Accounts You Need to Have for Financial Security

Today I wanted to talk about how one in general should be allocating funds.  As stated previously, this blog is primarily concerned with strategies to grow funds quickly, assuming that an investor is starting out with little money but working a steady job with a reasonable income.  It also assumes that an individual has scaled her “lifestyle” so that she is making more than she is spending.  This is the most basic requirement for becoming wealthy.  Virtually everyone can scale back to have extra income left over, but it takes a degree of sacrifice and patience since one will need to wait a bit longer to buy things but they will be quite a bit less expensive when one does (because one will be paying cash rather than buying them on credit).

The first place a person should put extra income is in a cash account that is readily accessible.  This should be built up until it contains enough to cover several months worth of expenses.  These funds are used to take care of the various unexpected expenses that occur (such as the car breaking down, heater going out, roof leaking, unexpected surgeries, etc…).  These funds should be guarded judiciously and not spent for things such as vacations, shopping, etc… since these are the funds that prevent you from needing to take out loans or run up the credit cards if something happens.  This account will also be used to live on if one loses one’s job, allowing time to find a good job, not just one taken out of desperation.


The second account is a retirement account.  This is the money you will live on when you’re ready to retire and also should be guarded carefully.  The only reason to access this kind of account is if you’re about to be out on the street if you don’t.  Absolutely don’t use this money for any other purpose, including taking out a loan against it.  The reason is that if you start saving in your 20’s each dollar will be worth over $128 when you retire, so if you take out $10,000, for example, you just robbed yourself of $128,000 in retirement worth, which translates into $12,000 per year in income.  This account should be filled with index funds when you’re young and gradually be filled with more dividend paying stocks, bonds REIT’s, and cash as you get closer to retirement.

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The third account is your investment account.  This is the account that will use the strategies in this newsletter to grow large, allowing you the financial freedom at some point to work or not work, as you choose.  This account will be invested in stocks starting with 1-3, and eventually growing to 10-20 as your wealth builds to the $500,000 – $1 million range.   Because the money in this account is not critical – you still have enough money to pay for emergencies and fund your retirement with the other two accounts – you can afford to take the risk of one or two of your positions taking a substantial loss.  Also, if you find you are not a good stock picker, such that your investment account does not do as well as the markets, the other accounts will make sure you end up in a good position as well.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

What to Invest in with your 401k


When investing your 401k money, it is critical to diversify, where you allocate your investments into different asset classes.  In a good 401k you’ll have choices of asset classes among:

  1.  Large US Stocks Index Funds
  2. Mid-sized US Stocks Index Funds
  3. Small US Stocks Index Funds
  4. US Bonds
  5. Real Estate Investment Trusts (REITs)
  6. International Stocks
  7. International Bonds
  8. Managed Large-Cap Stocks
  9. Managed Small Cap Stocks
  10. Emerging Growth Stocks
  11. Target-Date Funds
  12. Money-Market Funds

In a bad 401k fund, you may only have a few of these choices, and those that you do have will all be managed funds with big fees (of more than 1%).  A great plan may have even more of these choices, although the list above is more than adequate for good diversification.


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Given the choices above, here is how I would typically set up my 401k:

  1.  Large US Stocks Index Funds  (15%)
  2. Mid-sized US Stocks Index Funds  (20%)
  3. Small US Stocks Index Funds (20%)
  4. Real Estate Investment Trusts (REITs)  (20%)
  5. International Stocks  (15%)
  6. Managed Large-Cap Stocks  (10%)

Notice that I have about 25% in large US stocks, 40% in medium and small US stocks, 15% in international stocks, and 20% in real estate.  Factors that go into these decisions:

  • Sometimes large stocks do better than small and medium stocks.  Other times small and medium do better than large.  I want to be in both places so that I’m invested in those areas regardless of which is doing best at the time.
  • Over long periods of time, small and medium stocks will outperform large stocks.  I therefore have slightly more invested in medium and small US stocks (40%) than I do in large (30%).
  • I want to have things that may do well when the stock market is undergoing a correction.  Real-estate is normally fairly uncorrelated to stock movements (except for 2008, when a real estate bubble cratered the stock market).  I therefore have 20% in real estate, which will provide returns almost as good as the stock market over long periods of time since REITs have both rental income and appreciation of property values.
  • I have some money in a managed, large US stock fund, simply because the particular funds I have in my 401k have a track record of great investment returns when compared to the S&P500.  Normally I would forego these and just invest in index funds since the fees are higher for managed funds and performance is normally about the same as index funds, but so far the managers have shown themselves worth the fees charged in my case.
  • I have some international exposure as well.  Most of the time, the action is in the US, but during some periods international stocks do better.  I always want to be invested in whatever is doing well at a given moment.


