Where should I be investing my savings

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.

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!

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) .

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!