Category Archives: Investing

Financial Independence: A Universal Goal

While reaching early retirement is my goal, it might not be suitable for everyone.  On the other hand, the goal of reaching financial independence should be the focus of everyone during their working years.  Even though most careers seem to drag on forever, the amount of time that we have available to work and save money is truly finite.  Everyone should have the goal of saving enough money to cover at least 25 years of living expenses.  It does not matter if you enjoy your career or not.  This rule applies to everyone.  The sooner you start working towards reaching financial independence, the better off you will be.

Reasons to Achieve Financial Independence

Job Loss

Today, the unemployment rate in the U.S. is around 4.5%.  Most employers are now hiring.  Many jobs are even going unfilled.  Unfortunately, this can change in a flash.  Recessions occur as part of the business-cycle.  When business slows down, companies need to reduce expenses to remain profitable.  One of the easiest ways to reduce expenses is to reduce labor costs.  When this transition occurs, hard-to-fill jobs become hard-to-find jobs.

Losing a job is one of the most stressful situations that a person or a family might face.  By being financially independent, the stress can be removed or drastically reduced.  If you have many years of living expenses stashed away in savings, a job loss can be viewed as an opportunity to take an extended vacation from work, start a business, or explore working in a different line of work.  Financial independence affords options.

Defined Benefits

Since the start of the new century, employers who offer defined benefit plans have been on the decline.  Gone are the days when people work for a company for 35 years and receive $40,000 per year for the rest of their life after they retire.  Employers do not want to have to pay the costs or take on the risk of being liable for underfunded pension promises.  Defined benefit plans are even on the decline in government jobs.

This now puts the responsibility of paying for retirement on the employees in the form of a defined contribution benefit (401K).  The individual is now burdened with the responsibility of saving enough money for retirement.  Many people lack the sophistication to correctly determine how much they need to save and do not have the ability to manage this type of investment account.

If managed correctly, defined contribution accounts are great tools for saving money that can contribute to a person’s financial independence.  The money that is invested grows in a tax deferred account.  Most defined contribution accounts now offer low-cost index funds and target-date retirement funds.  In some cases, employers also match a percentage of their employee’s contributions.

Everyone should start by contributing 15% of their salary to their 401K.  After that, work on increasing contributions by 1% per year.  Increases the contributions every year until you are contributing the maximum amount allowed by the IRS.

Social Security

Social Security is going to run out of money by 2034 unless the government makes some major changes.  That does not mean that Social Security is going to go away.  At that point, Social Security will be funded by payroll taxes.  Based on the current projections, Social Security will be able to pay $0.75 for every $1.

By reaching financial independence, a person does not have to rely solely on Social Security to fund their retirement.  Even if Social Security was fully funded, it does not provide enough in benefits for most people to enjoy a high quality of life.  To ensure a high quality of life in the future, switch your focus from relying on Social Security to cover your future expenses to working towards becoming financially independent.  By doing this, you will be able to view Social Security as a nice supplemental income stream.

Health

Too many people think that, they can work forever.  You might be healthy today, but that can and will most likely change with age.  Yes, we can eat right, exercise, and keep up with doctor visits.  In some cases, we can take measures to improve our health.  The gross reality of the situation is that most people cannot keep up the physical and mental pace of a demanding career once they reach a certain age.

By being financially independent, a person has the option of being able to retire on their terms and to enjoy life while they are still young and healthy.  Life is not too much fun without money.  Life is less fun when you are in poor health.  Once your reach financial independence, you will not have to stress about being forced to work because you do not have the resources to sustain your lifestyle without the income from a job.

Family

Not only do we owe it to our self to reach financial independence, but we also owe it to our family.  We only have one shot at life.  By reaching financial independence, we can do so much for our loved ones.

By being financially independent, a parent or grandparent can better provide what their children or grandchildren need to be successful in life.  Financial independence provides security for a spouse and can reduce the  financial stress in the relationship.  Also, by being financially independent, you can be present in the lives of those you live with, extended family, and friends.

