money faster with tax advantages, and also takes the money out before it even reaches your paycheck. Our provider is TransAmerica, which like many others now offer an option for annual auto-increases as well. The only frequency option is every pay period.

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Auto-save with Ally Bank Savings Account.
This is my go-to savings account, and it has the most flexible list of frequency options: weekly, bi-weekly, every 15 days, weekly, every 2 weeks, every 4 weeks, monthly, every 2 months, every 3 months, every 6 months, every year, the first business day of each money, or the last business day of each month. With a competitive interest rate, no minimum opening balance, and no monthly fees, and other features – see my Ally Bank Savings Account Review for details.

save_ally

Auto-save with Capital One 360 Savings Account.
Formerly ING Direct, this is the original no minimums, no monthly fee online savings account. The frequency options include weekly, bi-weekly, semi-monthly, monthly, or quarterly. You can even set up special sub-accounts and name them things like “Vacation” or “Next Car”. See my Capital One 360 Savings Account Review for more details.

save_capone360

Auto-save with Vanguard IRA and mutual funds.
The best place for low-cost investing in an IRA. Under “Automatic Investments”, you can schedule investments for mutual funds in either IRA or taxable accounts. You’ll need to have the fund already established with the minimum initial investment. The frequency options include weekly, monthly, bi-weekly, or semi-monthly.

save_vanguard

What if I need the money? Well, if you put in an online savings account, if you really need the money, you can transfer it back. But even transferring back out of your savings account will take a conscious effort, so you’re less likely to do it. You can’t easily withdraw from a 401k or IRA, so you’ll just have to make the commitment.

The key here is to combat laziness. If you like this idea, take action today and you’ll be on autopilot the rest of the year!

Early Retirement Portfolio Income Update, Year-End 2014

When investing, should you focus on income or total return? I like the idea of living off dividend and interest income, but I also think it is easy for people to reach too far for yield and hurt their overall returns. But what is too far? That’s the hard part. Certainly there are many bad investments lurking out there for desperate retirees looking for maximum income. If possible, I’d like to invest for total return and then live off the income.

A quick and dirty way to see how much income (dividends and interest) your portfolio is generating is to take the “TTM Yield” or “12 Mo. Yield” from Morningstar quote pages. Trailing 12 Month Yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. SEC yield is another alternative, but I like TTM because it is based on actual distributions (SEC vs. TTM yield article).

Below is a close approximation of my most recent portfolio update. I have changed my asset allocation slightly to 60% stocks and 40% bonds because I believe that will be my permanent allocation upon early retirement.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (1/5/14) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
24% 1.76% 0.42%
US Small Value
WisdomTree SmallCap Dividend ETF (DES)
3% 2.68% 0.08%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
24% 3.4% 0.81%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
3% 3.17% 0.09%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 3.60% 0.22%
Intermediate-Term High Quality Bonds
Vanguard Limited-Term Tax-Exempt Fund (VMLUX)
20% 1.68% 0.34%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
20% 2.24% 0.45%
Totals 100% 2.41%

 

The total weighted 12-month yield was 2.41%, as opposed to 2.49% and 2.31% the previous two quarters. This means that if I had a $1,000,000 portfolio balance today, it would have generated $24,100 in interest and dividends over the last 12 months. Now, 2.41% is significantly lower than the 4% withdrawal rate often recommended for 65-year-old retirees with 30-year spending horizons, and is also lower than the 3% withdrawal that I prefer as a rough benchmark for early retirement. But in theory the total return will be much greater due to share appreciation.

As noted previously, a simple benchmark for this portfolio is Vanguard LifeStrategy Growth Fund (VASGX) which is an all-in-one fund that is also 60% stocks and 40% bonds. That fund has a trailing 12-month yield of 2.09%. Keep in mind that the muni bond interest in my portfolio is exempt from federal income taxes.

So how am I doing? Using my 3% benchmark, the combination of ongoing savings and recent market gains have us at 91% of the way to matching our annual household spending target. Using the 2.41% number, I am only 73% of the way there. Consider that if all your portfolio did was keep up with inflation each year (0% real returns), you could still spend 2% a year for 50 years. From that perspective, a 2% spending rate seems like a very conservative lower bound.

