This week I thought we’d talk about my current investment plan and the many, many mistakes I’ve made over the years. I found it extremely difficult to make that a viable title, so you get this pared-down one instead This will be a good time to review what I’m doing too since it’s been a while since I’ve made some of these decisions.
Before we get into it though:
The views expressed in this blog are opinion only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions.
While I know I have this disclaimer on every post I make, I want to put it front and center that I am not an investment professional, I’m just some dude on the internet with an engineering degree (see relevant XKCD). I’ve made my fair share of mistakes and I’m sure my plans will change in the years ahead.
How did we get here?
Before we get to what I’m currently doing I think we should cover what I’ve done and why my portfolio has many contradictions in it.
We’ll start with the very beginning. I had to do some digging around. I started off using the Investopedia simulator in March 2015. I was interested in stocks before that, but I have no real record of what that was. This was the first time I did anything with stocks.
My cousin was selling an investment service or something (I’m not really sure of the details) and I had asked him some questions over the phone and he had provided some information in an email titled “penny stocks.” The advice he provided was actually really good, especially had I pursued this path. I think at the time, I was going to invest in penny stocks because I had a couple hundred bucks from my first job in high school. That or I thought I was going to make it rich picking penny stocks. I could see myself thinking I could pick the big winner.
My cousin, my dad, and I all played the simulation for a little bit. I mostly bought mainstream companies. While I made money in the simulation, I lost out of the three of us. But it was a good experience for me. If nothing else it helped prevent me from making dumb mistakes with my money like buying penny stocks. I don’t think I would have done enough due diligence at 15 to make intelligent investment decisions.
In the summer after I turned 18 I got my first engineering internship. At the time my bank, USAA, had a minimum deposit of $6,000 to open a brokerage account. I saved enough and opened one. My strategy at this point was to buy companies I used or my family used. I don’t know if a taxable account was the best for me to have at this point in my life either.
I made two huge mistakes in these early stages, I sold frequently and for no good reason.
At the time, USAA charged fees for each trade that you made. So frequently buying and selling meant that USAA was taking their pound of flesh. I also wasn’t selling these investments for any good reason. Mostly I was tapping this account to buy things that I wanted to buy but didn’t need. I think by the end of my freshman year of college I only had ~$1,000 and I was up on most of what I had bought.
I think hitting this low was lucky for me, as I was shocked at how easily the money went down. It helped make me a better saver, the bull market also helped since I wanted to see just how much money I could sock away as a result. It also made me start reading more about investing and personal finance, even if it was just the occasional library book.
USAA also sold their brokerage over to Schwab while I was still in college. This degree of separation I think helped quite a bit as it would make it more work to transfer funds back from Schwab to my bank account. Maybe I was just better with my money as I was setting some aside to cover my expenses while in college.
After graduation in 2021, I started to get into dividend investing and did a bit there rather than index investing. I gave that a shot from mid-2021 to mid-2022 before I decided it was too much work to continue with it.
From mid to late 2021 I was saving about $1,000 a month, and in late 2021 I started pursuing FIRE more seriously and started saving significantly more.
2021 was also when I first got access to a 401(k), luckily I maxed it out from the start (my dad’s advice “money you never see, is money you never miss” was very helpful). My asset allocation was a mix of the Style Box and a handful of dividend stocks with close to an even mix between them all. I’m not super happy with what this asset allocation was, mostly that it’s a lot of funds with no concern for the fees that they charge. I probably would have been better off with a total market fund, but at least I was trying to have an asset allocation.
Starting in early 2022 I added a total US market, total international, and bond fund to my portfolio with a specific asset allocation and plans for the future. By mid-2022 all new contributions were going toward this balance. It was also in late 2022 that I opened and began funding a Roth IRA. We’ll talk about asset allocation here in a second.
What went well, what failed
The big thing that failed early on is that I didn’t have a plan for my money as I invested it other than to make money.
I wasn’t considering asset allocation or returns, I bought stocks I used since I thought they would go up. I would then sell them when I wanted the money I had invested back or thought the stock would go down. I was paying large fees for this luxury. I lacked discipline and a goal for the money.
I tried several different strategies from buying what I used to a strategy of buying what I thought would be secure dividends. The only issue I took with the dividend strategy is that it was a lot of work, I spent more time than I wanted on research. I think it was a perfectly fine strategy if I was willing to put the work in.
Overall it was a lot of individual stock or fund picking (some of these were even actively managed funds). While it was interesting to tear into why I would or wouldn’t want to buy it. But in the end, I wanted a simpler portfolio that lessened the overall amount of research I had to do while remaining diversified. That’s why I started transitioning to index funds. I spent a couple of months slowly increasing the percentage of new funds I put into index funds as I waited to see if it would work for me, it did and I made the switch.
A big thing I was missing early on is that I didn’t have a goal for my money. When I was just starting at 15 and 18 it was just to make money. After that first really bad year for money habits in 2018-2019, I started to make wiser decisions about saving, what this money in my taxable would be used for was still up in the air, but I was saving it. But it probably wasn’t until 2021 when I started pursuing FIRE that it became about retiring earlier.
I do think that the simulation was great. It let me learn about investing without making too many mistakes. I wish I had implemented it more thoroughly to settle on an investment strategy that works for me sooner.
So what am I doing now?