Conclusion

When you think of financial independence, do not only think of it in terms of being able to retire early or live a luxurious lifestyle.  Look at it as necessity.  Life happens and we do not know what is around the corner.  By being financially independent, you take more control over your life.  People who are financially independent have options that others who lack resources do not have.

Some say that control is an illusion.  On some levels, it is.  For example, we do not have control from one breath to the next.  However, losing a job and not having money is not an illusion.  By becoming Financial independent, you can take control where it is possible.  You are also able to enjoy a freedom that is available to almost everyone, yet experienced by so few.

Meeting the Bogleheads

In February, I attended my first Bogleheads chapter meeting.  It was a long drive.  I drove over 100 miles to the Philadelphia meeting in King of Prussia, Pa.  I have been a follower of the Bogleheads.org forum for many years and have spent countless hours reading the Bogleheads.org forum.

The Bogleheads take their name from John C. Bogle who founded Vanguard in 1975.  He created the Vanguard 500 Index Fund (VFINX).  The Vanguard 500 Index fund (VFINX) was the first index fund available to individual investors that tracks the S&P 500.  John C Bogle has also made a career of being a champion for small investors.  His approach to investing is to build a portfolio of low-cost index funds that are tax efficient and to stay the course during all market conditions.

The Bogleheads are a group of people who follow the investment teachings of John C. Bogle.  They have a forum Bogleheads.org.  They also have written The Bogleheads Guide to Investing and the Bogleheads guide to Retirement Planning.  The Bogleheads are an altruistic group.  They help others learn about investing at no cost and have donated the proceeds from their books to charity.  A person can post a question about investing, education, careers, consumer goods, as well as other topics related to personal finance on the forum.  Most questions receive many answers by highly knowledgeable and experienced investors.

The Bogleheads’ Guide to Investing

The Bogleheads’ Guide To Retirement Planning

I did not know what to expect since it was my first meeting.  Everyone was friendly and welcoming.  They were happy to see everyone who was in attendance.  Even though I did not know anyone, it was like a meeting with old friends.

There were about 30 people who attended the meeting.  They said that it was one of the larger chapter meetings.  Some people were long time members.  Others were first timers, such as myself.  There were people in attendance from Philadelphia, Maryland, New Jersey, Washington D.C., and the Poconos.

It was nice to put a face to some of the avatars that are regular contributors on the forum.  It was a pleasure to meet “Lady Geek”.  If you follow the forum, you know her as the moderator who regularly monitors the posts.  She makes sure that the rules are followed.  If someone strays from following the rules, the post will be removed or the thread will be locked.  The Bogleheads forum is as close as it comes to being a perfect online community.  That is due to the hard work that the moderators put in to keeping it positive and educational.  No politics, religion, trolling, or solicitation is allowed.

The topics that were discussed over the course of two hours were:

  • Retiree Portfolio Model, a highly informative lecture on Roth conversions (think MBA level).
  • Social Security tax impact calculator, how a Roth Conversion can impact your Social Security taxes (think Ph.D. Level).
  • Asset allocation, Lady Geek gave a great lecture on asset allocation based on risk tolerance (think undergrad level for newcomers).

It was truly an intense 2-hour lecture.  It was almost information overload.  I left the meeting feeling stimulated and exhausted.  I cannot wait to attend the next meeting in May to listen to the lectures on tax loss harvesting.

The Bogleheads have chapter meetings in most major U.S. cities.  They are free to attend.  I highly recommend attending if you are into reaching FI and FIRE.  If you are interested, there is a local chapter section on the forum to find a meeting near you.  Also, if you are interested in the calculator and more detailed notes from the February 2017 meeting, they can be found under the Philadelphia chapter meeting section on the Forum.

How I learned about money

I learned about money from my Grandmother.  I was a precocious kid.  As an only child, I spent a great amount of time with adults.  The adults in my life had the tendency to try to have dialog with me as if I too were an adult.  Friends from school would come over to my house to play quite often, but I remember spending a great amount of time with my Grandmother.