Early Retirement Portfolio Asset Allocation Update, Year-End 2014

Here’s a final update on my investment portfolio holdings for 2014. This includes tax-deferred accounts like 401(k)s and taxable brokerage holdings, but excludes things like physical property and cash reserves (emergency fund). The purpose of this portfolio is to create enough income to cover all of our household expenses.

Target Asset Allocation

aa_updated2015

I try to pick asset classes that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I don’t hold commodities futures or gold as they don’t provide any income and I don’t believe they’ll outpace inflation significantly. In addition, I am not confident in them enough to know that I will hold them through an extended period of underperformance (i.e. don’t buy what you don’t understand).

Our current ratio is roughly 70% stocks and 30% bonds within our investment strategy of buy, hold, and rebalance. With a self-directed portfolio of low-cost funds and low turnover, we minimize management fees, commissions, and taxes.

Actual Asset Allocation and Holdings

aa_pie_2014final

Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Notes and Benchmark Comparison

There was very little activity during the last quarter of 2014. I’ll need to do some rebalancing in the beginning of 2015. I did change my asset allocation tree above to reflect that my bond holdings have a weighted duration of close to 4 years now. It used to say “shorter-term” but really now it is more “intermediate-term”. I’ve been putting my new bond money into VWIUX, which holds intermediate-term high-quality municipal bonds. I haven’t sold any of my limited-term holdings. Overall, it’s a little longer in maturity and a little higher yield, but nothing drastic. I don’t really listen to future rate predictions; they’ve been wrong more than they’ve been right.

I’ve already noted the 2014 performance of each individual fund here along with my overall portfolio total return of roughly 6.5% for 2014.

A simple benchmark for my portfolio is 50% Vanguard LifeStrategy Growth Fund (VASGX) and Vanguard LifeStrategy Moderate Growth Fund (VSMGX), one is 60/40 and one is 80/20 so it also works out to 70% stocks and 30% bonds. That would have returned about 7.1% for 2014. One reason for my portfolio’s relative underperformance to this benchmark is my inclusions of TIPS bonds which returned 3.5% whereas the Vanguard Total International Bond Index Fund (BND) returned 6% for the year. I’m still happy to hold TIPS. If I had more tax-advantaged space and/or a lower tax rate I’d hold BND instead of muni bonds but I’m still happy with my muni funds as well.

In a separate post, I will update the amount of income that I am deriving from this portfolio along with how that compares to my expenses.

Acorns App Review: Automatically Invest Your Spare Change

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Updated. Acorns fee structure updated 1/1/15. Previously I wrote about WiseBanyan, which lets you invest in a basket of ETFs with no minimum opening balance. I remarked that it allowed starter investors to open a complete portfolio with as little as $100. Well, what about investing just 57 cents at time?

Acorns is a new smartphone app that lets you invest your “spare change” into a diversified ETF portfolio of stocks and bonds. For example, if you bought something for $10.43, the Acorns app will “round up” your purchase to $11 and invest $0.57 into a brokerage account. The idea is that these small investments will make it simple and easy for folks to start saving and investing. Thanks to reader Steven for the tip.

How does it work? You’ll need to provide them:

  • Your personal information (name, address, SSN) because this is still a real SIPC-insured brokerage account underneath.
  • Your debit or credit card login information (so they can track your transactions and calculate round ups)
  • Your bank account and routing number (so they can pull money into your investment account)

The app scans your transactions, calculates the round-ups, pulls that money from your checking account, and automatically invests it for you. You can also make one-time deposits or schedule recurring deposits on a daily, weekly, or monthly basis. The app also tries to identify “found money” like rebates and rewards which it encourages you to also invest. YouTube video demo:

Fees. As of January 1st, 2015, Acorns has changed their fees to be either $1 a month (balances under $5,000) or 0.25% of assets per year (balances above $5,000). So on a $10,000 balance that would be $25 a year. No fee on $0 balances. See fee estimator for detailed calculations.

Withdrawals are free, but you may incur capital gains on which you’ll owe income tax. I don’t know if they will support asset transfers via ACAT.