I break my strategy into two different camps, what I do with my retirement accounts and what I do in my taxable account. While I shoot for the same total asset allocation, my overall goals are the same across both accounts. We’ll round back to the holdovers from the other stuff I’ve tried later and ignore them for now.
I do plan with both sets of funds to reach roughly the same asset allocation over time with only a slight difference, over time shift from a high stock focus to a mix of stocks and bonds/REITs. Currently, I’m aiming for a mix of 60/40 stocks and more price-stable assets. In some cases, I use a widely diversified real estate fund as a bond stand-in. I don’t know what my final values will be for each account but I’m hoping for a roughly even split between bonds and real estate for that 40%, with a slight bias to bonds.
I will note I may change my allocations away from this slightly over time to try new allocations to see what works for me.
In my retirement accounts (Roth ira, 401(k)) I track four different indices; the US stock market, international markets without the US stocks, the bond market, and the MSCI US Investable Market Real Estate 25/50 Index. In my current 401(k) I couldn’t find a satisfactory bond fund so I don’t have one there, instead, I put most of that portion into a total US fund.
For my retirement accounts, I shoot for the following allocations:
|Account||401(k) (%)||Roth IRA (%)|
You’ll notice a distinct shift towards equities. This is money that I won’t be able to touch for at least 36 years. Since this money has so much time to grow, I’m working to slant it toward growth. It has plenty of time to bounce back from a significant downturn before I have to access the funds. I thought about having no bonds in these accounts but a bit would be better psychologically so that my retirement accounts don’t crash as much in a downturn, even if I’m currently confident I won’t sell into a downturn.
In my 401(k) I’m not as happy with the real estate fund’s total fee, which is why it has a lower (almost 9 times that of the fund I use in my Roth) makeup of these accounts. I may drop this entirely from my 401(k) and go all in on stocks while lowering the portion of stocks in my Roth account and shifting that over to real estate to make up for this difference.
As I get closer to tapping these funds, I’ll rebalance towards a more bond or other stable asset-heavy allocation. Unlike my taxable account, I don’t currently have a plan on how to increase the percentage of this allocation. Probably around age 49, I’ll start increasing the percentage of bonds in the accounts.
For the leftovers from my old 401(k), I’ll rebalance the holdings in that account at some point to match my desired holdings, probably in a year or so.
That’s about it for my retirement accounts.
My taxable follows a similar strategy except I don’t include real estate for tax considerations.
I aim for the following allocation:
|Total US stocks||60%|
As above I don’t hold much in the way of bonds. I’ll begin to change the allocation towards a higher value as I get closer to FI, currently, I want the highest returns I can safely obtain.
I do slant toward US equities, but most of this gap will be shifted toward bonds as I approach retirement. I plan to shift about 4-5% more towards bonds in this fund every year until bonds hit 40% and I have a more traditional 60/40 portfolio for my allocation. I did choose to keep this mainly in US stocks as they tend to be less volatile.
If in the future I go for more or fewer bonds in the final allocation (say 70/30), the plan is to move towards an even split of US-International stocks.
During the downturn in 2022, it wasn’t fun but it didn’t scare me off. So I think this split works well for me from a psychological perspective. I’m pretty ok watching my portfolio take that kind of hit. However, I’ll want to have a more stable and less risky portfolio when I retire
Rebalancing, contributions, and other considerations
Currently, I don’t rebalance my accounts. As I add funds I use that to move back toward my desired asset allocation. When I start withdrawing during FIRE I’ll be rebalancing annually.
I am dollar cost average with new contributions. Since Schwab doesn’t charge a commission on trades, I add money every payday. I then check my current asset allocation and then buy to adjust back towards my goal allocation. I figure this takes care of regular rebalancing.
Now there are still some other assets floating around my accounts from the other strategies I’ve tried. My plan for these assets is for them to make up for the items I initially draw down during retirement until they’re exhausted.
You might be wondering what I do with dividends. I just leave them on a DRIP plan. In retirement, I’ll stop using DRIP and instead use them as my first source of income before selling.
Since I currently don’t do tax loss harvesting or anything like that. I might begin to do so later but I don’t expect to have taxable income in retirement as my total living expenses will be $48,000 some of which being principal.
As a last point, let’s talk about cash in my current portfolio. Currently, I maintain a fund of $12,000-$16,000 in cash, the lower bound being my emergency fund and the upper bound accounting for the funds I keep on hand to cover expenses during the month. In retirement, I plan to hold one to two years of expenses on top of the emergency fund although parts of my spending money for that year may be in the forms of bonds or CDs.
Wrapping it up
So that’s a bit of what I used to do for investment and how I arrived at my current strategy. To summarize what I do now; I invest in broad low-fee index funds, tilted toward stocks, a plan to begin shifting more toward bonds over time, with a bit of cash on the side. I’m sure there will be more mistakes I’ll make ahead, but I’m being more careful now than I was in the past.
Over time I’ve made a lot of mistakes when it comes to investing; paying high fees, not considering taxes, not having an investment strategy, not holding, etc. I think a lot of this came from not having a goal for this money, at first it was just to make money but not towards any goal. After a bit, it shifted towards having more money during a traditional retirement. Finally, it became paying for FIRE which is its current goal.
I’ve also created plans for my old assets, each account type, and what changes will be made to my asset allocation and when.
That’s it for this week. I’ll see you next week.