My Grandmother owned her own small business.  She was a seamstress.  She worked for a few different bridal shops.  She also worked for a men’s clothing store.  Most days, she would pick me up after school and take me to her shop.  She would watch me until my Mother would pick me up on her way home from work.

It did not take me long to catch on to the theory of commerce.  Her customers would drop off cloths to be altered.  She would make the alterations with her sewing machine.  The customers would pick up their cloths and pay her.  When I earned good grades, she would take me to KB Toys and buy me Star Wars action figures.  Even though I was only 5 or 6, I understood this process.

There were also times when I would ask her to buy me a toy and she would say that she could not afford it.  She would explain that business was slow and she did not earn much money that week.  She said that she only had money for food, gas for her car, and other needs.  She taught me at a young age that if you want money, you must work to earn it.

That was a complex theory to comprehend at such a young age.  I was only in first grade.  I do not have a psychology degree.   I can, however, see that my frugal ways and entrepreneurial spirit were shaped by her teaching me how business worked.

The second lesson that she taught me was equally as profound.  She and I would sit together in her shop.  I would do my school work and she would be sewing.  I would spend about one hour per day with her.  We would have conversations.  She would ask what I learned at school that day?  She would tell me about her work and other stories.  She would talk about her life when she was growing up, her church, and money.

Money was her favorite topic.  She once told me that she invested in CDs that had paid out an interest rate of 13%.  She would double her money in 6 years.  She was so excited.  I am now referring to the early 1980’s when inflation and interest rates were sky high.  She explained that she would let the bank borrow $1000 from her and in 6 years they would give her $2000 back.  I found that fascinating.  Now remember, I did not understand compound interest.  I was not introduced to multiplication yet.

This first blog post is a tribute to my Grandmother.  Looking back, she truly shaped my view of money.  If you want money, you must work for it.  Also, if you have money, you should invest it.

In case you might be interested, my Grandmother is still alive.  My parents take care of her now.  She is 94 and ran her business until she was in her 80s.  She had to finally give it up because her body was breaking down.  Sewing was her passion.  At the end of her career, she was just doing alternations for her neighbors.  I don’t think she even charged them.  She just liked them coming over to talk with her.

Occasionally, my Grandmother will call my wife and ask her to come over for a visit.  She wants to teach her how to use her sewing machine and pass on her legacy.  Maybe she will also share some investing tips with her too.  We have never consistently earned 13% returns on our portfolio.

How did you learn about money?

Peer-to-Peer Lending (P2P)

INTRODUCTION

You cannot manage a household or do much of anything in this world without the input of money. There are so many people who lack the financial means to live and enjoy a high-quality life.  Money is what stands in the way of them acquiring their needs or wants. When there is a problem, various solutions will be thrown up. Welcome to the world of Peer-to-Peer Lending (P2P).

DEFINITION

Peer-to-peer lending is legal and recognized by the government. The use of official financial institutions as avenues to source for funds can be tricky, intricate, and cumbersome to some people who do not meet the required credit standards. Poor credit is the barrier between the borrower and the needed loan.  Credit Cards are an option for people who have poor credit, but they come with restrictive credit limits and high interest rates.   Most people are not comfortable with borrowing from sources other than insured financial institutions, yet they need access to financial capital. This scenario created the rise to the advent of Peer-to-Peer Lending (P2P).

Clearly defined therefore, this means of getting money is a method of debt financing whereby individuals can either borrow or lend money depending on the situation without recourse to any financial institution acting as an intermediary. The middleman is technically removed from the lending process. In some circles, it is known as social lending.

WHO ARE THE BENEFICIARIES

The borrowers and lenders are individuals. This mode of transaction is conducted online. The fact again must be laid bare here that most of the people that conduct their business through this method are those that have been rejected by established financial institutions. The reason for this is due to the fact of their inability to repay those loans.  Most financial institutions will not lend money out in such risky scenarios.

