WHAT’S THE BETTER choice? This is the perennial question for all of us, as we ponder how best to use our time, how to invest our savings and how to get the most out of the dollars we spend.
Want to lead a more thoughtful financial life? As I try to make better choices, here are five questions I find particularly useful.
1. Why would I stray from the global stock market’s weights? As I’ve mentioned a few times, my biggest holding is Vanguard Total World Stock Index Fund (symbols: VT and VTWAX), and my intention is to allocate even more of my portfolio to the fund in the years ahead. The fund owns every publicly traded company of any significance from around the world, offering—I believe—the ultimate in stock market diversification.
Why would I invest my stock market money in anything else? If I’m going to stray from a fund that offers the ultimate in diversification and does so at rock-bottom costs, the purchase would have to be pretty darn compelling. Like everybody else who pays attention to the financial world, I constantly hear about intriguing investments and I muse about whether they’d be good additions to my portfolio. But those musings don’t lead anywhere: It’s been years since I last bought a new investment.
2. If I were starting from scratch, would I hold my current portfolio? This is clearly related to the previous question. These days, not only do I find scant reason to buy any stock-market investment other than Vanguard Total World Stock, but also I’m sorely tempted to simplify my portfolio by unloading the other stock funds I own, such as those that target international small-cap stocks or U.S. large-cap value stocks.
These smaller positions have been a drag on my portfolio’s performance for more than a decade. But because their performance has been poor, I assume they’ll eventually have their day in the sun, and I can’t bring myself to sell until those happy days return. Am I being disciplined—or foolishly obdurate, imagining I know something that’s unknowable? I suspect the answer is “all of the above.”
3. How much should I have in bonds and cash? When many folks design their portfolio, they often begin by asking how much stock exposure they can tolerate or they simply adopt some prescribed asset allocation, such as the classic mix of 60% stocks and 40% bonds. But I favor starting with a different question: What’s the minimum sum—for practical and behavioral reasons—that we should each keep in bonds and cash investments?
To that end, retirees might calculate the amount that they’ll need to spend from their portfolio over the next five years, while those still in the workforce might decide how much cash they need set aside for emergencies and for, say, upcoming college bills, house down payments and remodeling projects. We might look at the resulting sum—which, in all likelihood, is all we rationally need to keep in bonds and cash—and then ask ourselves whether we should add a little more, so we can sleep better at night.
What about our other money? It could all potentially be invested in stocks. More than likely, if folks go through the above exercise, they’ll discover they could allocate more of their portfolio to stocks than they currently hold and far more than conventional wisdom suggests. For instance, when I run the numbers, I end up with a target allocation to bonds and cash of just 20%, equal to five years of 4% portfolio withdrawals. In fact, I currently have less than 20% in bonds and cash because I don’t envisage fully retiring anytime soon.
4. Will my kids want the possessions I buy today? The answer is, probably not. As they’ve grown older and pickier, Hannah and Henry have shown less enthusiasm for the “treasures” I offer. That means that, if I buy anything of lasting value, I’m buying it solely for my pleasure. Result? For a purchase to make sense, I need to be happy with the amortized cost over my lifetime, which is becoming shorter by the day. Needless to say, not many items make the cut.
That brings up a related question: What can I get rid of? Early in our adult life, we don’t just acquire many possessions we later regret. Often, we also acquire investments and financial accounts that soon clutter our financial life and become a nagging irritation. I’ve unloaded a surprising number of financial accounts and possessions over the past dozen years, but I feel I still have further to go. One positive sign: So far, I haven’t had any regrets about any of the stuff I’ve shed.
5. Am I using my time wisely? This is perhaps the question I ask myself most often. To be sure, it isn’t strictly a financial question, and yet how we use our time is inextricably linked to money, whether we’re looking to spend it or acquire more.
There are obvious time wasters, like following the stock market’s daily action, or brooding over some perceived slight, or standing in line at the Department of Motor Vehicles. These are all things I try to minimize.
But there are also bigger questions: In allocating my time, am I striking the right balance between helping others and pursuing my own interests? Am I putting too much emphasis on activities that make me money and not enough on things that I simply enjoy? If tomorrow I got a grim prognosis from my doctor, would I change how I use my time?
No, we shouldn’t be constantly fretting over the five questions above. But I do think there’s great value in quizzing ourselves about such things—because a little self-examination undoubtedly trumps a costly, unconsidered blunder.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles.
