My One-Page Financial Plan: Why Is Money Important To Me?

onepageplan2b

onepage0I’ve already shared two nuggets from the book The One-Page Financial Plan by Carl Richards – the importance of getting started and the true value of a human advisor. But what about the title itself?

Before even reading the book, I was impatient and tried to make a one-page financial plan but it didn’t sound right. Even after reading it all the way through, I got a bit lost as besides “one-page plans”, it also tried to cover other big topics like budgeting, investing, and insurance. It took a few re-reads before things finally settled down in my mind. Here are the parts that helped the most:

Your one-page plan simply represents the three to four things that are the most important to you: some action items that need to get done along with a reminder of why you’re doing them.

Having done this with hundreds of my clients, I’ve found no more efficient strategy for solving the problem of how to handle our finances than asking “Why is money important to you?” […] If you’re doing this with a spouse, it’s important that each partner answer the question separately.

The reason I ask my clients this question is because it helps us understand their values. Often, the process of asking “Why?”—“Why is money important to me?” or “Why have I been so anxious about money lately?” or “Just why do I work so hard anyway?”—uncovers deep desires and fears that we are often too busy or too scared to think about. While the process can be uncomfortable, recognizing what really matters to you is the first step toward making financial decisions that are in sync with your values.

Recently, the author shared his own plan on his website – What Does a One-Page Plan Look Like?:

onepageplan1

There are many reasons why my plan (at the top of this post) will be different from the author’s and yours. Our current situation is different, our priorities will be different, our goals will be different.

Why is money important to me?

  1. I greatly value security, sometimes so much that it is irrational. I don’t want to have to rely on anyone else for money or favors. We cut back on work hours to spend more time with kids, but we still want to make more than we spend. It’s not time to touch that nest egg yet!
  2. I greatly value spending time with my family, both on a day-to-day basis and for extended vacations in new and strange places. I have to work hard to avoid getting into a rut where the days and weeks all start melding together. Even if it means lugging multiple car seats and strollers everywhere, I still want to stay curious, make some mistakes, have some adventures.
  3. I want to someday shift my activities such that they more directly give back to my community or some other greater good. I don’t like the idea of just writing checks though, so I need to find a more active and satisfying role. If I could make some money while doing this, that would be great, but otherwise I need to put enough aside that my investments will support me.

The overall point of both this exercise and the book is that improving your financial life doesn’t have to be done perfectly. Just by getting started and putting down your best guess down on paper, you’ll already be better than most. If you see something wrong when comparing your values and your actual behavior, then make some changes. Having done them, I recommend both doing this exercise and reading the book. If your library participates with Overdrive.com, it is available to borrow as a Kindle eBook.

Early Retirement Portfolio Income Update, Mid 2015

The closer I get to the reality of living off of my portfolio, the more I like the idea of living off dividend and interest income. However, you can’t just buy stocks with the highest dividend yields and junk bonds with the highest interest rates without giving up something in return. Certainly there are many bad investments lurking out there for desperate retirees looking for maximum income. My goal is to live off my portfolio income while not reaching too far for yield.

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% 1.79% 0.42%
US Small Value
WisdomTree SmallCap Dividend ETF (DES)
3% 2.78% 0.08%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
24% 2.75% 0.81%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
3% 2.81% 0.09%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 3.76% 0.22%
Intermediate-Term High Quality Bonds
Vanguard Limited-Term Tax-Exempt Fund (VMLUX)
20% 1.63% 0.34%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
20% 2.18% 0.45%
Totals 100% 2.24%

 

The total weighted 12-month yield was 2.24%. This number is lower than the last three updates: 2.41%, 2.49%, and 2.31%. This means that if I had a $1,000,000 portfolio balance today, it would have generated $22,400 in interest and dividends over the last 12 months. Now, 2.24% 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. I should note that the muni bond interest in my portfolio is exempt from federal income taxes.

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 2.01%. (Last update, it was 2.09%.)

So how am I doing? Using the 2.24% income yield, the combination of ongoing savings and recent market gains have us at 72% of the way to matching our annual household spending target. If I switch to a 3% benchmark, we are 96% 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.

Sadly, some valuation models predict exactly that: 0% real returns over a long time. My portfolio has certainly gone up a ton in value due to the ongoing bull market. Bottom line is that we are getting closer but not quite where we want to be.

Early Retirement Portfolio Asset Allocation Update, Mid 2015

Here’s a mid-year update on my investment portfolio holdings for 2015. 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 can’t stick with).

