July 7th, 2014.
It was the first day of my full time job. I was pretty nervous, as most people are on their first day at a new company. I had not met my boss, coworkers, or anyone really, so I had no idea what to expect.
The day was a blur, from new hire orientation, to getting a badge, to walking around the cluster of office buildings; and who can forget sitting with the IT department to get your computer and credentials.
While all of that went smoothly, the thing I remember most was when I was getting walked through our benefits section and how they helped me to set up my 401k.
I was excited. This was my first chance to invest on my own! My parents and I had already walked through and created a budget for me to follow, which prioritized putting 10% into this account.
Easy as that right? Well…
Setting up contributions was simple enough, but when it came time to choose where I was putting that money…
Nothing. I had no clue what I should do on this step. It should have been easy. But it wasn’t.
There was a short list of 15 funds to choose from. They could’ve been written in a different language for all I knew:
VANG IS TL STK MK IP (Huh?)
TRP INST SM CAP STK (Excuse you!)
NT ACWI EX-US IDX DC (Ok now you’ve REALLY lost me…)
Even with my degree in Finance, I was clueless, and had no idea what I was doing.
If only there was a great resource out there so others can avoid this situation…
The Simple Path To Wealth
Alas! I found one! Unfortunately it was 4 years after I really could’ve used it.
Nonetheless, as you’ll see, I’ve taken many things from it, and it’s reinforced why I’m chasing after this goal of FIRE.
Although a few months ago I announced I had never read a personal finance book, I made sure to remedy that.
The Simple Path To Wealth, by JL Collins, was the first one I tackled, and this is one that I think can be a game changer for most people.
I won’t write a review of it, as there are many blogs/podcasts out there that have (like this post from JD Roth and this podcast from the Mad Fientist) and they did a much better job of it than I ever could.
I was lucky enough to meet the author at Camp FI Midwest, and came away in awe at the wisdom and knowledge he shared with the group from his experiences.
This book is one that should be required reading for those in college (or even high school!)
It so simply explains the concepts of money and investing, and is one that young people especially could utilize to their benefit. The earlier you start investing, the better!
I for sure know that this book could have helped me out immensely when first starting out. It would have led me to the Financial Independence community much sooner!
I currently have a sister on the verge of college graduation, and a brother in college as well. Guess who is getting a copy of this book for Christmas!?
This book is one that I would seriously recommend to anyone. If you prefer reading blogs over books, you can pretty much get all the knowledge for free on Jim’s blog via his Stock Series.
It is essentially the blog version of the book, though after reading both I think the book does a better job of wrapping everything together.
This book made me seriously rethink my investing strategy, and spurred me to make some changes.
Drowning In The Noise
Picking up where my story left off, I inevitably selected a few funds to invest in that my parents financial adviser recommended.
Judging on how my 401k returns from 2014 to 2016 lagged the overall market, I’d say I probably could’ve been in better funds.
Over the last few years I learned a bit more about investing and would adjust my portfolio occasionally based on what I had read in articles at the time.
For instance, I transferred 5% of my 401k into a company stock fund, settled on a round 30% figure to be put into an International fund, had anywhere from 10-20% in Small Cap Equities and the rest in a large cap fund.
Ask me where I got any of the these percentages from and I couldn’t tell you.
Conversely, I could do a simple Google search which would give me 10 different articles out there, all from experts, all claiming you should have a different asset allocation than what I had.
So who is right? What is the ideal asset allocation? With all the different recommendations out there, it’s no wonder people find it hard to pull the trigger on investing.
It’s safe to say, there is A LOT of noise out there when it comes to investing.
Most sound investment advisers will recommend you stick with an allocation that you feel comfortable with. But what if you don’t even know that?
Investing Doesn’t Have To Be Complicated
The thing I liked most about The Simple Path To Wealth, was showing just how easy and laid back your investing should be.
To be a successful investor, you really only need two funds. A Total Stock Market Index fund (Vanguard’s VTSAX being the preferred choice) and a Total Bond Market Index fund (Vanguard’s VBTLX preferred here).