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In June, 2023 I decided that I was going to retire January 5, 2024…and I did. In July 2023, I took 40% of my then portfolio and bought 4 Fixed Indexed Annuities, with Income Riders. I took the remaining 60% and put 5% in cash and the balance in Equities…80% VTI and 20% VXUS.
Why am I 100% in Equities and 0% in Bonds/Fixed Income? Because my Annuities are by fixed income portfolio. While there are deferred, they are growing by 8.25% annually, guaranteed. (This is in the Income Account, I am not asserting 8.25% interest.) If I wait the full seven years they can be deferred, I will have $54,000 in tax free income annually, since they were funded with Roth Dollars. These FIAs have a secondary benefit called the “Income Doubler,” which will double the income stream for 5 years, in the event of needing Long Term Care, until the income account is deleted, while guarantying the regular income stream for life.
In addition, I have a $425,000 home with a $53,000 mortgage balance, on a HECM for Purchase Reverse Mortgage. The associated Line of Credit is $179,000, or 3 years of current retirement expenses, which includes 10% for charitable giving and $10,000 a year in Vacation Funds.
Lastly, I waited until age 70 to file for my Social Security, maxing out my benefit for my spouse, should I predecease her. We have 111% of our regular retirement expenses covered solely by our annual social security benefits.
Looking through JC’s comments, I am happy with my answers for 1-2-3, but #4. gives me pause. I am a gun collector. I doubt either of my children will want my guns after I am gone, but I have given my spouse the freedom and ability to dispose of them through having them auctioned off and providing the proceeds to be placed into our family trust to be dispensed as she sees fit.
My bride of 50 years has way more stuff that will need to be disposed of, and I will let my kids handle that if I am already gone. If not, Goodwill will have a great year that year!
Everything else…estate sale works for me.
#5. is in development. I am still in the “permanent vacation”stage of early retirement. We start traveling in April and have 6 different trips planned for 2024. I will be considering HOW best to spend my retirement years once we figure out WHERE we will spend them.
Another marvelous Article by JC.
Another interesting article and terrific comments. I’m one of the contrarians: I continue to keep far higher % in safe funds, as retirement nears.
No pension, inheritances or other income sources requires a lot more cushion to sleep at night. Higher equity is oh-so-sweet – until it’s suddenly not.
I’d rather hold onto what I have vs. gunning for higher growth during vulnerable retirement years.
To the global diversification and the stock/bonds/cash points, I agree everyone’s situation is different and there is clearly not a”one plan first all”answer.
Our situation is that my wife retired a couple of months ago and had a pension. I retired with a pension fourteen years ago but I continue to work part time. I will start receiving SS at FRA in a couple of months and at that time my wife will start receiving her spousal benefit.
Our SS and pensions cover 100% if it income. The only budget change I plan on making is that our retirement account investments will go to our cash flow expenses.
As far as global versus domestic investing my thought is that some articles that mention the VTI has only dominated VT the last fifteen years and the past doesn’t necessarily reflect the future but then they mention Japan of thirty years ago or even the great depression. I might be living in a bubble (pun intended) but I can’t imagine a world without technology advancing. There is no better technology created in the world than in the USA and therefore I am 100% VTI
I sometimes find myself reflecting on what is important for the day. I allocate my time to the highest priorities for the day and week. This article is important to remind ourselves of what is valuable to spend time on. Thanks Jonathan.
Thank you for such a thoughtful article. I invested about 30% of my portfolio in a TIPS ladder that goes out to 2050. That with expected Social Security should cover my essential liabilities and I forecasted.
The rest of the portfolio is is 70% US and 30% foreign equities (including emerging markets) invested in Avantis index ETFs. I am overweight US since I plan to spend my portfolio in US dollars.
I expect to have a rising equity glide path as I spend down my TIPS portfolio in retirement and my heirs inherit an all equity portfolio.
Jonathan–Super article. As I get older, simpler with investments feels better. Another number that proves interesting….when calculating the traditional % bonds/cash and % equity of the portfolio, one thing I consider as a key component of the “bond” portion is the PV of SS and pensions for spouse and I. That will get your bond/cash portion to a higher portion of the portfolio.