Portfolio details. You can choose one of five target portfolios, ranging in risk level from conservative to aggressive. Mostly standard Modern Portfolio Theory fare, not surprising as their “Nobel Prize-winning economist advisor” is Harry Markowitz, who is a paid consultant.

acorns_portfolioma

All portfolios are constructed using the following six index ETFs:

  • Vanguard S&P 500 ETF (VOO)
  • Vanguard Small-Cap ETF (VB)
  • Vanguard FTSE Emerging Markets ETF (VWO)
  • Vanguard REIT ETF (VNQ)
  • PIMCO Investment Grade Corporate Bond ETF (CORP)
  • iShares 1-3 Year Treasury Bond ETF (SHY)

Fractional shares are used. Dividends are reinvested. Rebalancing happens automatically. Their asset allocation has much in common with most other automated portfolios, although it is probably one of the more different ones that I’ve seen in that you have no exposure to any stocks from Developed European and Asian countries like the UK, Japan, or Australia.

I’m a little concerned about all the tax lots created when buying stocks in such small amounts. Dealing with taxes when you sell might be a headache if they don’t import directly to TurboTax or similar tax software.

Availability. Currently available on iOS 7 or higher. iTunes download link. Android and web application “available soon”.

My thoughts. My first reaction was… that it was a great idea. I used to participate in Bank of America’s Keep The Change program, which is similar in that it also rounds up your BofA debit card transactions to the nearest dollar but instead moves the money into a BofA savings account paying essentially zero interest. Acorns takes it further by letting you use any bank and any debit or credit card, and also lets you invest it for potentially higher returns.

In addition, I agree that Acorns will lower the psychological barrier to investing because you don’t even have to commit to $25 a week or $500 a month. You know if you can afford a gizmo or meal at $15.66, you can afford it at $16, so why not invest that spare change? The hurdle can’t get much lower than that.

At the same time, we have to be realistic. With this model how much you save depends entirely on how many purchases you make, with a theoretical average of 50 cents saved per transaction. Even buying five things a day times 50 cents is $2.50 a day or $75 a month. It’s good as a kickstart, but not nearly enough to fund a retirement.

If you want to look at it purely mathematically, a monthly fee of $1 taken out of a $75 investment ends up being like a front-end load of 1.3%. Or you could just look at a buck a month as something you’d otherwise blow on some Candy Crush Saga app.

It bugs me when people call it a “piggy bank” when it isn’t. A piggy bank means you put in a quarter, and you can take out a quarter later on. A piggy bank is a bank savings account. Acorns on the other hand is a long-term investment account that you have to be ready not to touch for at least a decade. Sure the “expected” return is 4-9% but you have a good chance of a permanent loss of money if you withdraw within the next few years.

Finally, will people will keep large amounts of money in this little smartphone app for years and years? Maybe. My bet is that they are eventually bought out by a larger firm in the future (or someone just straight-up copies the idea).

Bottom line: Neat idea, very nicely-designed app. It won’t fund your retirement, but it might be worth a try for those that need a nudge to invest. I think there should an option for an FDIC-insured high-yield savings account.

More: Wired, Techcrunch

Back to Basics: Create Your Own Investing Priority List

scale_money

Happy New Year! You want to perform a check-up on your finances. Where should you be putting your money?

I’m searching through my archives and doing a series on classic financial topics called “Back to Basics” . The Vanguard blog recently talked about investing priorities, which compared closely with this 2006 blog post. There is no definitive list, but each person can create their own with common components. Here’s my current list:

  1. Invest in your 401(k) or similar plan up until any match. Company matches typically offer you 50 cents to a dollar for each dollar that you contribute yourself, up to a certain amount. Add in the tax deferral benefits, and it adds up to a great deal. Estimated annual return: 25% to 100%.
  2. Pay down your high-interest debt (credit cards, personal loans, subprime car loans). If you pay down a loan at 12% interest, that’s the same as earning a 12% return on your money and higher than the average historical stock market return. Estimated annual return: 10-20%.
  3. Create an emergency fund with at least 3 months of expenses. It can be difficult, but I’ve tried to describe the high potential value of an emergency fund. For example, a bank overdraft or late payment penalty can be much higher than 10% of the original bill. Estimated return: Varies.
  4. Fund your Traditional or Roth IRA up to the maximum allowed. You can invest in stocks or bonds at any brokerage firm, and the tax advantages let you keep more of your money. Estimated annual return: 8%. Even if you think you are ineligible due to income limits, you can contribute to a non-deductible Traditional IRA and then roll it over to a Roth (aka Backdoor Roth IRA).
  5. Continue funding your 401(k) or similar to the maximum allowed. There are both Traditional and Roth 401(k) options now, although your investment options may be limited as long as you are with that employer. Estimated annual return: 8%.
  6. Save towards a house down payment. This is another harder one to quantify. Buying a house is partially a lifestyle choice, but if you don’t move too often and pay off that mortgage, you’ll have lower expenses afterward. Estimated return: Qualify of life + imputed rent.
  7. Invest money in taxable accounts. Sure you’ll have to pay taxes, but if you invest efficiently then long-term capital gains rates aren’t too bad. Estimated annual return: 6%.
  8. Pay down any other lower-interest debt (2% car loans, educational loans, mortgage debt). There are some forms of lower-interest and/or tax-deductible debt that can be lower priority, but must still be addressed. Estimated annual return: 2-6%.
  9. Save for your children’s education. You should take care of your own retirement before paying off your children’s tuition. There are many ways to fund an education, but it’s harder to get your kids to fund your retirement. Estimated return: Depends.

