Things have been quiet in the Satisfied Ghost online world lately, because things in IRL have been crazy! Over the last few months we decided to employ domestic arbitrage and moved from our home in the HCOL Bay Area to another state. I’ll detail the decision, process and details later. As I type this, I’m surrounded by boxes and chaos but at least wifi is working!
The move and subsequent sale of my Bay Area home has me thinking about investing. Generally, my investments are on auto-pilot as I’ve done most of the work of allocation in the past. But a new lump sum has me questioning my investing philosophy.
Bogleheads for all
My philosophy is derived from Jack Bogle, the founder of Vanguard, and the Bogleheads, the online group that follows his investing approach. If you’ve read JL Collins A Simple Path to Wealth you will recognize these ideas. (If you haven’t read A Simple Path to Wealth, you should! It’s excellent.) The Bogleheads Guide to Investing is also excellent.
The Bogleheads Investment Philosophy is a fantastic resource for all investors. They’ve even created videos for each rule below. I believe in these principles, but thought it would be interesting to see how they apply to my current situation and if I need to update my plan.
- Develop a Workable Plan
There are things we want to do: retire, fund kids education, take a vacation. Understanding what we spend and how much we need is the first step. For me, I want to live off of my savings and watch it grow. I believe in the 4% rule so I have a good idea of what I may possibly need, yet I don’t feel I have a good handle on expenses yet, especially with the health care market. Should this money go into our normal funds and asset allocation? Will I need this money in ten years? Or thirty? You can’t develop a plan before deciding when you need it. I need to think more about glide path.
- Invest early and often
The power of compounding is undeniable. The longer I put off investing cash, the more this works against me.
- Never bear too much or too little risk
This is about asset allocation and how to manage risk. For some reason, a lump sum makes me question my normal allocation. Some would say we should pay off the mortgage— at 4.375% it’s the lowest risk “investment” you could make. But I also value liquidity, and a house you’re going to live in has limited immediate liquidity, apart from taking out more expensive debt through home equity. I’d like a mix where we pay off most of the debt, but keep some cash invested.
- Diversify
I believe in diversification, having a wide range of asset classes, to reduce risk. Currently my investments are in stocks and bonds, with a rather aggressive split towards stocks. I also hold real estate through REITs and a single family home rental I bought during the foreclosure crisis. By paying off our house, would that give us less diversification given I also own a rental property? Or is paying debt at 4.375% a sure fire return, given we have other assets invested? Perhaps I should increase my bond exposure, even though in a rising rate environment a typical bond fund concerns me. I do have some cash in a floating rate fund, which is designed for this scenario, but honestly the complexity here concerns me.
- Never try to time the market
Trying to predict where the market is going is a loser’s game. It’s impossible. Our human psychology works against us here, so automatically investing is the best thing to do. But if you’ve read this post so far you see me desperately caught up in timing the market! Stocks are overpriced! Bonds are going down as rates go up!
A lump sum makes me question the timing much more so than when I was in steady accumulation mode. Yet even as I know it’s folly, right now many asset classes do seem over-inflated to me, so I think it’s worth it to dive a bit deeper into other options, such as individual treasury bonds, passive commercial investing etc.
- Use index funds when possible
I completely believe in index investing and almost all of my assets are in index funds. But looking at crowdsourced commercial real estate or individual muni bonds is running counter to this. Ultimately, I feel the vast majority of my investments are in index funds, and having a few alternative investments such as real estate or individual stocks as a small percentage of my investments is sound.
- Keep costs low
Low costs are what make index funds outperform. In mutual funds you don’t get what you pay for. Any expense you pay eats into your returns. Vanguard is warning us that we may have a decade or more of lower than average returns, so costs are even more important. I use index funds and am careful with my expenses. If you use Personal Capital they have a great way to check the ERs you pay.
- Minimize taxes
Our philiosophy around taxes tells us to keep our bonds in tax-advantaged accounts, like IRAs or 401k, and stocks in taxable. This is absolutely the right way to do it. I’d give myself a C on this, more from the way my investing grow up over time and then the inertia sets in than anything else. When you’re young, you likely only have investments in tax advantaged. These are the years you’re 100% in stocks. Of course if you keep things simple, it’s easier to re-allocate and maximize for taxes, but as you can likely see, I haven’t exactly kept things as simple as they could be. I’m also looking at commercial real estate, however, to minimize taxes, and how muni’s may fit into this.
- Keep it simple
As JL Collins says, the best path is a simple path to wealth. Over complicating things can lead to inaction, or increased risk, or expenses. There’s also the time factor. A simple three fund approach (or two fund) is simple, powerful and low fee. The vast majority of my investments live in that world, but I’ve also found value by investing in real estate. The rental I purchased for $130k in 2009 is now valued at $280k. It’s been rented every month except 2 since I’ve owned it. The depreciation saved me on taxes while I was still at my regular job. It cash flows about $500 a month and I’m getting equity by my renters paying off the mortgage for me. If I would have invested the $30k I put into this into the stock market would I have done better? Unlikely. Would it be simpler? Certainly. But I’m happy for this balance of simplicity/complexity at this time.
- Stay the course
Stick to the plan. When stocks plummet, rebalance and buy more. Keep investing even if you’re scared. Don’t mess it with it because of a headline. I’ve gone through two mini-crashes in my investing life. One with the .com crash of 2000 and of course the great dip of 2008/2009. In most examples I stayed the course and didn’t liquidate. And of course I’m happy I did.
Now what?
Based on this refresher look at my general investing philosophy, I’ve decided I need to get more specific. I need more buckets for things I’m saving for, with greater granularity around time horizon. I probably also need to add to my philosophy where and how much I want to invest in other areas like commercial real estate, individual bonds or residential real estate. A written plan where you list this out and stick to it is powerful and effective. As my assets and life has evolved, so should my investing plan.
What’s your investing philosophy? How has it evolved over time? And for those interested in learning more I recommend the Bogleheads content.