Despite all the odds however, Peer-to-Peer Lending (P2P) has come to stay as a means of getting needed cash to people who are desperate. There are instances of people who have taken advantage of this medium of borrowing.  The emergence of new intermediaries in this mode of borrowing money is also time saving compared to traditional lending sources.

CHARACTERISTICS OF PEER-TO-PEER LENDING (P2P)

  • The transactions take place online.
  • There is room for intermediation by a peer-peer-lending company.
  • If the P2P offers total facility, the lender will more often make a choice between borrowers; they will choose the ones they will lend money.
  • Some (though not all) of the P2P platforms provide transfer facilities or what is referred to as free pricing choices. It applies to debt collection as well as to profits.
  • In this system of monetary transaction, there is no need for a prior knowledge/common bond between the lender and the borrower.
  • In most instances, it is conducted for profit.
  • The loans under this category can be secured or unsecured.

WHY PEER-TO-PEER INTERMEDIARIES

The initial concept is to do away with being forced to borrow from approved financial institutions:

  • A means of getting new lenders and borrowers.
  • The development of credit models meant for loan approvals and for pricing.
  • There is need for some verification before each deal is sealed. Issues such as borrower identity; employment; bank account and income can be verified through the intermediaries.
  • It will enable the performance of a borrower credit check with the sole aim of separating and filtering out dubious and unqualified borrowers.
  • There is the need to process the financial transactions, borrowers will pay and same will be returned to those that lent out the money in the first instance. The processes need effective co-ordination which can be guaranteed by the intermediaries.
  • There is the aspect of tiding up the legal aspects and the reporting of such which are performed by the intermediaries.

THE LEGAL ANGLE 

In most countries of the world, the art of soliciting investments from the public is considered illegal. To get legal cover; the language adopted is crowd sourcing. This is an arrangement whereby people are made to contribute money in exchange for potential profits based on mutual efforts of those in the group; it is known as securities.

THE ADVANTAGES

  • It is two-way traffic; a sort of win/win situation for both the borrower and the lender. The borrowers will get access to funding otherwise not available from traditional bank. On the part of the lender; they are guaranteed higher returns more than they would obtain elsewhere.
  • It assists people and is beneficial to the community.
  • It supports the efforts of individuals to break free from the burden of debt.
  • It discourages those that are involved in activities deemed immoral-the ones that are detrimental to the society.

THE DISADVANTAGES

  • Interest rates may be higher in other to cushion the effects of likely loss occasioned by defaulters.
  • Measures to enforce repayment of the loans through the government are not in place.
  • The default on repayment of the loans is very high.

PEER-TO-PEER LENDING (P2P) PLATFORMS

If you are interested in learning more about peer to Peer lending (P2P) or participating in this practice, please see the below list of top rated (P2P) platforms:

CONCLUSION

There is the risk factor in any business or investment endeavor. But considering all factors, Peer-to-Peer lending (P2P) has come to stay and it is now a strong factor in the economies of most countries-the developed and underdeveloped alike.

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.

The Vanguard Star Fund (VGSTX)

Many of my friends know that I truly enjoy living a frugal life, investing, and working toward financial independence.  Most of my friends, however, do not share the same passion for personal finance the way that I do.  They all like what money provides, but they are more focused with other interests.

Over the years, people have asked me to set up their work sponsored 401K.  Others have asked for help setting up an IRA for them.  Some have even asked me if I would help their other friends or relatives with their investments.

I am not a financial professional.  When I help people, I do not receive any compensation.  I do it because I love investing and helping others.  Please read my Disclaimer page for more information about this.  I also do not work for Vanguard, but do recommend Vanguard as the best company to invest with.

When people come to me with a large sum of money, they have more options.  Most Vanguard funds have a $3,000 minimum for investor shares.  If someone comes to me with between $3,000 to $5,500, I set them up in a Vanguard Target Date fund.  We select a fund based on their age and risk tolerance for their IRA.

