The Dirt Simple Investment Portfolio


So you are interested in investing to grow wealth but you don’t want to spend a lot of time doing it.  You just want something that is simple.  Something dirt simple.  Well, here it is, the dirt simple investment portfolio, which consists of three funds:

1.  The Vanguard Total Stock Index Fund

2.  The Vanguard Total Bond Fund

3.  The Vanguard Total International Stock Index Fund

This portfolio has all you need to properly diversify and allocate money between income and growth.

The percentage you would put in each fund would vary depending on your age.    As you get older and will need the money sooner, you would shift from growth (stocks) to income (bonds).  The percentage you would put into the bond fund would be your age  minus 10%.  You would then put the rest into stocks, split between the domestic and the international stock fund.

For example, let’s say you started with $12,000 and you were 30 years old.  You would then put 20% into the bond fund and 40% into each of the stock funds.  Your portfolio would therefore look like this:

$4000 Vanguard Total Stock Index Fund

$2000 Vanguard Total Bond Fund

$4000 The Vanguard Total International Stock Index Fund

(Note that the minimum investment in the bond fund is actually $3,000, so you’d need to scrape together another $1,000, but you get the idea.)

You could then keep this same portfolio, adjusting the percentages as you got older, to continue to invest your age – 10 % in bonds.  At age 40 you would have 30% in bonds and 35% in each of the stock funds.  At age 60 you would be 50% in bonds and have 25% in each of the stock funds, and so on.

You would need to rebalance the funds about once a year.  In rebalancing, you shift money from the funds that have done well to those that have not done as well in order to restore your target percentages.  For example, let’s say that you are age 30 and the stock funds had a great year, such that your $10,000 portfolio became:

$6000 Vanguard Total Stock Index Fund

$2000 Vanguard Total Bond Fund

$7000 The Vanguard Total International Stock Index Fund

Your total portfolio value would now be $15,000.  You would want to put $3,000 in the bond fund and $6,000 in each of the stock funds to restore your target percentages of 20% bonds and 80% stocks.  You would therefore pull $1000 out of the Total International Stock Fund and invest it in the Total Bond Fund.  Vanguard, and several other fund companies, have online tools to allow you to do this very easily without even doing the math.  You just indicate the percentages you’d like to have and press a button to rebalance the portfolio.

There is an issue with doing this, however, if you are investing in a taxable account.  If you have had gains in the account this might result in capital gain taxes being owed.  This is particularly an issue if it has been less than a year since you invested the money because that would be a short-term gain and be taxed at a higher rate.  Depending on your income, long-term gains may not be taxed at all (check with a CPA).  Another way to rebalance the portfolio if you are contributing new funds to the portfolio – which you should be doing on a regular basis – is to invest new money in the fund that you want to grow.  In this case, you would direct new money to the bond fund until you reached the target percentage of 20% bonds, then start to allocate new money based on the 20%, 40%, 40% percentages again.

Investing doesn’t need to be difficult.  While you can perhaps eek out a little bigger gain by developing a more sophisticated portfolio, you will do very well with the dirt simple portfolio.

Contact me at VTSIoriginal@yahoo.com or leave a comment.

Buy the SmallIvy Book of Investing, Book 1: Investing to Grow Wealthy at https://www.createspace.com/4306997
The SmallIvy Book of Investing, Book 1: Investing to Grow Wealthy

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Investing $100,000 to Generate Income or Beat the Markets


Let’s say that you have a large sum to invest, like $100,000 or more.  Maybe you received the bonus of you life at work, or maybe you just got an inheritance check and want to make it last.  Invested right, that $100,000 can grow quickly and then provide extra income in retirement or before.

One of the best ways to think about investing is encapsulated by The Parable of the Pipeline, created by Burke Hedges.  When you add investments, you are creating a source of income for which you don’t need to work, much as you can create a source of water that requires no effort on your part if you take the time to build a water pipeline.  With $100,000, you can create an income of about $3,000-$4000 per year without the money ever running out.  If you let it grow for another 20 years, that income stream can grow to $24,000-$32,000 per year.  You’ve got to love compounding.

When looking at investing you money, you need to consider two factors – the time you have until you need to start getting an income from the money and the strength of your stomach for changes in the value of your investments.  Let’s look at the four options:

1) You need income within five years and you can’t stomach a big drop in value. If you need the income soon and you just can’t take a lot of ups and downs in the market, you need a conservative strategy, which means diversification (investing in a lot of different things), income, and cash.  In this case I would use index mutual funds to provide diversification and income and bank CDs to provide a cash reserve.  Note that you can’t leave too much of the money in cash or inflation will consume a lot of it.  A portfolio might look something like this:

$20,000 S&P 500 Fund

$20,000 International Fund

$20,000 REIT Fund

$30,000 Bond Fund

$10,000 in bank CDs

The S&P 500 fund would provide some growth of your money, but be invested in large stocks that aren’t going to decline as quickly as small stocks.  The international fund provides some protection against a recession in the US (or just in case other countries’ markets are growing fast while the US is stagnant for a period).  The REIT fund and the Bond fund both provide income and will provide a hedge against drops in the stock market, unless that drop is due to a rise in interest rates.  On a really bad year, this account might drop by about 20% due to the equities, but there is plenty of cash available to spend while waiting for the recovery.