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An important aspect if you want to do well is discipline.  You need to decide upon your allocations and stick with them through think and thin.  At times, it is difficult to stay invested the way I should.  For example, in late 2016 with the Brexit and other events, the international stock fund in my 401k has been doing poorly over the last year, while US stocks have been doing well.  I was very tempted to drop the international stock fund and just be in US stocks, given the performance.

This would have been exactly the wrong thing to do, however.  Since international stocks have been doing poorly, while US stocks have been on a roll, the price of US stocks has been bid-up and international stock prices have dropped and some stocks may be under-priced.  We may very well see a shift from US to international stocks as investors look for bargains outside of the US.  When that happens, I certainly want to be there.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Invest a One Million Dollars Nest Egg

So you have a million dollars and you want to make it last rather than blowing it all on stuff.  Good plan!  But how do you invest all of that new-found wealth so that it will keep providing you with income throughout your lifetime and maybe that of your children and your grandchildren?

Well, the answer depends on how old you are when you got the million dollars and how much other money you have.  If you are young and have a job that provides a steady income, you can afford to invest the money in things that will fluctuate more wildly but provide a greater return over time.  If you are entering retirement, however, and that $1 M is a payout from your pension plan or 401K and that is all of the money you’ll have to pay for your expenses through retirement, that is an entirely different scenario.  I’ll therefore look at a few different situations and the thought process that would go into setting up an investment plan in each case.  Since your situation will be particular to you, buying a couple of hours of a financial advisor’s time would be well worth the investment.  Just kindly say “thanks but no thanks” if he tries to sell you a bunch of products because there are plenty of good investments in the open markets that will be cheaper and provide a better return.

Case 1:  25 year-old:

Let’s first look at the case of a 25-year old who wins the lottery. This individual, let’s call her Cindy, still has years to earn a paycheck and therefore can put the money away for a long period of time and let it grow.  Perhaps she would like to enhance her lifestyle a bit – she did win the lottery after all – but also wants to let her money earn money so she can turn that $1 M into $10 M or even $100 M by the time she stops working.  Cindy would want to invest mainly in growth stocks that would allow her to build wealth while minimizing taxes along the way.  She could also spend a portion of the earnings from the stocks, allowing her to do things like take nice vacations and improve her home, while reinvesting the majority of her earnings to let her wealth grow.

Things she should do, therefore, are:

1) Pay off any debts she has outstanding.  She should pay off credit cards, car loans, and even her mortgage.  This reduces her risk substantially and lets her keep her whole income instead of paying it out to others as interest.  Rich people make interest, they don’t pay interest.

2) Put $10,000 into a bank account.  This is her emergency fund that will allow her to take care of any unexpected expenses like a broken leg or a car repair without needing to dip into her investments.  She should keep about half to two-thirds of this money liquid and maybe put  one half to one-third in a 3-6 month CD to earn a little more money. If she needed to, she could sell the CD early and just forfeit a little interest.

3) Invest the remainder in stock mutual funds.  A good mix would be 25% in large cap growth, 25% in small cap growth, 25% in international stocks, and maybe 25% in a value fund.  She could also mix real estate into the mix by purchasing shares of a REIT or a REIT fund, or by purchasing a couple of small rental houses for cash and renting them out if she feels like being a landlord.  If desired, Cindy could also buy a set of individual stocks with some of the money.  For example, she could take $150k of the money and buy $25,000-$30,000 positions in 5-6 individual stocks in different industries and invest the remainder in mutual funds as specified above.  This would give her the chance to significantly increase her return if one of the companies outperformed the markets while still using plenty of diversification.

4) Set a threshold of 8% above which she withdraws some cash, perhaps half of the earnings above 8%.  For example, if her portfolio returns 10% one year, she would withdraw 1% and spend it as she wished.  If she had a year like 2013 where returns were over 25%, she might withdraw 8% (which would be around $100,000) and maybe do something major like a major home upgrade, moving into a nicer home, or buying a vacation condo.  On years when the return was 8% or less, she would let the money reinvest and continue to grow.  She could also put money in a cash account on the really good years and then spend it over the next several years for things like vacations and newer cars.

Case 2: 50 year-old:

Our 50 year-old, let call him Matt, has retirement not too far into his future.  It is great that he has this million dollars to get things in order and go into retirement in style.  Assuming that he won’t retire until 65, he has the chance to double his money a couple of times in the stock market if the economy cooperates and it is not a period like 2000-2009, meaning that he could enter retirement with $4 M.  If he works until he is 71, he might even be able to double it three times, leaving him with $8M for retirement.  This is a bit aggressive, however, since he really doesn’t have the time to recover from a bad market loss.  It happens very rarely, but there are times like 1929 where he may not see high portfolio recover to its previous value for 10-15 years or more.  He therefore needs to use some caution in allocating his funds.

