Military Money Manual has partnered with CardRatings and OMAAT for our coverage of credit card products. Military Money Manual, OMAAT, and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Thank you for supporting my independent, veteran owned site.
My investment principles are keeping things simple, low cost, automatic, and diversified. I achieve this by buying and holding index funds offered through the Thrift Savings Plan and Vanguard. I also have a regular Betterment account I opened to understand robo-advisors and compare the cost and performance to a self managed account.
My focus is on what I can control in investing: costs, savings rate, and diversification. My favorite investments are low maintenance investments that don't require any input from me. Dividends get reinvested automatically and I just keep contributing money every paycheck.
I have enough hobbies, activities, and work to occupy my free time. I don't enjoy reading financial statements, picking stocks, or managing and maintaining real estate. I only look at my accounts once a month with Personal Capital when I update my net worth spreadsheet.
Beating the market is extremely hard to achieve even for professional stock pickers, so why bother? I have better things to do with my time. See Jack Bogle's The Little Book of Common Sense Investing for more on this topic.
With those thoughts on my investing philosophy, here's my 2018 asset allocation.
Asset Allocation: 95% stocks, 5% bonds
In 2018 my money is invested the same as in 2016: 95% in stocks and 5% in bonds.
75% US Stocks
20% International Stocks
- Vanguard VTIAX Vanguard Total International Stock Market Index Fund Admiral Shares
Within this overall asset allocation, I hold 75% of my investments in US stocks through in the Vanguard VTSAX (ETF: VTI) Fund, TSP C Fund (S&P 500 equivalent, the largest 500 companies in America), and S Fund (all other US stocks outside the S&P 500).
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. This is weighting my portfolio by market capitalization.
International stocks make up 20% of my portfolio, all held in the VTIAX (ETF: VXUS) Fund at Vanguard. I've moved away from the TSP I Fund due to it not completely representing the total international stock market. It's a small and probably negligible difference, but VTIAX contains more countries and more companies than the I fund.
My bonds are held 2.5% in government bonds through the G Fund and 2.5% investment grade corporate bonds through the F Fund.
Low Cost and Diversified
Through my index funds, I own a small piece of nearly 10,000 publicly traded companies. I own shares in over 40 countries around the world.
This is a tremendous amount of diversification and helps me sleep easy at night. I never have to worry about a single company or even country going bankrupt. There's no Enron or Bernie Madoff risk in my portfolio.
My average annual fees across all my accounts are 0.06% on average, meaning I only pay $60 per year for every $100,000 I have invested. Check out the fee analysis performed by Personal Capital below.
Because I opted into the BRS, I have to spread my TSP contributions over the whole year. The 5% BRS match can be worth thousands every year, but only if you contribute at least 5% of your pay every month, because the match is paid monthly.
If you max out your TSP account before Dec 31 in any year, you could miss out on hundreds or thousands of dollars in matching. I made a few charts on the value of the BRS TSP contribution match so you can see exactly how much extra the government will put into your account.
Also, I calculated the percentage of your pay you should contribute every month so you can max the TSP by the end of the year but still receive the 5% match every month.
For my wife's and my Roth IRA accounts, I am manually contributing and trying to max out the accounts as early in the year as possible. After those accounts are maxed out I will continue investing a percentage of each paycheck into our taxable brokerage accounts at Vanguard or Betterment.
Retirement or Brokerage Accounts
Even though I plan on being financially independent by age 40, I still plan on working after that age. If I could find a well paid job without long hours, I would be happy to work that.
The tax advantages to retirement accounts outweigh the pain of gaining access to the money in the accounts. There are many ways to access money in retirement accounts before age 59 1/2. See Mad Fientist and White Coat Investor for more details.
Especially when you have income from a Combat Zone Tax Exclusion (CZTE) area, you need to stuff your Roth TSP and Roth IRA accounts as much as possible. This pay goes in untaxed, grows untaxed, and distributes untaxed.
You can always access Roth IRA contributions untaxed and penalty free. Do not hesitate to contribute to your Roth IRA if you are in a CZTE area.
I am prioritizing contributing to my retirement accounts and then my regular brokerage account. Based on 2018 values, that will be $18,500 into my Roth TSP, $11,000 in my wife's and my Roth IRA, and the remainder of my savings for the year into my brokerage accounts.
Roth Or Traditional
Most military members have very low taxed income since much of the military paycheck is untaxed. Anything that is an allowance such as BAH, BAS, COLA is not subject to federal income tax.
When you deploy to a CZTE, all of your pay such as base pay and other special pay is not subject to federal income tax. This is the time to prioritize Roth contributions.
Roth or Traditional contributions depend on your family income situation. If your spouse is making a lot of taxable income, you may want to reduce your tax burden today with Traditional accounts. Otherwise, you should probably prioritize Roth contributions.
My taxable pay was so low in 2017 and 2018, thanks to being stationed in a CZTE area, that I converted my Traditional IRAs to Roth IRAs and paid the tax on the conversion. A good strategy for highly paid military members is to contribute to a Traditional IRA if you are not deployed. Then, convert some or all of the account to a Roth IRA when you have a low tax year thanks to CZTE.
Reblancing My Portfolio Annually
Vanguard recommends annual rebalancing or rebalancing if your allocations get more than 5% outside your goal allocation. They have a paper here if you want more info.
I prefer rebalancing annually. I have not yet had to rebalance when the accounts get 5% outside my parameters, since I am contributing monthly and each contribution is essentially a small rebalance.
When I manually contribute to my Roth IRA accounts, I will check to see if my asset allocation is out of whack. If VTIAX grew a bit faster than VTSAX, I will contribute to VTSAX to get back to the allocation I want.
Better* Asset Allocations
Other bloggers have shared their asset allocations:
- Go Curry Cracker 75% US stocks, 18% international, 7% bonds
- My Money Blog 67% stocks, 33% bonds. Stocks: 45% int'l, 45% US, 10% REITS
- The White Coat Investor 40% US stocks, 20% international, 20% bonds, 20% real estate
- Budgets are Sexy 100% US stocks VTSAX
*Are they actually better than mine? No, just different. The problem with selecting an asset allocation is we don't know what sector is going to outperform in the next period.
You can back test the data (with a site like Portfolio Visualizer) all you want, but past performance is no guarantee of future results. I believe it is best to own many asset classes that you expect reasonable returns from rather than betting the farm on one particular sector or idea. Here's a “periodic table” of 8 major asset classes and how they have performed over the last 20 years.
Notice how what's hot for a few years, like Emerging Markets in 2007, drops by over 50% in 2008. And every sector was down in 2008 expect for bonds. Just something to think about when constructing your own asset allocation.
How are you investing in 2018? How much longer do you think the bull market can run? Does the market and economy seem like it's overheating to you?