I wasn’t sure where to put this, but you should also make sure you have adequate insurance (health, disability, and term life insurance if you have dependents). The goal of most optional insurance is to cover catastrophic events, so ideally you’ll pay a small amount and hope to never make a claim.

Investment Returns By Asset Class, 2014 Year-End Review

I don’t always check my portfolio performance, but when I do, I do it at the end of the year. Here are the trailing 1-year returns for select asset classes as benchmarked by passive mutual funds and ETFs. Return data was taken from Morningstar after market close 12/29/14.

2014performance

Stocks. The Total US Stock Market (VTI) went up nearly 15%, while the rest of the world’s markets (VXUS) dropped around 3%. Europe specifically struggled, and Emerging Markets (VWO) only eeked up 1.5% total return. US REITs (VNQ) went on a tear, up 32%.

Bonds. The Total US Bond Market (BND) went up ~6%, even though most market pundits thought rates would go up in 2013. Short-Term Treasuries (SHY) were mostly unchanged, while Long-Term Treasuries (TLT) shot up 27%. Inflation-linked TIPS (TIP) inched up 3%.

Gold (GLD) had its gyrations but ended the year with very little change, down ~3% over the past year.

In the end, nothing really went down that much and a few things did really well. It was another year where half of the predictions were wrong, and new predictions will no doubt sprout up soon. Business Insider has a hilarious post on completely meaningless market phrases that sound smart. On that note, my official position will be “cautiously optimistic” for 2015.

The overall asset allocation of my personal portfolio hasn’t changed much since my October 2014 update, but I’ll probably do a final update once the year is officially over. Some quick calculator work indicates the overall 2014 return to be roughly 7%.

US Treasury Bonds Negative Correlation with Stocks

Here is an interesting chart comparing the correlation of various asset classes to the S&P 500 over the last 5 years. Chart is from Richard Bernstein Advisors, found via The Reformed Broker.

5yearcorr

A negative correlation between two asset classes means that they tend to move in opposite directions. While long-term US Treasury bonds have been the most strongly uncorrelated, it is also worth noting that intermediate-term US Treasuries (5-7 years) were nearly as uncorrelated. Of course, this is the past and correlations can and will change.

Still, this would seem like good news for people who hold a “total” bond fund like the Vanguard Total Bond Market Index Fund (VBMFX, BND) or iShares Barclays Aggregate Bond Fund (AGG) as these contain ~70% US government bonds and have an intermediate average maturity. You want your bonds to serve as a hedge against stock movements, and they did over the past 5 years while still maintaining positive returns (~4% annualized for AGG, ~15% annualized for S&P 500).

Robinhood App Review: What’s The Catch Behind Free Stock Trades?

robin0Finance start-up Robinhood promises to “democratize the financial markets” by creating a mobile-first brokerage that offers unlimited free trades with no minimum balance requirement. That is a pretty bold move, and I was skeptical when they started getting noticed in late 2013.

A year later, they’ve gathered $16M in venture capital and last week publicly launched their iPhone app (no Android yet). I’ve already been a beta user of their app for ~5 months (thanks to you guys) and here’s my review.

Application process. You must provide your personal information including Social Security number, net worth, income, investing experience, etc. This is the same as any other brokerage firm, but this may also be the first such account for many users. Everything was done online; there were no paper documents that required mailing or faxing.

Core features. Yes, the app gives me $0 commission trades with no minimum balance requirement. That means you could open account, put in five bucks, and buy a single share of Zynga (ZNGA) if you wanted to. You can make market or limit orders. You can open a cash or margin account. Along with all the other legit brokerage firms, Robinhood Financial is a member of the SIPC which protects the securities in your account up to $500,000. Data is encrypted with SSL. Apex is their clearing firm.