The “old” 60/40 number makes zero sense…..it has to be a function of the specific circumstance of the household. Someone who is 70 with $XX mil of asset ( and ample safe monthly income) is absolutely nuts to have 60% in bonds. Conversely, someone who is 70 with $100k of assets is absolutely nuts to have as much as 40% in equities.
In any case, keeping things simple does look better and better!
(But like you, I have to play with the portfolio some for entertainment). For me, the weakness is the emerging market and small cap value sectors. Been waiting now for decades! But just wait those sectors will put the Magnificent 7 to shame in the next 10 years!!…I just know it will happen!!!
I and my wife are fortunate to have pensions along with Social Security. I didn’t do enough Roth to reduce my RMDs, but we are fortunate enough to have our portfolio growing faster than we can spend it, and enjoying life immensely with time for travel and volunteering, among other activities.
I add my voice to the earlier commenters as we always appreciate your thought provoking articles. Thanks!
Between waiting until age 70 to start my social security benefit and earnings from some seasonal part time work I do not currently need to withdraw any funds from our portfolio for expected current living expenses. I have been fortunate.
I recently completed, in 2023, a conversion from my previous employer 401(k) to my tIRA. My old 401(k) had limited low cost equity options and I was 100% in VFIAX, the S&P 500 index, in my 401(k) allocation due solely to the low expense ratio. After rollover I am now holding about five years of estimated RMDs in the Vanguard cash settlement fund and US T-Bills and T-Notes of various duration being bought at auction to try to match my future expected RMD cash requirements for a rolling five year period. I do currently have some additional cash above the RMD cash requirements so I sleep better.
I have currently split my tIRA equity holdings approximately equally between VTWAX and VFIAX. Emotionally it was hard for me to fully embrace 100% VTWAX given the recent lower yields of VTWAX when compared to VFIAX. Yet the long term logic of owning a cap weighted world equity fund encourages me to move towards a higher allocation of VTWAX. My plan is to systematically convert a large portion of my tIRA to my rIRA over the next ten years using my marginal tax bracket as a guide to the conversion amount and when I do the conversion I will reduce my tIRA VFIAX holding and my rIRA conversion amount will be invested in VTWAX or VT. While our children will likely not want our stuff when my wife and I are gone I am certain they would prefer to inherit a tax free Roth instead of a taxable retirement account. Time and life events will dictate if there is anything left for them when we are gone.
For the remaining cash portion of my tIRA I am considering increasing some limited portion to TIPS vs. nominal US bills or notes to guard against unexpected inflation. As I age I plan to shorten the time to maturity of my cash like holdings. I do not plan to currently buy TIPS that are longer than ten years and likely will buy only five year TIPS or a TIPS fund when I reach age 80. I like simplicity of the idea of a TIPS fund but a zero expense ratio on TIPS bought at auction still appeals to me.
Excluding the tiny 0.10% and 0.07% mutual fund/ETF expense ratio difference of VTWAX/VT I am not compelled to convert to the EFT version on my current mutual funds.
In my long term planning I am also concerned about future tax law changes and particularity potential law changes to require gain recognition on transfers of appreciated assets at death or taxing tIRAs on a decedent’s final 1040. I expect such tax law changes to be low hanging fruit as dead people typically no longer vote.
Best, Bill
But heirs may vote!
I agree with you. And yet, the current March 11, 2024 proposed administration budget for fiscal year 2025 fact sheet includes “Moreover, the Budget eliminates the loophole that allows the wealthiest Americans to entirely escape paying taxes on their wealth by passing it down to heirs.”
The minimum tax rules were enacted in 1969 after 155 taxpayers with incomes over $200,000 paid no tax in 1966. The current AMT tax provisions we have today is an outgrowth of those minimum tax rules. The TCJA effective in 2018 increased the exemption amount for AMT which resulted in less AMT being paid by fewer taxpayers compared to pre-TCJA tax years when millions of taxpayers had a AMT tax liability. The AMT calculation is still being calculated in commercial tax preparation software and by the IRS. You and I pay for that complexity in the tax code either directly with additional tax dollars or indirectly with additional compliance costs.
After 2025, the AMT liability will return in full for individuals as exemption amounts will reset to pre-TCJA levels under current law. What the tax law in 2026 will look like is unknown.
I am simply pointing out how tax law in congress was enacted in the past which may be a guide to what they do in the future. I support voting for good tax policy but that does not appear on my ballot. In my opinion, the AMT tax law and rules is bad tax law and any proposed tax law that contains benefits or gotchas on certain groups of taxpayers are undesirable. United States taxpayers deserve better.