Many of the people who I have helped did not have a large amount of money to start investing with.  Some of these people are artists, social workers, police officers, ministers, students, or other people with limited means.  Never the less, they did want to take responsibility and start investing for their future.

The one fund that I have always defaulted to for this population was The Vanguard Star Fund (VGSTX).  Looking back, I have helped at least 10 people or more by opening an IRA with this fund.  This is a good fund to start with because it only requires a minimum of $1,000 to invest in an IRA at Vanguard.

It is a balanced fund with a somewhat conservative asset allocation of about 60% invested in stocks and 40% invested in bonds/short term reserves.  The Star Fund is a fund of funds.  It is made up of 11 different actively managed vanguard funds. The Star Funds stock allocation is well diversified with both domestic and international equities.  Within the stock allocation, it has a mix of both growth and value funds.

Allocation to Underlying Funds (as of 6-25-2017)

Vanguard Windsor II Fund Investor Shares – 13.9%

Vanguard Long-Term Investment-Grade Fund Investor Shares – 12.5%

Vanguard GNMA Fund Investor Shares – 12.3%

Vanguard Short-Term Investment-Grade Fund Investor Shares – 12.3%

Vanguard International Growth Fund Investor Shares – 9.6%

Vanguard International Value Fund – 9.6%

Vanguard Windsor Fund Investor Shares – 7.5%

Vanguard U.S. Growth Fund Investor Shares – 6.3%

Vanguard Morgan Growth Fund Investor Shares – 6.2%

Vanguard PRIMECAP Fund Investor Shares – 6.1%

Vanguard Explorer Fund Investor Shares – 3.7%

I do not own this fund.  For my own portfolio, I rather index funds because of their low fees and tax efficacy.  The Star Funds does, however, have an expense ratio of only 0.32% compared to 0.86% of the average fund in this class.  The Vanguard Star Fund has a 4 out of 5 star rating on Morningstar.com.  The Star Fund was created for IRA accounts because it is not the most tax efficient fund that Vanguard offers.  An IRA is where I suggest people to use this fund.

The Star Fund was launched in 1985.  It has historically performed well:

1-year return – 11.42%

3-year return – 5.54%

5-year return – 8.14%

10-year return – 5.93%

Since Inception on 3/29/1985 – 9.43%

Some people might feel this fund is too conservative for younger investors.  You are correct, if you follow the approach that suggests holding your age in bonds or an even more aggressive approach.  In my opinion, the Vanguard Star Fund is a good place to start for investors with limited means and investing experience.  I am comfortable recommending the Star Fund to new investors as a fund to start with in an IRA.  If they chose to have a more aggressive portfolio as they learn more about investing and risk, they can switch to a Vanguard Target Date Fund that better matches their risk tolerance once they save up over $3,000 in their IRA.

Please remember to check with a financial professional before you ever buy an investment.

The Power of a Dual Income Couple

Albert Einstein said that compound interest is the 8th wonder of the world.  He who understands it will earn it, and he who doesn’t will pay it.  If compound interest is the 8th wonder of the world, then I feel that the power of a dual income couple is the 9th.  Being in a dual income couple can be a powerful wealth building partnership if managed correctly.

At my first full-time job, I worked with a guy named John.  John trained me when I first started at the company.  He and I became friends and we would often have conversations during lunch hour.

John was more than 20 years older than me.  He and I would talk and he would give me advice about life.  He told me that his wife was a stenographer and they lived off her salary.  They used her salary to pay their mortgage, car payments, buy groceries, and all their other expenses.  He said that they saved all the money he earned from his position.  They invested all his earnings and were planning on retiring in 20 years when they were both age 60.

I was a young man at the time and never heard of living off one salary.  This was just around the time that I was getting interested in personal finance.  It truly did sound like an ingenious plan.