Funds transfers. You can link any bank account with your routing number and account number, but you can also directly use your username and password at these 9 banks: Bank of America, Wells Fargo, Chase, Citibank, US Bank, USAA, Fidelity, Charles Schwab, and Capital One 360. Such ACH transfers are free.

What’s missing? Getting free trades is great, but I think it’s also important to know what you won’t get, at least right now:

  • You must access your account via your iPhone, iPad, or iPod Touch. Android and web interface are “coming in 2015″.
  • There is no phone number for customer support, at least that I can find. All their contact links direct you to compose an e-mail to support@robinhood.com. I’d feel more comfortable with a phone number, but customer service agents cost money.
  • No advanced order types like trailing stop-loss or trailing stop-limit.
  • According to their fee schedule, broker-assisted phone trades are $10 each. But again, I can’t even find a phone number to reach a broker.
  • Electronic statements are the default. I don’t even see an option to enable paper statements in the app, but according to their fee schedule paper statements cost $5 a pop.
  • Currently, they do not support ACAT transfers, so you can’t move over your existing assets from an outside brokerage. (Or move out your assets via ACAT either, I’m guessing.)

How do they make money? For now, Robinhood will make money the same way other brokers do: collect interest on your idle cash, charge you interest for margin loans, and sell order flow. The most innovative prospect is to the plan to sell API access to other financial apps.

The fact that Robinhood sells order flow may leave you with a slightly worse execution price as compared to other brokers with more complex order routing. If you are making large value trades, then this small percentage difference may add up to something significant that matters more than commission price.

User interface. Over the last 10 years, I’ve opened an account at the majority of the “discount” brokerage firms. I’ve had $0 trades before, along with $2 trades, $2.50 trades, $4.95 trades and so on. What makes Robinhood special is their modern, app-centric approach. I agree with this quote from Wired:

But the app’s simplicity is meant to be about more than style. Ease of access and understanding is meant to make Robinhood compulsively engaging for a new generation of investors that don’t find the stock market very accessible from the mobile screens at the center of their lives.

Even though I don’t trade frequently and I only hold one ETF in this account, I still check the app all the time. That’s more often than my primary Vanguard account. Why? Because it’s so easy. It takes only 5 taps. One tap on the Robinhood app logo, and four quick taps to type in my PIN. If I had a more recent iPhone, I could use Touch ID and get in with a tap and a thumbprint. I know, security, but I just won’t type in a 16-character password on a tiny keyboard just to check a balance.

Screenshots.

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robin3 robin4

Recap. Robinhood delivers on their free stock trades with no minimum balance promise. The app-only user interface is clean and intuitive, if a bit minimalist on features like order types. You do give up some traditional brokerage features like phone customer service and paper statements. I’m still skeptical about whether they can make the economics work over the long run, but they do appear to be streamlining wherever they can.

More: Fee Schedule, Official FAQ, Techcrunch, Buzzfeed

Note: If you’re still on the waiting list, they state plans to onboard you within the first two months of 2015. If you’re signing up now, you can set up a stock watchlist on the app, but don’t expect to open an account for a couple of months.

LendingClub IPO for P2P Loan Investors: First Day of Trading Over

(Updated. Lending Club ended their first day of trading at $23.43 a share, up 57% from their IPO price. With roughly 361 million outstanding shares, LC is roughly a $8.5 billion dollar company! I have updated the post to include the rest of the IPO documents and process. I ended up selling my 100 shares for roughly a $800 gain during the first day of trading. Details and rationale below.)

LendingClub connects individual borrowers with individual lenders, and I’ve been writing about them since 2007. They successfully had their IPO on Thursday, December 11th, 2014 and they actually set aside a few shares for individual investors. Usually you’d either need serious cash or insider access. If you were an investor at LC by 9/30/14 you should have gotten an e-mail asking if you were interested.

I participated in this IPO for a few reasons:

  • I’ve been a lender on LendingClub since 2007 and have been following their progress since.
  • I have never participated in an IPO before, and am curious about the process.
  • I view this investment as purely speculative. It is not an investment, it is a gamble!
  • I can commit as little as $250 and up to about $5,000 (details below). I can choose a number that will keep my interest but it won’t break the bank either way.