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

1506aa

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 has been very little portfolio activity over the last 6 months. No major market movements (the S&P 500 hasn’t moved more than 2% in day so far in 2015). No mutual funds added or removed. I continued to invest in the same funds through 401k auto-contributions and the occasional fund purchase from saved income. Things are little off, but I’ll just wait and rebalance with new money. Some of my usual savings has been diverted to college savings. Mostly, just keeping my head down and moving forward. :)

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 benchmark would have returned about 3.5% YTD for 2015. I haven’t bothered to calculate my exact portfolio return, but it should be roughly around this number.

I like tracking my dividend and interest income more than overall market movements. 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.

The True Value of a Real, Human Financial Advisor

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The hot buzzword right now is “FinTech”, where technology will help us manage our finances more and efficiently than before. But I’ve also been tracking the reasons why working with a human advisor can be worth the money and time spent. As I’ve mentioned, the strength of the book The One-Page Financial Plan by Carl Richards is that you’re hearing the voice of an experienced financial planner who also has the skill of distilling his experiences down to a sketch. Here’s how he puts it:

onepage_bigmistake

Takeaway: A good financial advisor keeps you from making The Big Mistake that derails your plans.

The big institution Vanguard says that a good financial advisor should be able to improve the performance of a “average” client’s portfolio by about three percentage points in the following ways. Take note of which one factor makes up half of that 3%:

vgalpha

Takeaway: The biggest “value add” from good advisors is their “behavioral coaching”.

Here’s more incisive commentary by Josh Brown of The Reformed Broker, called When the flood comes:

When the flood comes, all of the bullshit arguments among the financial commentariat will come to an end. This will be my third time through. Believe me. We will not be arguing about how many basis points an advisor charges versus another advisor or a software program.

The people who are there for their clients and keep a cool head in public will come through okay. More than okay – they’ll actually raise assets from new and existing households who realize what a mistake they’ve made with their previous advisor or solution.

Takeaway: A good client advisor will help you keep your cool when the next disaster comes.

I’m sure you’ve caught onto the theme by now.

The value in a financial advisor arrives when they help you maintain your plan through both the good times and bad. They will prevent you from participating in the mania during the next bubble, and they will keep you from bailing out during the next crisis.

The problem is, how do you find this “good” financial advisor amongst a sea of average to downright dangerous ones? Here’s some advice from The One-Page Financial Plan:

To a certain extent, the process of finding a real financial advisor is a qualitative experience. It boils down to the question “Can I see this person getting to know me well enough so that I can trust him to help me behave for the next twenty years of my life?” Yes, you should verify that they’re properly registered. Do a Google search of their regulatory record. I’m not talking about blind trust here— the kind that would allow someone to steal your money. I’m talking about finding someone who’s willing to get to know your goals and values well enough to help you stick with your plan. Remember, your financial advisor is the only one standing between you and the Big Mistake of buying high and selling low. You’re hiring them to do what you can’t: make unemotional decisions about your portfolio. If they can’t do that, why pay them?

Now, I still don’t see myself hiring an outside advisor. But I do keep my portfolio conservative enough that my portfolio “boat” stays relatively stable even in rough weather. We’ll see if I can remain unemotional during the next flood, as it is not a matter of “if” but “when” the next one comes along.

Your Financial Plan & The Importance of Getting Started

onepage0I’m currently reading The One-Page Financial Plan by Carl Richards, who also writes for the New York Times. Given the title, I thought it would be a quick read but it turns out to cover a variety of topics over its 200+ pages. So far, I like that it comes from the point of view of an experienced financial planner who spends his days talking with clients.

A valuable observation is that the most common financial mistake most people make is simply doing nothing. Either they are scared of what they might find, or they are overwhelmed by how hard it is to plan for something with such uncertainty. Future jobs and/or income? Uncertain. Childcare/Healthcare/Retirement costs? Uncertain. Future investment returns? Uncertain.

As a financial planner, his job is get people over this hurdle. Guessing is okay! You can always correct your course as you go along, but as long as you are facing the problem and doing something, you are much more likely to have a good result. Carl Richards is also known as “The Sketch Guy” and this one from the book illustrates things well:

onepage1

However, you could replace “investment” with any decision that you have been putting off. Don’t worry about making mistakes (you will). Don’t worry about making the perfect or optimal decision (you won’t). Financial planning is not an exact science.

Here’s another take from inspirational speaker and writer James Clear in Why Getting Started is More Important Than Succeeding:

I can’t think of any skill more critical to the active pursuit of a healthy life than the willingness to start. Everything that signifies a happy, healthy and fulfilled existence — strong relationships, vibrant creativity, valuable work, a physical lifestyle, etc. — it all requires a willingness to get started over and over again.

