After the TSP, I invest my money in Betterment and Vanguard. I track all of my investments with Personal Capital. I also wrote a short, 2 hour book summarizing this site. You can buy it here.
What does the portfolio of a 28 year old military officer investing for financial independence by age 40 look like? Quite boring. My investment philosophy is heavily influenced by Jack Bogle, Warren Buffett, and the Bogleheads wiki. My core investment principles are:
- Low cost
After a few forays into the stock market (such as betting on oil in 2014) and reading thousands of pages on investing, behavioral finance, and even getting a bachelor’s degree in economics, I have come to the inescapable conclusion that I am not a genius stock picker. I do not have the time, energy, or desire to find the next Apple, Google, or Tesla.
Rather than trying to find the needle in the haystack, I just buy the entire haystack. Passively managed index funds consistently beat their actively managed cousins. This fact is proven every time a study is conducted. Just Google “passive funds vs. active funds” and you will see a news article every year going back at least 25 years.
The fees active managers charge just don’t make up for their lack of performance. While 10-20% of actively managed funds do beat their benchmark index, good luck finding that particular fund before it starts beating the market. Past performance is not a guarantee of future results.
Focus on What You Can Control
Rather than focusing on finding higher return (and therefore riskier) investments, something that is outside of my “locus of control,” I choose to focus on my personal savings rate. When it comes to reaching financial independence rapidly, the data shows a high savings rate is the most important factor. Here’s one study from Vanguard and another from Go Curry Cracker.
My wife and I keep our costs low by only owning one car (a fuel efficient 2015 Mazda 3), renting an apartment $1000 less than our BAH, and cooking most of our meals at home.
By making conscious lifestyle choices and minimizing our big three expenses (housing, transportation, and food), we can relax about our other spending (entertainment and travel). Since we automate our investments, we find it’s actually very easy to invest 50% of my income and 90-100% of hers. It’s all about creating a sustainable lifestyle that you enjoy.
This year we are on track to max out our Traditional IRAs and Traditional TSP contributions by August. Rather than dollar cost averaging through the year, I decided to front load our contributions and try to max out our retirement accounts as fast as possible. This decision is partially based on the research done on the Mad Fientist blog, whereby front loading your tax-advantaged accounts in the beginning of the year you can cut months or years off of your journey to financial independence.
When I first started investing in my 20s I essentially followed the rule of thumb of “120 minus my age” in stocks and the rest in bonds. Since then, I’ve read more on tilting towards more equities (stocks) and less fixed income assets (bonds). Here was my asset allocation at the end of 2015 as shown by Personal Capital (you can do a deep dive on your own data if you sign up for free). Looks like I have just a little rebalancing to do:
Simple: 95% Stocks, 5% Bonds
My 2016 asset allocation is 95% stocks, 5% bonds. Within that overall asset allocation, I hold 75% of my investments in US stocks through in the Vanguard VTSAX (VTI) Fund, TSP C Fund, and S Fund. Since the C + S Fund = VTSAX, I hold 4x as much C Fund as the S Fund because the C Fund’s market capitalization is 4x as large as the S Fund.
International stocks make up 20% of my portfolio, all held in the VTIAX (VXUS) Fund. I’ve moved away from the TSP I Fund due to it not completely representing the total international stock market. My bonds are held 2.5% in government bonds through the G Fund and 2.5% through the F Fund.
Since about half my investments are at Vanguard and half in the TSP, I had to split the percentages. I also don’t hold bonds in my Vanguard accounts and no longer hold international stocks in my TSP due to the deficiencies of the I Fund. I still invest at Betterment but it does not yet represent enough of my portfolio to include.
Low Cost & Diversified: 0.07%, 10000+ Stocks
Here’s our total average expense ratio (0.07%) across all of our funds, as shown by Personal Capital. You can get your own average expense ratio by running the fee analyzer at Personal Capital for free.
Because I still have some Vanguard Investor class shares and not Admiral class, the expense ratio is a bit higher than it probably will be in the next year as I upgrade to Admiral funds. With an average expense ratio of 0.07%, I own some of every publicly traded US stock (4000+), 6000+ international stocks in 47 countries from New Zealand to Pakistan, and a good mixture of US and corporate bonds.
At 0.07%, every $100,000 invested only costs me $70 per year. That means more of my returns stay with me, rather than going to the fund manager. This is the kind of low cost investing you get when you stick with the TSP and Vanguard. I love it!
The Thrift Savings Plan is the best tool for servicemembers to automatically invest every month. Setup a contribution on myPay, then go to the TSP website to adjust your asset allocation. You can rebalance daily but there’s really no need to. I rebalance once a year on May 1.
Why 1 May? There’s an old adage in investing circles to “sell in May and go away,” meaning don’t leave your investments in the market May-October. Like all adages, there is a grain of truth to it, but really it’s hard to implement correctly. Better to stick with your asset allocation throughout the year and only check on your investments every few months. Remember that it’s time in the market that makes you the most money, not timing the market.
So I don’t “sell in May” but I do rebalance in May. Some people rebalance in December, some in January, some on their birthday, some on their anniversary. It doesn’t really matter. Just pick a date and stick with it for a few years. Again, the TSP makes rebalancing incredibly easy. Just go to the Interfund Transfer option and set your percentages to whatever asset allocation you have chosen.
Vanguard has a great “maximize retirement contributions” feature that will withdraw money from your checking account to ensure that you end the year with maximum contributions. Because I am front loading all my contributions, I’ve just set up an automatic transfer into our Traditional IRAs so we max out the contribution before August.
How are you investing in 2016?
So that’s me, but what about you? Let me know in the comments or contact me page. What are your core investment principles? Do you like to actively manage your portfolio or do you just try to match the market? Do you think a 95% equities portfolio is too risky or am I missing out by not having enough bonds?
2 Websites I Use to Achieve Financial Independence
The best way I know to achieve financial independence is to keep your investments simple, diversified, automatic, and low-cost. Costs eat into your returns like you wouldn't believe! A 1% difference in expense ratios can mean $100,000s lost to fees over a lifetime of investing.
Even if you're a DIY (do-it-yourself) investor like I am, you need to check out Betterment. You can read my full review here, but the bottom line is for only $250 per $100,000 invested (0.25% expense ratio) you get simple, diversified, and automated investing. In addition every account now gets free Tax Loss Harvesting+ features, which should increase returns for the average investor more than the minuscule management fee.
If you're not a DIY investor or are just getting started with investing, then you definitely need to check out Betterment. It's what I recommend to my family and friends who aren't strong investors or don't care to learn about asset allocations, diversification, or rebalancing.
I have investment accounts all over the place. To keep track of all of them in one place I use Personal Capital. It combines all of my accounts, shows me where I may be overpaying in fees, and provides beautiful charts showing my overall asset allocation and performance.
I use Personal Capital to track my Roth and Traditional TSP, Vanguard IRAs, banking accounts, SDP, and my Betterment taxable account, all in one place. It's free, secure and presents me with a one-stop dashboard so I can see all my money on one site.
Read my full review of Personal Capital and see how easy it can be to manage your investments in one place. Trust me, once you try it, you'll love it.
P.S. - If you have over $100,000 of assets and a 401k, you really need to run the Personal Capital 401k Fee Analyzer.