What has the long term return been of the Total World Stock Index Fund since you first invested, compared to the S&P 500 over the same period?
I don’t know precisely, but I can guarantee you that it hasn’t been as good. Still, I try not to drive while staring in the rearview mirror.
Another excellent article, Jonathan. Thinking through your point 3 has led me to the realization that, for myself at least, determining portfolio asset allocation in target percentage terms (60/40, 80/20, etc.) is rather pointless. Why? Because it utterly fails to take into account both portfolio size and future liability matching needs. I think the relevant analysis has to be carried out in dollar terms. Subsequently, that will of course yield a result that can be expressed in percentages. But the percentages are simply an end product of the process; they are not what one should begin with.
I thus agree with Jonathan’s starting point: “What’s the minimum sum—for practical and behavioral reasons—that we should each keep in bonds and cash investments?” In other words, how much money does one need their portfolio to contribute over the next X number of years to meet anticipated expenses. Once that sum is determined, then the rest of the portfolio can be invested in the asset class that has historically demonstrated the strongest real returns over time, namely, a globally diversified holding of equities, preferably invested in index funds. I believe this has been referred to as the “barbell” approach to portfolio construction.
We can debate what that minimum amount, expressed in years of anticipated expenses, should be. Is it five years? Seven? Ten? Twenty-five? That, of course, is a personal decision, based on our own temperaments, contingencies, objectives, etc. For me, five years, or maybe five to seven years, is the sweet spot. I am aware that Bill Bernstein and others have advocated for a longer period of time to ensure not having to sell equities. Fair enough. But again, even Bernstein has acknowledged that the crucial number is your “burn rate,” that is, the percentage that you need to withdraw from the portfolio each year to go with other sources of income in order to meet expenses. As he has said, if your burn rate is, say, 2% or less, it doesn’t really matter what your portfolio is invested in.
So for me, I have two more years or so of full-time work and almost six years until claiming Social Security at age 70. My calculation of five years of portfolio withdrawals in safe assets will fluctuate quite a bit over the next decade, reaching a maximum amount at the point of retirement and then declining gradually until Social Security kicks in, and then declining more sharply. Right now, given our situation, that leaves me with an overall allocation of about 85/15. But again, I don’t start from that allocation as a target; I end there as a result of liability matching.
Thanks for the great comment. That’s exactly how I think about it — and, like you, my need for a cash/bond cushion will be much reduced once I reach age 70 and claim Social Security.
Thank you Jonathan. I only wish that I had known all this 30 years ago!
A thoughtful article – very solid.
The one item where I differ: I don’t share the same faith in the global stock market as Jonathan, but I certainly acknowledge that Jonathan’s view may be the predominant one.
I am also a big, big fan of diversification, but to me the global market is really a hundred or so different markets, none of which I know at all. Many of them are subject to forces far beyond commerce, including corruption, war, coups, and most importantly, the absence of the rule of law, to me the bedrock of any civil society. Sure, we have some of that dysfunction here, too, but not to the extent it predominates elsewhere.
Most of these countries also lack the specific “rules” for company listing, reporting, and other activities that exist in the United States, and that allow one to see more clearly into the companies in which you invest, so you can at least get a sense of their financials that you can trust. Who really trusts China’s financial reporting? So, as I’ve said before, although I understand Jonathan’s view, to get some international exposure, I’d rather lean more heavily on US-based firms who have diversified globally.
An observation: Investors in their comments below — and I suspect this is a reflection of how many U.S. investors think — view the recent (meaning the past 15 years) strength of U.S. stocks as a reason to disdain foreign shares, and yet they also view the recent strength of U.S. stocks as a reason to hold more bonds. So, does the recent strength of U.S. stocks mean they’re more attractive — or less so? We’re all bullied and seduced by recent market performance, and it’s worth pondering how we’re being influenced.
Good points, and again I acknowledge you may be completely correct. My own prejudice is that the world economy is still one where, when the US sneezes, the rest of the world eventually gets a bad fever. And I also believe that, at bottom, the US is still propping up the rest of the world, notwithstanding the emergence of China, India and a few others. I admit I may miss out on those fast-growing economies, but my (admittedly-selective) memory tells me that they will grow for 5 years and then implode from something. I don’t want to have a portfolio like that. The US always bounces back in a few years from its slips – these other countries can take a very long time to do that. (Which addresses that bond question, too: With Social Security, two small pensions and a good cash balance, I mostly don’t need bonds. But I would certainly opt 100% for American-issued bonds or bond funds over bonds of a foreign issuer or a foreign bond fund, because of trust in our system.)