If your company’s retirement savings plan doesn’t offer Vanguard funds, find one that closely resembles these two.
All you need to do is figure out how risky you are. Risk taker? Have your split be 90-100% stocks (VTSAX) and 0-10% bonds (VBTLX). More risk averse? Lower the percentage of stocks and raise the percentage of bonds until you feel comfortable.
This was a game changer to me. Instead of worrying about what is the right asset allocation for myself (what’s the right International allocation? How much should I be in Small/Mid Caps? Etc.), I have the confidence knowing that if I put it all into this one fund, things are likely going to turn out just fine down the road.
And even more likely than not, it’ll do better than whatever allocation I can come up with on my own.
Making The Changes
Prior to reading this book, my 401k allocation was as follows:
50% VITPX (same thing as VTSAX, just even lower fees!), 35% in a low fee International fund (tracks to ACWX), 10% in a Small Cap index fund (tracks to Russell 2000) and 5% in my company stock fund (not a share buyback fund or anything like that). (This makes up almost 70% of my entire investment portfolio).
I also had 100% of my Roth IRA in VIMAX (a Vanguard fund for Mid Cap stocks) which made up a little over 10% of my portfolio.
We’ll ignore the Brokerage and HSA for now.
As a result of reading the book, I made two big changes:
I moved the holdings in my 401k of Small Cap and company stock (total of 15%, though 10% of my overall portfolio) to a Bond fund, and transferred my entire Roth IRA to VTSAX.
I also adjusted my 401k contributions, to put nearly everything going forward to VITPX.
Why the changes? To put it shortly, I was getting tired of tracking how various segments of the market were doing. It’s so much easier and less of a hassle to just put most of it into the total stock market and sit back and relax as JL Collins wrote about.
Personally, I do still want at least some international exposure, so I let that be for now, but I’m focusing most of my investments towards the Total stock market (US based, aka VTSAX).
So what’s up with the Bonds?
I’ve always considered myself an aggressive investor, keeping 100% of my invested money in stocks. But I realized that the current market environment is giving me pause.
Who knows what will happen. Perhaps the market goes way down soon. Perhaps it keeps going up and it will never be this low again.
I’m no fortune teller and can’t give you those answers. What I do know is that keeping 10% of my overall portfolio in Bonds feels right to me at the moment.
If the market goes way down, I can always move that back into Stocks for a buying opportunity. If it keeps going up, well I’ve sacrificed some gains, but had more peace of mind.
When it comes to investing, you should always choose peace of mind (unless your peace of mind says to not invest of course! 😉 )
Keep It Simple
To round it all out, I skipped over the Brokerage account as I did not want to cause a taxable event (yet), so I’ll be on the lookout for opportunities in the future.
The HSA also has a relatively small value right now, so I left it as is too, though I’ll likely shift out of the REIT I’m in to a VTSAX equivalent once I (hopefully) purchase a rental property next year.
In the meantime, I won’t be actively contributing to my new Bond position, so over time this percentage will be watered down as I funnel more and more money into the market. I am completely fine with this.
Maybe someday I’ll look into further diversifying and really reading into all the different asset allocations, but for now, this is so much easier and free’s up my mental capacity for other important things.
Ultimately, how you choose to invest is completely up to you.
Many fear investing due to it’s “complexity”, but simplifying it down to just two funds is something that anyone can manage.
Set up your auto contributions, invest as much as you can and forget about it. If you do that, you’ve got a great chance of waking up years later to find out you’re a very wealthy person 🙂
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Have you read The Simple Path To Wealth? How do you determine your asset allocation? How much of a risk taker are you? Let me know!
I’m going to move my HSA investment entirely into a total index fund, but I don’t want to lock in losses right now as those funds are generally down about 3% since I opened my HSA earlier this year. All of my other investments are either in my Roth IRA or brokerage account where my advisor selects investments based on my goals. I may look at simplifying that, but I’m fairly comfortable with it.
Generally I’ve noticed during good times, my returns are slightly under the broader market. During the bad times (such as this downturn), my losses have been noticeably not as steep as the broader market. That seems to fit my risk profile. I want returns, but I’m also more comfortable when I see my investments don’t fall as hard during troubled times.
