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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