Why not VTI instead of VT. It outperforms in every time period with less than half the fees (.03 vs .07). Sharpe ratio roughly the same … volatility perhaps?
If I bet solely on Vanguard Total Stock Market Index Fund, I’d be betting that U.S. stocks will always outperform foreign shares and that there’s no danger that the U.S. market could suffer truly horrendous performance, as Japan has for the past three-plus decades. That’s not a bet I want to make.
Agree. The US market is about 60% of the world equity market today. If things keep up, as they have over the last 20 years (with the US clobbering international ex US), the US will represent about 80% of the world equity market in a couple decades. Past trends do not, usually, continue forever!! I’m betting against that happening and Japan remains a good case study.
As a retiree after I account for dividends, interest, and future Social Security I don’t really “need” to spend anything else from the portfolio. I want to have some bonds there for discretionary purchases. It just doesn’t seem right to let the stocks exceed 85% so I don’t.
So insightful, as usual. I’ve taken your advice on cash and bond allocation to an extent. I have about 18 months in short-term Treasurys, CDs, money markets and I Bonds, I want to err on the side of caution. By the time I retire I should have five years in bonds and cash, though some of that is likely to be lower quality bonds. I have more limited interest rate sensitivity than I’d have in a bond index fund, and that’s been good the past couple years.
On total world indexing, I admit my portfolio is WAY too complicated— I have bets on Japan and small-cap value, for instance. And a defense stock and an oil stock. As a result I’ve missed much of the Magnificent 7 rally. About half my stock portfolio is in index funds.
But as I’ve written for your site several times, I just can’t bring myself to put any money in China. There’s too much government interference and I’m morally opposed as well. I know I may miss a big bounce back; so be it. I’ve done well to avoid it in recent years.
Some bad calls, some good calls. Too much work and worry but I’m generally satisfied with my performance in the past five years compared with index-based asset allocation funds.
I do hope and plan to simplify greatly in the next five years.
Using the handy “Drawdowns” calculator on the “Portfolio Charts” website the worst historical drawdown for an 80% Total Stock Market/20% short-term Treasury portfolio was 44% – and recovery took 17 years. And as someone who retired in 2002, only 2 years into one of the worst two decade stretches of stock market returns in history, such statistics aren’t just arcane history to me.
So I’m with Dr. Bernstein and thus strongly against what seems to me to be a reckless blanket recommendation of a mere 5 years in safe assets. instead, following the good doctor’s advice, I suggest allocating whatever amount to equities you can live with seeing lose half its value at any moment and not recovering for a decade.
This is clearly all-but-essential for anyone in or near retirement, but arguably prudent for many much younger investors as well. I vividly recall how Bernstein completely changed his advice after many wealthy clients of his – all of whom had filled out detailed risk tolerance questionnaires and had lots of personal hand-holding – bailed on their equity-heavy portfolios en masse during the ’08-09 market meltdown. It was only after that experience that Bernstein routinely prescribed liability matching portfolios equal to 25 years worth of residual living expenses and so on.
Being greedy when others are fearful and vice versa is advice a real investing genius like Warren Buffett or Jonathan Clements (I’m not making fun here as I truly do believe you both merit the designation) is constitutionally capable of doing but many of the rest of us are made of weaker stuff.
I agree. Just a bit too much recency bias in this aggressive approach. The general rule was always 105 minus your age as a safe allocation to equities. Perhaps a bit too conservative and in need of some revision, but I cannot see abandoning long term, proven strategies just because the markets have been in such a historic run. The last 15 years have been abnormal in many ways due to government intervention and low rates that seem to be normalizing a bit. I would hate to see recent retirees get hurt when the markets inevitably return to historical rates of return.
I’m also with you, and I have sat out three drawdowns, neither selling nor buying. I’m 50% in stock index funds (around 20% of that is international) and am planning for another 23 years (that takes me to age 100). I don’t care about leaving a legacy, so see no need to take risk if I don’t need to.
