Philosophy and Asset Allocation
We’ve spoken now in shades of vagueness about our investments and investing strategy. We’re focused first and foremost on simply getting folks to save more. Begin with allocating the majority of your effort to increasing the gap between money in and money out. Slowly chip away, with a goal of spending less than half of your income. If you can make step-changes in this area, you are light years ahead of most Americans, and frankly most humans. So yeah, start there.
…We’re focused first and foremost on simply getting folks to save more.
The next element of this game is getting your new-found savings to start making money for you. Your traditional savings and checking accounts are not your friend. With an average interest rate on a typical savings account at 0.08% APY (!), your money is losing value over time as your courageous dollar fights a valiant, but fruitless battle against the tyrant forces of inflation (current inflation rate is around 2%). Remember, goods and services today will cost more next year. You either need more income or higher interest rates on your savings, just to keep up!
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Investing vs Savings
You might consider a very simple and passive approach to securing much better long-term gains in the stock market, instead of relying on a feeble savings account — or worse yet — spending all of your income. I want to reiterate the emphasis on long-term. Again, long-term. For the vast majority of us, the stock market is not to be used as a short-term, get-rich-quick scheme. We invest in the market as a way to let the power of the global economy inflate the value of our hard-earned dollar while we sleep, year after year after year.
A Simple Case Study
Let’s take a look at an admittedly over-simplified case where $10,000 has landed in your lap. Now most of my climbing audience will probably just go buy a van 🙂 . However, assuming the money is either saved or invested, we can analyze different investing vs. saving scenarios over a 60 year period:
(1) Simply save the money in a traditional savings account with a compound interest of 0.08%.
(2) Compare to the rising cost of $10,000 worth of goods/services (2% yearly inflation).
(3) Invest that money at a 7% yearly compound interest rate.
The obvious (and oversimplified) assumption here is that the interest rates are fixed over a 60 year timeframe, which is not realistic. You get the idea though. The charts below speak for themselves.
Remember, your working life is infinite if your income does not exceed your spending.
If your job is not your passion, it’s time to start evaluating whether this is the course of action appropriate in your life. Some form of investment strategy is essential if you desire increased freedom and flexibility in your life.
Our Investing Strategy
Our specific strategy has evolved over the last 7 years since we first dipped our toes into the warm and inviting waters of the stock market. Through trial and error mistakes, and later other voices of reason, we’ve come to find the following key elements of comfort for the CC Family:
Key Elements
Simplicity
Who has time to review stocks, PE ratios, and prospectus reports? Not us! We wanted a set-it-and-forget-it investing strategy.
Low Risk
For those of you new to stock market investing, any money spent in the stock market might seem risky. Investing does carry risk, but so does driving, jaywalking, and chewing steak the way I chew steak. The biggest risk I see to your future is not investing.
Diversification
The performance of companies and industries vary wildly and are sensitive to different local and global market forces. We’d prefer, as best as possible, an investing strategy that captures the average performance across all sectors and industries.
Liquidity
We really like the idea of real estate investment. I think it’s a great wealth-building tool if treated like an investment. However, we don’t want the majority of our money tied up in an asset that can’t be quickly sold to generate cash.
Low Fees
There are lots of enticing mutual funds out there with seemingly great long-term performance, but have you considered how much of that performance is being eroded by the fee structure of that fund? Make sure you are comparing expense ratios.
Risk Tolerance
We decided on a relatively aggressive investment strategy focused on equities (stocks), and to a much lesser degree, bonds. As 30-somethings with what we believe is a fairly high tolerance for market volatility and (presumably) many years left in our lives, we wanted to go heavy on stocks.
Stocks tend to perform much better over the long term than bonds. We also feel that the diversification potential of bonds has been overstated, so we add them as a bit of cushioning to stock market volatility and leave it at that.
Our Asset Allocation:
This is fairly straight-forward, and frankly boring. I hope you didn’t tune in for some secret way to game the market, because you won’t find it here.
Investing Strategy: Stocks
We invest 90-95% of our money into stocks, and primarily into the Vanguard Total Stock Market Fund (VTSAX). Here’s why:
Diversification
This fund tracks the U.S. stock market as a whole, which in today’s global economy also gives you quite a bit of default international flavor as well. As we stated above, we want automatic diversification and have zero desire to research companies and pick our own stocks.
Low Fees
The fee structure is incredibly low. The VTSAX fund imposes a 0.04% expense ratio, which is one of the very lowest in the industry. It should be noted that Schwab and Fidelity now carry some comparable index funds. All index funds and mutual funds carry a fee structure, and it’s critical to evaluate how much of your returns will be eroded by those filthy fees.
