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15 Little Life Hacks

Now THIS is the kind of investment research you should be doing

34 Comments- Get free updates of new posts here

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My friend, “E,” who’s in his mid-twenties, writes me:

I quit my job last week, and I’m loving my new focus on [my own business].

One scary thing about being an entrepreneur is that it’s easy to lose discipline with investing (no automatic opt-in of 401(k) for example). I’m in the process of sorting out my investments and I was hoping to get your help. I plan to roll over my old Fidelity 401(k), which is about $40K, to a mix of Vanguard index funds. My Fidelity account currently has the following mix:

  • 70% Fidelity Contrafund
  • 30% Fidelity Diversified International

I want to roll over these investments to the following Vanguard investment mix, slightly modified by Swensen’s suggested asset allocation (see below)

  • 30% – Domestic Equity- S&P 500 Index
  • 15% – Foreign Developed Equity – Total International Stock Index
  • 15% – Emerging Market Equity – Emerging Stock Index
  • 10% – Real Estate – REIT Index
  • 15% – Long-Term Teasury Index
  • 15% – US Treasury Inflation Protected Securities

In terms of my own investment profile, I seek a somewhat aggressive portfolio since I plan to invest for the long-term. I would also like to copy this asset allocation to my personal Vanguard investments that are not tax sheltered.

A few questions:

  • Your thoughts on the diversification and balance on my suggested asset allocation?
  • Am I maximizing my ROI?
  • Anything you would change or modify?


Two points from E’s email to me:

  • What would you tell him? (Note: Here’s a quick collection of links on asset allocation.)
  • Lots of people say they want to invest for themselves, but this is the bare minimum amount of research you should be doing. It’s kinda like when people say they want to write a book, or get 6-pack abs…yes, I want two twins in the back of a limo feeding me grapes (that’s all, Mom!!!) but I don’t necessarily want to do all the work to get them back there.

That’s why, when you invest, you can choose convenience or control. Here’s an excerpt from Chapter 7, “Investing isn’t only for rich people”:

amazon-logo-small barnes-noble-small-logo

When you order the book, forward your receipt to so I can send you spreadsheets, bonuses, a signed nameplate, etc.

* * *

I’ve sent out 3 long, detailed emails to my newsletter in the last 24 hours. If you’re not on the list, you’re not seeing stories where I rant about my stupid friends (and include stuff that I never post here). Sign up at the top of the blog.


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  1. I would recommend a pull-back on the US Treasuries (10% each) and foreign equities while adding investment-grade US bonds. Vanguard offers an Intermediate-Term Bond Index Fund that would work well int the strategy laid out above.

    One broad recommendation is to have a plan on what you expect to do with your dividends. Its good to have an idea on whether you’ll have them automatically reinvest in the funds from which they came or manually reinvest them into whichever asset seems the most undervalued at the time (for example, US equities right now).

  2. Mid twenties and he wants to put 30% in bonds? Maybe he should go back and read this post:

    If he’s in his mid-twenties, I wouldn’t put more than 5% of my portfolio in Cash or Cash Equivalents (i.e. Gov’t Bonds)

  3. Regarding “maximizing rate of return”:

    It’s impossible to know now if you’re maximizing your return of the future. The best thing you can do is try to make your portfolio as “efficient” as possible. This means maximizing *expected* returns with the least amount of risk.

    What you should do is determine what your tolerable risk is (which happens to be the hardest part of determining asset allocation). The SP500 was 60% off from its high. Is that tolerable to you as an investor (i.e. can you take a 60% loss if you were 100% equities)? Think about this and choose a stock/bond mix. That’s going to give you the most return for your risk tolerance.

  4. It’s worth having a look at Vanguard’s tax-exempt bond funds and working out the math – they often offer higher returns on a post-tax basis than their non-exempt analogs. You have to weigh this against the risk profile, though (e.g. tax-exempt municipal bonds are less credit-worthy than Treasuries – how much so is the million-dollar question).

    Also, for what it’s worth (although admittedly inconsistent with the principle of not trying to time the market), many people would have you believe that Treasuries are over-valued at the moment (compared to other bonds) as a result of high risk aversion in the markets and the resulting flight to safety. If you 1), believe this dynamic will unwind as financial markets return to normalcy, and 2), are comfortable with some “active” management, you should probably tend toward other investment-grade bonds over Treasuries in the near term.

  5. @elmariachi On the bonds – He’s rolling these funds from a 401(k), presumably to an IRA. So wouldn’t the taxation on the bond returns be immaterial?

  6. The research I’ve read has shown that the most important thing is finding a reasonable asset allocation and sticking to it; you might be able to eke out a few more percentage points by finding The Perfect Allocation, but you’ll never know what exactly it was until after the fact.

    That said, I would take a look at some other folks besides Swensen, just to get an idea of what’s out there. I’m a fan of William Bernstein (Intelligent Asset Allocator/Four Pillars Of Investing); he might suggest that you:
    -ignore long-term bonds (focusing on intermediate and short instead)
    -diversify domestic equity into large cap blend v. large cap value v. small cap blend v. small cap value, since small cap and value stocks (both small and large) tend to have higher returns (with somewhat higher risk, of course)
    -as mentioned above, take a hard look at the tax consequences

    But really, that looks like a perfectly fine mix — depending on when you’re planning on retiring.

  7. A 30% bond allocation seems high for someone in his mid-20’s saving retirement; I would pull it back to 10 or no more than 20%.

  8. @Amy: Good point. Taxation shouldn’t really be a consideration in this scenario.

  9. Is it okay that you invest in the same allocation mix for both your IRA and your un-tax sheltered investments? Doesn’t it seem kind of redundant?

  10. I agree with SimpleSimon; moreover, maxing ROI is almost always a recipe for disaster. I prefer not to reach for the last marginal dollar. Make sensible investments that will return well over the long term. Maximizing ROI usually means taking too much risk, something the professionals have a hard time quantifying, and the amateur has no hope of measuring accurately.