I’ve documented the process below:

11/17/2014. I got an e-mail with the subject “Lending Club IPO – Directed Share Program (DSP)” telling me that I was eligible to participate and that I had to opt-in to sharing my information with Fidelity Investments. Here is a screenshot:

lcipo1

I clicked, and then was instructed to wait. (More below)

[Read more...]

Bogle Interview: Why You Don’t Need International Stocks, Why To Hire An Advisor

Whenever Vanguard founder Jack Bogle speaks, I listen. He has spent more time thinking about how to help the average investor than I have been alive. I found this recent Bloomberg interview covered a lot of topics regarding portfolio construction. Here are my notes, I have paraphrased what is not in quotes:

  • “The best thing you can do for yourself is to make your choice [of a long-term strategy], keep it simple and stick with it.”
  • The traditional 60/40* balanced fund is still a fine, simple choice for a portfolio. He prefers that over a target-date fund. (*60% stocks, 40% bonds)
  • For the stocks portion, a traditional total US stock market fund is fine. You can add a little international stock exposure, but you don’t need it. The long-term returns for foreign companies will likely be similar but with increased currency risk.
  • For the bond portion, a traditional total bond fund is fine. Higher yield won’t come without higher risks.
  • Even if valuations are currently high on a relative basis, you should take the long-term view and invest now.
  • “Financial planners and advisers need to sell their value as keeping their clients from doing the wrong thing at the wrong time.” That is their value-add, and it can be significant.

Keep in mind these are Bogle’s opinions and not necessarily my own.

Vanguard Adds Two-Factor Authentication

vglogoVanguard has announced that they now support two-factor authentication via SMS text messages when logging into your financial accounts. There should be a little blurb when you log in, or after logging in you can navigate to “My Accounts > Account maintenance > Security code” to activate it.

I definitely appreciate the availability of two-factor authentication, although my actual usage depends on how often I have to use it and the importance of the account. Since my Vanguard accounts contain a significant chunk of my assets and I usually log in less than once a week, I enabled it immediately. Here are the highlights:

  • If activated, you’ll receive a unique 6-digit code via text message that can only be used once to gain access to your account. The code will expire after 10 minutes.
  • Security codes sent via e-mail, phone call or other methods are not supported. No future plans are mentioned.
  • You can choose to receive a security code every time you log in, or only when Vanguard doesn’t recognize the device that you’re using. This can be a good compromise if you log in frequently from the same computer.
  • You’ll still need your current user name and password. You may also need to answer your previous security questions like “high school mascot?” when calling Vanguard.
  • Security codes work with Vanguard.com and their official mobile apps. They do not work with Vanguard.mobi.
  • Two-factor authentication may conflict with financial aggregation tools such as Mint.com, Personal Capital, or Yodlee.

Also: TwoFactorAuth.org is a nifty website that tracks which financial websites (and other services) offer two-factor authentication.

Chart: International Bonds and Risk-Adjusted Returns

Here another data point on the topic of adding international bonds to your portfolio. The AllianceBernstein Blog has post on how adjusting the US/Global mix of your bond asset allocation affects risk-adjusted returns:

abglobalbonds

Using data from 1994-2013, you can see some trends as you go from 100% US bonds to 50/50 to 100% International ex-US (hedged). As you add more international the historical return drops a little bit, but the volatility drops even more. Thus, the risk-adjusted return actually goes up (dotted-line). The author suggests a 50/50 US/non-US mix as a “realistic target”, while reminding you that if you do add international bond exposure it should be currency-hedged.

Also note the fine print that the chart measures the performance of an index, while international bond funds usually have higher fees in the real world. For example, the Vanguard Total International Bond ETF (BNDX) has an expense ratio of 0.20%, while the domestic Vanguard Total Bond Market ETF (BND) has an expense ratio of 0.08%. The gap is smaller that it used to be, but it still exists.

So it is a critical asset class to include? International bonds are the world’s largest asset class by market cap. Since 2013, Vanguard has included international bonds in their Target Date Retirement and LifeStrategy all-in-one mutual funds – currently 20% of the total bond allocation.

I’m still not convinced myself. I think there may be a benefit in a real-world portfolio, but it likely will be small and even smaller after the higher fund fees and internal trading costs. I just don’t feel the need for such added complexity. As the cost gap shrinks further, I will reconsider.