Expense Ratio & Fees: They’ll Hose You Big Time
Long-Term Returns
We assume a 7% yearly return on money invested in this fund. Recent years have been much better — or of late much worse — but we’re focused on the future and a long investing timeframe, not the present.
The legendary Jim Collins has written and explored far more on this subject. In interest of not reinventing the wheel, I thoroughly recommend the Stock Series for further perusal.
Starter Stock Options
It should be noted that an initial investment of $3,000 is required to enter into the Brotherhood of VTSAX (down from $10,000 in 2018). If you don’t have that kind of cash lying around, there are still great whole-market index funds to help get you started at any price point (our approach of years prior). Once you hit the minimum threshold, money can be diverted to VTSAX.
Vanguard’s VTI ETF fund is a good place to start if you don’t have or are unwilling to throw $3k of your life’s work into this game. The skinny is that this fund can be purchased with no minimum investment, but does potentially carry fees when traded. You can transfer funds from VTI to VTSAX once you hit the minimum $3,000 investment.
Automatic Investments
We have an automatic monthly contribution set up with our Vanguard brokerage account to withdraw a predetermined amount from our checking account. As the checking account grows, occasionally we throw the surplus towards VTSAX and/or our mortgage, dependent on current market performance. Like this time.
Note that automatic deposits are unavailable with ETF funds, so we prefer VTSAX because we want the absolute laziest approach to making money. We would rather have our minds on say, I don’t know, a mother-daughter moose pair.
Investing Strategy: Bonds
We aim to keep about 5% of our funds in bonds, and the ideal fund for us is the Vanguard Total Bond Market Fund (VBMFX). As discussed above, bonds can act as a dampening agent against stock market volatility, but have much lower growth potential when compared to stocks.
Investing Strategy: “Cash”
As you know, bills have to be paid and some money needs to be spent, right? At current, we are keeping about a year’s worth of living expenses in our traditional checking and Vanguard Money Market accounts (5% or so of total savings at current). Mr. CC at least would like to see that cut to no more than two month’s worth and the rest invested. Marriage is a compromise and I don’t see that changing anytime soon 🙂
Home Equity & Mortgage
We own a home and have enjoyed (insane) equity growth on this humble abode since purchasing in 2013, with an average annual growth rate of 11% (!!). We track this growth rate monthly, which is based on average estimates from Zillow, Redfin, and Homesnap. Of course, we realize that we aren’t actually capturing 11% growth on our “investment”, due to fees, mortgage interest, maintenance and the like. But hey, we’re still quite happy with this cushion.
(Related Post: Should I Buy a Home?)
We do not include home value or any home equity in our net worth calculation. We still carry a mortgage, which we hope to pay off in 2-5 years. Any proceeds of an eventual sale or rental income are pure sausage gravy on top of the biscuit that is our plan. We currently pay extra on our mortgage principal, but are constantly evaluating the appropriate amount to “over-pay”.
Pay off Mortgage or Invest?
Ah yes, the hotly debated topic up there with crag babies and crag dogs in the climbing world. One more forum post or blog article ought to solve it!
Mr. and Mrs. CC differ on whether extra mortgage payments are the right answer. Mr. CC prefers more savings directed at investing in the market, whereas Mrs. CC sees any debt as the “He-Who-Must-Not-Be-Named”, so we meet somewhere in the middle. I suspect that after we hit our financial independence target we will focus our efforts much more strongly on slaying the mortgage and therefore greatly reducing our overall spending.
Math vs Emotions on Investing Strategy
The math generally supports investing over paying off a mortgage, which is especially true when you have a low interest rate on your mortgage. With a mortgage interest rate of 3.5%, that’s the guaranteed return on our investment we are getting by paying extra on our mortgage.
In recent years, the market has been consistently generating double-digit returns and should return an average of 7% over a long investment timeframe. So you can see the benefit of diverting those funds there instead. That being said, there are some very real intangible emotions of carrying debt not captured by the math, so we split the difference and go cook dinner and think about something else. There is no right answer.
Up Next on Our Investing Strategy…
So now that we’ve shared a bit about our investing strategy, we’ll next take a look at where our investments reside — the so-called “buckets”. We want this to be a basic how-to, so please reach out with any questions, comments, or angry criticisms and cries of irresponsibility. Also note that this is our plan, and far from the only plan.
Do you need more details to help you get started? No problem, let’s ride a magic internet carpet to Part 2 of our investing strategy!
Well folks, there you have it. The CC investing skeleton. We’ve enjoyed the fruits of this lazy plan. Plus, very little action is needed to get it up and running. But please, read and research as much as you can to find a plan that’s comfortable for you. The best-laid plan means little if the risk profile exceeds your ability to sit on your hands in a down market. This is very important, because all investors are tested at some point.
How have you begun to think about the years ahead?
Updated November 2019