Take note: being the best isn’t required to be happy or fulfilled, but being in the game is necessary.

Get started and correct your course as needed. In terms of personal finance, so many people have never drilled down to the real reasons why money is important to them, they have never calculated their net worth, never tracked and broken down their monthly expenses, and thus never properly prioritized their time, energy, and money accordingly. But that’s okay, as now is still a great time to get started! I have finished the book yet, but apparently you can fit an entire plan on one page. :)

Dynamic Withdrawal Rates: Increase Spending Flexibility, Improve Portfolio Sustainability

The WSJ has a nice introduction to dynamic withdrawal methods and managing your portfolio in retirement. They outline a few of the more popular variations – Adjusted 4%, Floor-and-Ceiling, and Guardrail. I like learning about dynamic strategies because I think they are more applicable to the real world and involve good ole’ common sense. When my portfolio is crashing and my dividends are getting cut, I think I’ll be fine with pulling back a bit as everyone else will likely be doing the same. If your investments have a good run and your income stream grows, and then you can spend a bit more.

Here’s an infographic they put together to help visualize one type of dynamic strategy called “floor-to-ceiling” (click to enlarge):

wsjdyn

Vanguard’s Managed Payout Funds are also designed to aid in portfolio withdrawals, using dynamic methods but adding in a smoothing component so that your income won’t swing as wildly from year-to-year. I don’t plan to buy those funds, but I might use their smoothing idea.

I am a conservative investor, so I don’t know about using dynamic withdrawals to justify a 5% average withdrawal strategy, though. It would just make 4% for 30 years less scary. In my case, I’m considering 3% dynamic for 50 years.

The Affluent Investor by Phil DeMuth – Book for $100,000+ Club

affinvestor

This week I’ve been trying to catch up on my book reviews (you should see my “to read” shelf!), and after a good beginner book I thought I’d write about a good intermediate-to-advanced book. You’ve probably noticed there are a lot of starter books out there for novice investors but not as many with more advanced advice ($$$… the potential audience is a fraction of the size). Addressing this deficiency is the goal of The Affluent Investor by Phil DeMuth.

In terms of the title, the industry classifies you as “mass affluent” if you have investable assets between $100,000 and $999,999. From $1 million to $10 million you are “high net worth”. This definition excludes some possibly important stuff – your income, the value of your personal residence, pensions, etc. But in real world terms, I would say this book is for anyone who isn’t living from paycheck-to-paycheck. If you have a $10,000 portfolio and have a surplus each month, sooner or later you will reach $100,000. If instead you have a credit card balance and it just keeps inching up, then you need something closer to a Dave Ramsey book.

The overall tone of the book is that of a close friend who is smart and into finances. DeMuth is already a financial advisor to rich folks so the last part is expected. What I mean is that he will be blunt and isn’t afraid to make stereotypical assumptions in order to rattle off all his tips. At only 200 pages, most things are only touched upon in a concise manner. Here’s a rough outline of the topics covered:

  • Big picture rules. Get and stay married. Make sure you can afford your children. Avoid debt. Save early and invest it. Diversify. Plan ahead.
  • Financial advice based on life stage. He puts you in the basic “affluent” mold of 20-35s have a kid buy a house, 35-55 working hard at professional career making most of your money, 55-65 protect assets and prepare for retirement, and 65+ retire and spend down money.
  • Financial advice based on job. Has special advice for doctors, lawyers, small business owners, and corporate executives.
  • General investing advice and “Can you do better?” investing advice. General investing advice is keep costs low and buy index funds that closely approximate the global market portfolio. “Can you do better?” advice touches on things like value stocks, small-cap stocks, dividend stocks, momentum, low-beta, etc.
  • Asset protection. Being affluent means you have money, and other people will want it. Insurance, buying real estate with LLCs, homestead exemptions, and similar topics are are very complex but his take is condensed into less than a page each.
  • Tax minimization. IRAs, 401ks, Solo Pensions, 529 plans, Health Savings Accounts, etc.

Here are things you might expect from a “book for rich folks” but won’t find inside:

  • You won’t get in-depth, hand-holding walkthroughs of anything. Consider the book as a push in the right direction for researching ideas.
  • You won’t find his secret list of the best hedge fund managers.
  • You won’t find tips on how to get rich with real estate.
  • You won’t find advice on how to pick individual stocks like Warren Buffett.
  • You won’t find him selling his own personal advisory services.