I’m with you on this one and it turns out the end of my recovery decade coincides with the start of maximum SS.
Love your list of questions, Jonathan, especially the bigger ones that could never be answered by Google or AI, only by ourselves: “In allocating my time, am I striking the right balance between helping others and pursuing my own interests? Am I putting too much emphasis on activities that make me money and not enough on things that I simply enjoy? If tomorrow I got a grim prognosis from my doctor, would I change how I use my time?”
Each of those fit the definition of a “beautiful question”:
Those kinds of questions really engage our brains and cause us to keep thinking about them over time (with sometimes the answers changing over time, too).
Answers changing over time reminds of the Wayne Gretzky quote, “Skate to where the puck is going to be, not where it has been.” Now to know where the puck is going to be!
In recent years I consolidated all my non-Berkshire equity holdings into VTWAX despite the US outperforming the International stock market in recent years. I’m ok with waiting for regression to the mean.
Now that I am retired (for nearly 6 years) I do like the idea of deriving my optimal allocation to stocks rather than choosing from what look like arbitrary formulas, such as 60/40. You have explained in recent posts that holding 5 years worth of future withdrawals in safe assets should insulate you from most gyrations in the stock market.
Various withdrawal strategies are evaluated by determining how they would have worked during historical periods of poor stock performance. The classic would be the crash of 1929 and The Great Depression. I and perhaps many others may subconsciously minimize the risks from that period, thinking its “ancient history”. A tidbit in Bernstein’s second edition of “The Four Pillars of Investing” from p173 bothers me. “The period between 1966 and 1982 saw the longest stretch of negative real returns in US Stock market history,…” I think many of us look a little differently at history from our own lifetime which we lived through, compared with events which occurred before we were born. And he suggests holding 10 years worth or more in safe assets accordingly.
You have reminded us in recent posts that our standard of living does not merely increase with annual inflation, but rather real GDP, which has run about 1.5% higher than inflation. A healthy allocation to stocks for future growth is needed to keep up.
So holding enough in safe assets for protection from uncommon but possible protracted periods of poor performance (like 1966-1982) leaves less to allocate to stocks which are needed for future growth. I have sort of “split the difference”, and decided to keep 10-12 years worth in safe assets. But I withdraw 3% rather than 4, meaning 30-36% in cash/short term bonds leaves 64-70% in stocks.
I wonder how many years worth of safe assets other retirees choose to hold?
Thank you for yet another excellent and thought provoking article Jonathan!
I remember looking at that 1966-82 period for a WSJ article. While your stock portfolio would have suffered mightily through the period, the damage was less if you diversified the S&P 500 companies with smaller stocks and foreign shares. But amid today’s obsession with large-cap U.S. growth stocks, that’s a notion that often falls on deaf ears.
Good point. My equities are 75% Berk and 25% VTWAX, in part due to decisions made decades ago, and capital gains taxes would offset much of the advantage in moving 100% into VT. I do anticipate gradually moving toward a 50:50 mixture of the two. I recall Buffett suggesting in recent years that he expects future Berk performance to resemble that of the S&P 500, lagging in boom years, but not falling as far in bust years (my words not his). But as you mentioned, the performance of medium and small cap companies, not to mention foreign shares, and their moderating effects on the total portfolio need to be considered. Thank you for responding.
Jack, what do you think with happen to Berkshire-Hathaway stock when Warren Buffet passes? I know he has a management team but I still think the stock prices will go down, at least temporarily.
Good question kt2062, and I have no idea what it will do in the short term.
Buffett has made it clear in his annual letters that he is a “hands off” manager, and that all of its 70-plus wholly owned businesses are entirely run by their CEO and leadership teams.
I didn’t have much of a strategy when I was young. I had little control over how my 401-k was invested early in my career, but I did purchase Berkshire B shares in a taxable brokerage account on my own, once they became available, and eventually some in my 401k too. Now, 75% of my equities are in Berkshire.
If I were just now starting out, I would probably choose VTWAX as my sole equity investment, for reasons discussed by Jonathan.
To your question, once investors determine that the company’s intrinsic value was the same, its long term performance will be just fine. If there is an early sell off and prices plunge, it might be a buying opportunity!
“(To determine how much in bonds) retirees might calculate the amount that they’ll need to spend from their portfolio over the next five years.”
Why five years?