2) You don’t need income soon but you can’t stomach a big drop in value. Because we don’t need income we’ll use fewer fixed income securities.  We won’t keep any cash since the cash will be eaten away by inflation.  Such a portfolio might look something like this:

$30,000 S&P 500 Fund

$30,000 International Fund

$15,000 REIT Fund

$25,000 Bond Fund

Here we’ve increased the amount of equities (stocks) because of the longer lime horizon.  The bond fund and REIT fund are therefore slightly reduced, but the bank CDs have been eliminated.   On a really bad year you might see a 30% drop in value, but because cash isn’t needed right away, you could wait for the recovery.

3) You need income within five years but you don’t mind a wild ride if it means a better return.  Here we’ll add in some small cap stocks and some individual stocks for the money you don’t need right away.  We’ll keep cash for the money that will be needed and a small amount of bonds and REITs for a little bit of downside protection.

$15,000 S&P 500 Fund

$20,000 International Fund

$15,000 Small Cap Fund

$10,000 REIT Fund

$5,000 Bond Fund

$15,000 in Bank CDs

$20,000 Individual Stocks

3) You won’t need the money for a while and want to maximize your potential return.  In this last scenario, we have a long time before the money is needed and are willing to have more volatility if it means a better return.  We therefore forego the bonds and the REITs.  We keep a base of large cap and international stocks, but then put a large share into small cap stocks and individual stocks since they will offer a better return if given a long time to grow.

$20,000 S&P 500 Fund

$20,000 International Fund

$30,000 Small Cap Fund

$30,000 Individual Stocks

Contact me at VTSIoriginal@yahoo.com or leave a comment.

Buy the SmallIvy Book of Investing, Book 1: Investing to Grow Wealthy at https://www.createspace.com/4306997
The SmallIvy Book of Investing, Book 1: Investing to Grow Wealthy

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Getting a Better Return on Your IRA Investments – 101 Ways to Build Wealth


Money magazine has a great article in this month’s edition called, “101 Ways to Build Wealth.”  A couple of the tips, numbers 28 and 29, give some great advice on Individual Retirement Account (IRA) investing.  These point out some mistakes that I find myself guilty of doing when it comes to my IRA.  Not making these mistakes can make you tens of thousands of dollars at retirement time.

The first tip, number 28, is Shift Your IRA Out of Park.   It speaks of how many people contribute money to their IRA, planning to invest it later, but then four or five months later the money is still sitting in cash.  When investing for long periods of time it is better to have the money invested than on the sidelines.  You never know when the big moves up will come and if you miss them your total return will be a lot less.

I definitely find myself guilty of leaving money in cash.  I often get busy with things and it gets to be a while before I get around to picking out what I want to buy in my IRA. Of course, I normally pick individual stocks and lo0k for stocks that I consider to be great long-term investments. Those are not easy to find at any given time, so it may be worth waiting a bit. Keeping a “wish list” of stocks that meet the criteria may be the way to go, however, since then I can just find one on the list when I have money to invest rather than waiting to look until after I have cash to invest and then needing to find time to scan through Value Line.

Another consideration would be to just park the money in a mutual fund like an S&P500 ETF or a Total Stock Market Fund and then sell shares of the fund to buy individual stocks as they are found.  The only issue there is that you could be paying out a lot in transaction fees if you only hold the funds for a few months.  There is also no guarantee that the fund would increase in value over any four-month period.  If you did it every year, however, you would gain more than you’d lose.  (Note that each time you buy, your odds of making money would be about 50-50, but because the market has an upwards bias, if you did this several times you’d come out ahead since this would be similar to buying and holding for several years.  Most of the gains would come during a few very rapid increases, since that is how most of the gains in the market are made.)

The second tip, number 29, is Grab the Earlybird Advantage.  Many people wait until the end of the year before they contribute to their IRA.  Using a calculation from Vanguard, contributing $5500 per year and assuming a 4% after inflation return (hopefully you’ll do better than that!), Money magazine estimates that you’ll have about $15,000 more if you contribute at the beginning fo the year instead of the end of the year because of that extra year of market return you’ll get on that $5500 each year.

There was a time when I would always contribute at the start of the year.  The trouble was that I slacked off on contributions to my IRA when I started contributing to the 401k. I’ve now gotten in the habit of contributing late to the IRA, often after figuring out taxes and deciding how much will be deductible for both my IRA and my wife’s IRA.  Still with a little planning, I should be able to contribute a little earlier.

It is difficult to switch from late contributions to early contributions, however, since then you need to come up with two year’s worth of contributions at once.  (This is a little like trying to get off of the credit card habit when you pay your balance every month because there are expenses you are used to floating on the card.  You’ll need to come up with that cash or cut expenses for the month if you want to stop using the card.)  Perhaps the best way is to contribute a little throughout the year, perhaps using the extra paychecks (the ones where you get three in a month since there are 26 pay periods and only 12 months) to make bigger contributions since our monthly income will be bigger during those months.

So how many out there contribute at the start of the year?  Any good tips for making sure you remember to actually invest the money rather than leaving it in cash for several months at the start of the year?

Contact me at VTSIoriginal@yahoo.com or leave a comment.

Buy the SmallIvy Book of Investing, Book 1: Investing to Grow Wealthy at https://www.createspace.com/4306997
The SmallIvy Book of Investing, Book 1: Investing to Grow Wealthy

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.