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 🙂
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!