I just tried to look up the longest amount of time that stocks remained underwater after setting new highs, but couldn’t find a useful figure. (In contrast, lists of “crashes” are easy to find.)
I would think this is this benchmark retirees would want for determining their bond allocation: The longest period stocks have remained underwater in the modern era.
Restated, how long could you get by with all portfolio distributions taken from the fixed-income side alone? Perhaps with a bit extra in bonds just in case.
Priority No. 1: Don’t die broke.
Priority No. 2: Having insured against No. 1, leave a legacy that will have survivors smiling at the funeral.
There are very few rolling five-year periods when stocks have lost money. Thus, if you have five years of spending money in conservative investments and the market plunges on Monday, there’s a good chance share prices will recover before you spend all of your five years of cash and bonds.
“Very few” is not the same as never. We only retire once (hopefully) and the risk of running short of money in retirement is real if you experience an abnormal period of negative returns. Just ask any of the unfortunate retirees who had to return to work after 2008-09 or anyone (like me) who lost their jobs during that period. Not only did we lose substantial amounts of hard earned savings during that “drawdown” but many were forced to sell assets at depressed levels which made our pain that much worse. Everyone’s situation and risk tolerance is different, but holding sufficient funds outside of the stock market to help you weather the storm seems prudent for everyone, young and old.
“Will my kids want the possessions I buy today? The answer is, probably not. As they’ve grown older and pickier, Hannah and Henry have shown less enthusiasm for the “treasures” I offer.”
One thing that might be of interest to them later on, and possibly to future generations, is the family history. Either a written version or just turn the video on and record what you remember of the family and your personal history. I could kick myself now for not asking more questions before my parents passed.
Interestingly, while many WWII veterans didn’t want to talk about the war, my father wrote down his entire experience. It’s a family treasure now.
SLK…A few years ago my daughter bought be a membership in Storyworth.com. It is a service where you answer any number of questions about your life (whatever questions you choose to relate) and they bind them into a book for your children. I am up to @200 stories now, from “Who was your first serious girlfriend or boyfriend?” to “Who was your most influential teacher?” to were “Was your favorite vacation trip.as a child?”
It has been a fun experience remembering all these memories.
I agree. When my mother — almost 85 — talks about family history, I’m happy to listen. I want to remember as much as I can, so I can pass it along to future generations.
Perhaps when I retire and want a simpler portfolio I will change over to index funds. For now my actively managed funds continue to outperform their respective index/category handsomely enough that I’ll keep going that route.
Is your statement true when you subtract expenses from your returns? If true then you are lucky enough to find Jack Bogle’s “needle in the haystack” because research has shown that generally active funds trail index funds once expenses are deducted. What active funds are you invested in that are beating their proxies?
Mr. Lancaster – I use Morningstar (M*) to track fund performance and all M* performance data is net of fees and that’s clearly the only appropriate reporting to measure apples to apples. I have 95% of our retirement assets divided between FCNTX, FLPSX and DODGX. Not exactly small funds but by any OBJECTIVE measure, and again, net of fees, they have been superb performers (Note the 5-year, 10-year, and 15-year “Percentile Rank” for each fund on M*). While many investors are more interested in arguing about month-to-month or quarter-to-quarter performance, that sort of argument is speculating, not investing. Of course, I cut my teeth at Fidelity and active management has always been the name of the game and I’ve been lucky.
Perhaps reasonable people will disagree on the best investing approach – the key is being invested, not being on the sidelines.
And I certainly see the value in indexing and may transition to that down the road.
I used to have the fidelity funds you mention. The turnovers for these funds are 12-39% which adds to the expense. For VTIAX it’s 4%.
As Jonathan has already pointed out, I am not the best at investment choices or perhaps financial planning choices. There is a reason for that. I am human.
While most of us say we want and like choices, that is not really true. My experience dealing with people regarding 401k and health benefits decisions tells me people generally fear choices, fear making the wrong decision and have minimal interest in investigating the best choice for them.
Too many investment options in the 401k, too many health plans and people default to name recognition, go with the crowd, or in the case of health plans see the most expensive plan as the best for them. That is almost never the case.
Not too many of us do an analysis between fixed premium costs and the realistic cost of out of pocket spending.
Of course the reason for all these choices is to minimize the liability for those providing retirement and health benefit plans.
However, forget employer plans just look at the choice landscape for retirement saving vehicles, Medicare plans and Obamacare.
