Where should I be investing my retirement savings?
That’s a great question – and the answer is likely to depend on whom you ask; however, among the honest investment advisors there are some common themes: Start early, invest regularly, take advantage of tax privileged accounts (401K, IRAs, etc.), invest in low cost index funds and stay away from stock brokers and their kind.
Become a millionaire by investing in just 3 funds…..
I’ve mentioned Dr. Bernstein before. He’s former neurologist who is now considered one of the foremost experts in the field of modern portfolio theory. He is nothing short of a genus. He wrote a booklet – its only about 16 pages – titled “If You Can: How Millennials can get Rich Slowly.” You can download a copy of it for free here. Don’t let the title fool you – this is great advice for everyone. Essentially, he advocates a simple plan by where you save 15% of your salary and put equal amounts of that into just three different mutual funds:
A U.S. total stock market index fund
E.g. Vanguard Total Stock Market Index Fund (VTSMX)
An international total stock market index fund
E.g. Vanguard Total International Stock Index Fund (VTIAX)
A U.S. total bond market index fund.
E.g. Vanguard Total Bond Market Index Fund (VBMFX)
Using just 3 low cost index funds –a US stock fund, an international stock fund, a US bond fund – you can essentially “own the whole market.” Well, most of it anyway.
The three funds will grow at different rates, so once per year you adjust their balances so that once a year they all have an equal amount of money in them. Dr Bernstein states that this plan will out perform 90 percent of finance professionals, and if you start when you are 25, it make you a millionaire. Personally I believe him. You should read the booklet – it won’t take you very long. If you get nothing else out of it, you will learn about all the roadblocks that try to prevent you from attaining your goals so that you can look out for them!
Bogleheads ?
The bogleheads are a group of investors who are ardent followers of John Bogle, the founder of the Vanguard Group and the architect of the low cost index fund. These folks are serious about investing and I highly recommend the book: The Bogleheads Guide to Investing. They hang out here on the web. Their investment strategy is slightly more complex and changes with ones age so that a portfolio for a younger investor might look like:
Young investor
Domestic large-cap stocks 55%
Domestic mid/ small-cap stocks 25%
Intermediate bonds 20%
This could be achieved with just 2 Vanguard funds
Vanguard Total Stock Market Index Fund (VTSMX) 80%
Vanguard Total Bond Market Index Fund (VBMFX) 20%
A middle aged investor’s asset allocation might look like this:
Domestic large-cap stocks 30%
Domestic mid/ small-cap stocks 15%
International 10%
REITs 5%
Intermediate bonds 20%
Inflation protected securities 20%
Using Vanguard funds this could be achieved
Vanguard Total Stock Market Index Fund (VTSMX) 45%
Vanguard Total International Stock Index Fund (VGTSX) 10%
Vanguard Real Estate Index Fund Investor Shares (VGSIX) 5%
Vanguard Total Bond Market Index Fund (VBMFX) 20%
Vanguard Inflation-Protected Securities Fund (VIPSX) 20%
You can see that as one ages, they advocate putting more assets into lower risk assets (e.g. bond) .
Which strategy is best for you?
There are many other strategies out there. Which do I think best? Honestly I think if you invest regularly invest in low cost index funds, diversify, take advantage of tax privileged accounts and stay away from stock brokers I think you are going to do quite well. Personally, I like strategies that adjust the stock / bond ratio according to ones age, but if you prefer Dr. Bernstein’s simplified plan and you stick to it – you are likely to do great!