A general problem with all books of this type is that the advice is pretty short and to the point, but it doesn’t provide very much supporting evidence. You’ll either have to do your own due diligence, or blindly decide to trust the author. I’ve read books where the author might sound convincing but their advice is horrible. In my opinion, I think for the most part the advice in this book is good. But I’m just another person on the internet, so again do your own research.

In conclusion, I think this book covers a lot of questions that are commonly asked by the intermediate individual investor. It’s not too long and not too short. Some of the advice won’t fit your own situation, but at this level if you just find one solid actionable idea that makes the entire $18 book worth it. I’m personally going to look into the solo defined-beneift plan idea again, although I may still be too young to take full advantage.

The Position of F- You and Financial Independence

In the recent movie The Gambler, a loanshark named Frank explains the Position of F- You to gambler Jim Bennett. (Played by actor John Goodman.) Warning: Lots of explicit language ahead!

(Embedded YouTube video above. Direct link.)

If you can’t view the video, here is a partial transcript:

Jim Bennett: I’ve been up two and a half million.
Frank: What you got on you?
Jim Bennett: Nothing.
Frank: What you put away?
Jim Bennett: Nothing.
Frank: You get up two and a half million dollars, any asshole in the world knows what to do: you get a house with a 25 year roof, an indestructible Jap-economy shitbox, you put the rest into the system at three to five percent to pay your taxes and that’s your base, get me? That’s your fortress of fucking solitude. That puts you, for the rest of your life, at a level of fuck you. Somebody wants you to do something, fuck you. Boss pisses you off, fuck you! Own your house. Have a couple bucks in the bank. Don’t drink. That’s all I have to say to anybody on any social level. Did your grandfather take risks?
Jim Bennett: Yes.
Frank: I guarantee he did it from a position of fuck you. A wise man’s life is based around fuck you. The United States of America is based on fuck you. You have a navy? Greatest army in the history of mankind? Fuck you! Blow me. We’ll fuck it up ourselves.

I found this via the ERE Facebook page but saw that Nassim Taleb also commented on it:

This is a critical 1 min lecture to understand independence, antifragility, “f** you money”, selfownership, and many things.

I’ve written about the concept of F- You Money before as discussed by Dilbert and Humphrey Bogart. Here’s that Dilbert comic again.

dilscott

Financial independence, financial freedom, early retirement, whatever you want to call it… Why do some people yearn for it? Perhaps you recall the most common regret on our deathbeds:

#1. I wish I’d had the courage to live a life true to myself, not the life others expected of me.

In my view, that is what it is all about. Having “f-you money” can help. You don’t need a million bucks or anywhere near that. Even a small sum of money tucked away can make a big difference in your mood and outlook on life.

Fidelity IRA Match: Switch and They’ll Match Your Contributions Up to 10%

Fidelity has released an infographic [pdf] about the power of saving 1% more of your income:

fido1more

To coincide with this, Fidelity started a related promotion to entice folks to move over their IRA assets to them. The Fidelity IRA Match is designed to mimic the 401(k) contribution matching that many employers offer, where Fidelity will match between 1% and 10% of your future contribution for 3 years if you roll over $10,000+ to them. Valid for both new and existing Fidelity customers, but only for IRAs and not other account types. Here’s the breakdown:

Qualifying transfer* Match rate Estimated max benefit* (age 50+)
$10,000 1% $165 ($195)
$50,000 1.5% $247.50 ($292.50)
$100,000 2.5% $412.50 ($487.50)
$250,000 5% $825 ($975)
$500,000 10% $1,650 ($1,950)

 

* Qualifying transfers must be rollovers or transfers from non-Fidelity IRAs (Traditional or Roth). Rollovers from workplace savings plans are not eligible for this offer. Estimated max benefit is based on $5,500 annual contribution for three years ($6,500 for age 50+). Max benefit is set at $1,950.

It’s an interesting proposal. Keep in mind that many IRA custodians will ding you with an outgoing transfer fee if you move your money out. Also, Fidelity has other deposit promotions going on that offer a little less than the max payout here, but they are more straightforward bonuses.

To participate, you must register at www.fidelity.com/IRAmatch. If you do participate, I would like to point out the availability of their Fidelity Spartan Index funds, their Fidelity Freedom Index 20XX target-date funds which you can now purchase in an IRA, and their commission-free iShares ETFs. Fido has some good, low-cost products on their menu, but you may have to look for them.

Selected fine print:

[Read more…]

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.

Back to Basics: Create Your Own Investing Priority List

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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.