Sometimes one size is a better fit for all, because most of the “all” have no idea what they are doing.
HD readers being the exception of course – except perhaps me.
I too have the vast majority of our holdings in Vanguard’s Total World Stock Index Fund. The past 10-15 years it’s been, um, interesting to witness massive underperformance vs Vanguard’s Total Stock Index Fund. Similar to your desire for small cap international and large cap value to have their day in the sun, I’m sanguine the world diversification will eventually pay off.
I believe we each have the entirety of our Roth IRAs, earmarked for adult children, globally diversified. Given a 30 to 40 year time horizon, I remain humble about my ability to make predictions. This is the way.
Did you mean to say “The past 10-15 years it’s been, um, interesting to witness massive outperformance OF Vanguard’s Total Stock Index Fund.”?
Yes. Edited. Thank you.
I, too, am humble about my ability to make predictions — and, when I’m not, the markets soon enough re-instill that humility!
Excellent article Jonathan. It’s important to ponder the big questions occasionally. It should help inform your decisions on the little questions, especially with regard to #4. #5 is a big one. I find the answer will vary depending on your stage in life. I think it’s important to remember that if our answer to #5 is NO, it’s within our power to change it, especially in retirement.
Another good one with lots of food for thought.
Sorry to say my answer to #2, would I hold the same portfolio if starting from scratch, is absolutely not. For starters, we have way too many holdings.
On the bright side though, my answer to #3, how much to hold in cash and bonds, probably would be the same, and that’s the most important portfolio decision we make.
Timely article for me Jonathan. Four years ago I inherited my parent IRAs when they both passed away months apart. About that time I also retired and sold my Vanguard retirement target fund and bought the components of that fund in like percentages so quarterly I could sell appreciated funds to rebalance and generate cash pay our expenses while we delay claiming Social Security.
I figured that I would keep all of my parent’s accounts as constituted as an homage to them.
I changed recently changed my mind as our funds had swelled to 21 and many of them were redundant. Just this week I pared down our holdings funds to 13. When I get to the point that I no longer want or are able to manage this many funds I will adopt Morningstar’s Christine Benz’s three fund Vanguard portfolio.
I inherited these traditional and Roth funds before the passage of the most recent tax laws and thus planned on withdrawing the funds over my parent’s life expectancy.
I have recently had a change of heart. My traditional accounts are just more than twice as large as my wife’s. To minimize my RMDs when we turn 73 (the same year) I am utilizing my traditional accounts to pay for our living expenses to get my traditional balance lower. I am also trying to convert all my wife’s traditional accounts to a Roth as soon as possible to take advantage of the lower tax rates for the next two years. When we turn 73 I will only have to withdraw RMDs from my accounts.
The other day I realized that since my mother’s Roth account withdrawals are tax free I could use these funds to fund our living expenses and covert a like amount from my account without increasing our tax liability. This is going to allow me to convert nearly twice as much in one year. I figure that since my wife’s side of the family has had two centurions in the past two generations these Roths may not get touched for at least 35 more years. Because you mentioned VT in a past article Jonathan that will be the fund of choice. Maximum diversification for 35 or more years tax free seems to make sense to me. Also, whatever is not spent from this fund will be inherited by my children tax free.
“To minimize my RMDs when we turn 73 (the same years) I am utilizing my traditional accounts to pay for our living expenses to get my traditional balance lower.”
This is an interesting thought. It’s occurred to me as well but I haven’t don’t the math. We have a sizable percentage of our portfolio in taxable accounts which could be tapped at a lower rate of tax than our IRAs and probably should be first. But, if we start tapping IRAs first as you plan to and leave the taxable accounts alone, some of those assets could get a step up when one of us goes.
Besides the math which I confess is a little beyond me, you never know what’s going to happen, so hard to say that one approach is much better than the other.
I have been thinking of at least withdrawing upto the limit of the 12% tax bracket from tax deferred accounts as well and leave the taxable for heirs who can inherit a stepped up basis.
I’ve decided to hold VTI instead of VT to avoid the increased currency/political risk that foreign-based companies are subject to.
Another nice article. Regarding how much fixed income, I often counsel those looking at retirement to have their AA set at what they want during retirement when they are 3 years away. This way if the market crashes 1-3 years before retirement…they likely can still retire. I saw too many people with 90% or more in equities…just before retirement.