Things Matt should do are:

1) Pay off any debts.  This is still the number one thing he can do to improve his financial security.  Given that retirement isn’t that far away, he should certainly retire his mortgage and direct the money he was paying towards expenses like college tuition so that his children (or he) doesn’t have a student loan in five years.  Paying off other consumer loans would also be at the top of the list.  Getting rid of these will reduce the amount of money he needs to pay out each month, giving him security in the case of a job loss, medical condition, or other life event.

2)  Put $10,000 into a bank account for emergencies.   Everyone should have enough cash on hand to handle events that come up.

3)  Invest the remainder in mutual funds with about 40% in income producing securities.  This could mean putting about 60% of his funds in a growth and income fund (which would contain both growth and income securities), 40% in a bond fund, or maybe 20% in a bond fund and 20% in a utilities fund.  The remainder should still be invested in stocks to grow wealth, but a smaller percentage should be small stocks since they are more volatile.  For example, one possible portfolio might be 40% in a bond fund,  25% in an international stock fund, 25% in a large cap fund, and 10% in a small cap fund.  Individual stocks could still play a role, perhaps building up 5-10 $10,000-$25,000 positions in some big companies that pay a decent dividend like Wal-Mart, Home Depot, Procter and Gamble, Intel, or MicroSoft as part of the portfolio.  A couple of small growth stocks could also be added, but exposure should be limited since this investor has less time to wait for the companies to grow.  Note that Matt should be contributing all he can to tax-sheltered accounts like 401K and IRAs and be buying his income producing assets in those accounts where they will be sheltered from taxes.  Growth stocks should be in the taxable portfolio since these will grow tax deferred anyway so long as Matt doesn’t do much trading.

4) Withdraw some money periodically to supplement lifestyle, but take it easy.  With less time for the portfolio to grow before retirement, a lot of spending could lead to issues with having enough money to make it through retirement.  Matt could probably withdraw about 1% of the portfolio value per year, or about $10,000, to add to his income, but he really wants to let most of the money compound and grow.  Left largely alone with a 40% income, 60 \% growth portfolio, Matt should be able to grow his portfolio to between $2 M and $3 M before retirement age, which would provide a secure retirement.

Case 3: 65 year-old:

Our third case is a 65 year-old retiree we’ll call Barbara.  While a million dollars may seem like a lot, it really isn’t that much when looking at a 25-30 year retirement with medical expenses.  Barbara must therefore be very cautious with her money, particularly in the early years.  She will still need to invest some of her money in growth stocks since inflation will erode her purchasing power if she just keeps everything in cash.  There is also recent evidence that she should start out more cautious and then get more aggressive with her investing as time goes on since a big loss early will hurt a lot more than a similar drop later on.  Here are some steps that Barbara should consider:

1) If she owns her home free-and-clear, she might consider selling and trading down.  She can build up more cash for living expenses, reduce her property taxes and maintenance costs, and generally make things easier.  If this is not an option for sentimental or other reasons, a reverse mortgage is another option to gain some cash from her home to use as a second income source and avoid the need to sell stocks in her portfolio at depressed prices should a market drop occur.  Note that this would result in her selling her home for far less than she would receive if she simply sold her home and traded down, and it is very likely that the reverse mortgage lender would own all of the equity in the home when she died or went to a nursing home.  This  is not an option I would prefer, but it might be an option if staying in your home is worth paying a bit extra and you can accept not leaving your home to your children.

2) She should eliminate all debts and reduce expenses as much as possible.  People in retirement certainly don’t need to be paying credit card or car loan interest.

3)  She should build up a big emergency fund of 3-5 years’ worth of expenses.  This would provide money for living expenses should a market downturn occur.

4)  She should invest a portion of her account in income producing securities.  This would be bond and high yield mutual funds as well as dividend paying stocks, REITs, and other assets.  Rental real estate is another option that can generate some regular income.  Holding more cash reduces the need for income producing assets and vice versa.  If Barbara had 5 years’ worth of cash, she might keep 30-40% of the rest of her portfolio in income securities.  If she only had 2 years’ worth, she might keep 50% in income securities.

5) She should invest the remainder in stocks, with the balance spilt between large caps and international stocks.  A small percentage, like 5-10%, might be kept in small cap stocks.

6)  She should consider products such as annuities to provide a steady income stream.  Some annuities kick in at a late age, like after the investor turns 85, and pay a lot more than they would if they started paying as soon as they were purchased.  With any product like this, however, the insurance company will make more on average than the buyer, so you are paying a fee to shift risk from yourself to the insurance company.

Follow on Twitter to get news about new articles. @SmallIvy_SI. Email me at or leave a comment.

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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