I’ve been building up my online savings account over the last few months, especially now that rates are rising (getting over 2% now as of last month!) and the market is re-calibrating or maybe even dipping into a bear market. In the short term I’m going to keep raising more cash in order to put that to work once things stabilize on Wall St.
I like the way you’re handling your investments, especially because it seems like you are comfortable with it and how it performs. That’s the most important part!
I’m with you on the cash though. As you know I’ve been stockpiling cash for a future rental property, and the fact that the market hasn’t been doing great is reinforcing that decision as the diversification is nice during rocky times.
+1 to that! I was such an idiot when I first opened my Robinhood account – I went all-out looking at online resources and trying to guess whose earnings were going to beat expectations when, and cash out. Sometimes it felt like there was no rhyme or reason to what the market was doing, and I’ve since learned that it’s better to let go and just get a handful of ETFs, or use services that invest in the overall market for you. The returns are better, and I have better things to do at 6:30am every day than obsessively track each individual company on the news.
The freeing up of mental capacity is so huge to me. Even if I somehow could figure out a method to beat the market consistently, right now with everything that’s going on in my life I don’t think I’d want to expend that energy. Maybe that’s something I’d find interesting in retirement when I have more free time, but right now it’s not worth it to me (especially when I definitely can’t beat the market! 😂)
I think keeping things simple is probably a good way to go (need to remind myself to follow this approach!).
Good to hear that your company took the initiative and told you about your retirement plan, and that you could draw on the experience of your parents and their financial advisor.
I think many people miss out on learning about how to invest when they are young and so they only learn by happy accident later on in life or when their retirement age starts to loom into view.
HH
Yes I think that as people learn about and understand how easy it can be at a young age, it can essentially set them up for life! The tough part is trying to get all that info to them…
who can forget sitting with the IT department…..
Now that made me laugh. Do I send some sarcasm in there 🙂
The simple path is the best path, especially for those of us who don’t want to waste a lot of time pouring over numbers and thinking too much about it
Hahaha just a tad bit of sarcasm 😉
Time is the most important luxury we have! The FI space has a lot of money experts who love this stuff, but most people are not interested. The simple path is the easiest and exactly what most of them need 🙂
What I also love about the Simple Path to Wealth is that following that advice helps cut down on investing time lost to indecision. When you’re just starting out, your contribution amounts and getting started as early as possible far outweigh the importance of returns, so just picking something and investing in it is important. And if it happens to be what seems like the very rational choice of VTSAX, even better!
Yes exactly! Those early returns likely won’t matter as much because you aren’t working with as much money. Set it and forget about it is the way to go!
I can say that I wish I had this approach when I was younger. I thought I was a good stock picker, I wasn’t. I lost more than a few pretty pennies in my younger days that I would prefer to have back now.
That being said, while I mostly agree with this, I still need my gamble stocks. I have most of our funds in equivalent stock funds. I do add a spread to get some international exposure. I also am developing a dividend aristocrat portfolio that has a few REITs and a few true dividend aristocrats in it. That’s more effort, but that’s after spending about 10 years the way suggested by the book. I am just spreading things around a bit. To each his own.
The big thing for me, though, is the low cost for the mutual funds and ETFs that we have in our various retirement, non retirement, and my son’s educational IRA.
Totally agree with this. If you’re willing to put the time in and research stocks and all that, more power to you! Plus it gives you more diversification. I feel like majority of people out there aren’t willing to do this though, and for them just sticking to a couple funds is probably best
My first IRA was with Edward Jones. As you can imagine, the returns weren’t great, and the fees were worse. And guess who hasn’t finished transferring it to vanguard yet… 🙈
Noooo. Do you need another accountability partner to finish that up!? 😉
Probably… 🙈
God bless this post. I’m vested at my company next month, which means I get to start contributing to my 401k, and reading the 16 page document about all the different options almost made me cry I was so overwhelmed.
I’m glad you found it useful! Hopefully this helps to make choosing the funds easy for you! Feel free to reach out if you have any further questions!