When my wife and I got married, this was the basic strategy that we planned on using.  In my own experience, I have found that being in a two-income household has many financial advantages.  Here are some tips on structuring a plan to get the most out of a dual income household:

Salaries

Start by analyzing both salaries and identify the higher of the two.  Use the higher of the two salaries for paying all the reoccurring monthly expenses including housing, food, insurance, recreation, miscellaneous expenses, and child care if you have children.  Set a goal of one day being able to use the lower of the two salaries to pay these expenses.  This can be done by focusing on reducing expenses, career growth, and even side jobs.

You might be thinking that living on one salary would be impossible.  It might not be easy, but it is defiantly doable.  Check out the Story about Liz who was featured on budgetsaresexy.com.  Liz provides for a family of five people while also saving to reach early retirement (FIRE).  Liz is also the author of the blog Chiefmomofficer.org.

Debt

Before you start savings and investing, you want to analyze your debt.  If you are part of a dual income couple that has a debt, first work on paying that down.  If need be, take a few years of using the lesser of the two salaries to pay down your debt.  Start by paying off all credit cards, auto loans, and any personal loans that you might have.

Next, pay down your student loans and mortgage.  Once you are left with only student loans and a mortgage, pay them down to debt-to-income ratio (DTI) of under 15%.  After your debt-to-income level (DTI) is at a manageable level of under 15%, the higher of the two earners can work towards reducing the (DTI) even further.

To calculate your Debt-to-Income Ratio, see the formula below:

Debt-to-Income Ratio = Monthly Debt Payments/Monthly Income x 100

Example: $1000 in Monthly Debt Payments/$4000 in Monthly Income x 100 = DTI of 25%

Savings

When you are in the paying down debt stage, you should also contribute to a 401K if there is an employer match.  You want to contribute to get the max amount of what your employer is matching.  To do otherwise would be to refuse compensation.

Now it is time to start saving and investing.  First establish an emergency fund of 3-6 months of expenses in a FDIC insured savings account.  Second, max out both 401K accounts to take advantage of tax deferred savings.  Third, max out both Roth IRA accounts to grow that portion of your savings in a tax-free account.  Forth, use any additional savings to invest in broad market ETFs in a taxable account.

Conclusion

No matter if you are newly married or have been in a dual income couple for many years, you too can take advantage of the powerful wealth building capabilities that you have been blessed with.  My wife and I have been following this approach to reach financial independence for almost ten years.  Our savings rate is over 50% because we have learned to live on one salary.

One last note, I ran into my old co-worker John last summer after not seeing him in many years.  I was having breakfast at a local diner one Saturday morning and John was there with his wife.  We had a brief conversation.  He told me that he is retiring next year and moving from Pennsylvania to Texas where his wife has family.  It appears that he truly did follow the simple yet profound approach to reach financial independence that he introduced to me a long time ago.

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer Page.

Early Retirement Portfolio & Plan

Thank you for reading part-4 in my series on asset allocation.  In my last post, I wrote about our current balanced-growth asset allocation.  That is the asset allocation that we plan on maintaining until we retire in 2028.

In this post, I will be considering the future.  This post is about how I foresee our assets being allocated at the time of retirement.  I use the word foresee because it is what I am anticipating.  As I stated in my previous post, I don’t have a crystal ball.  Nobody can predict the future, but this is what I am optimistically forecasting.

At the time of retirement, I will be age 52 and my wife will be age 60.  At age 60, my wife will draw a Pension equal to 70% of her last annual salary.  The Pension technically has a cost of living adjustment (COLA), but there has not been an adjustment in over 15 years.  Moving forward, we are not going to count on any COLA adjustments.

By 2028, we plan on having about 50 years of annual living expenses in investable assets.  To come up with that amount, I have run our figures on many different financial calculators including AARP, Charles Schwab, and Fidelity that take future projected growth of different asset allocations into account.  The 50 years of living expenses is based on what we currently have saved, the amount we plan on adding to our savings, as well as projected market performance.

The asset allocation that we plan on using at retirement will be 50% invested in stocks and 50% invested in bonds/cash:

S&P 500 Index Fund – 32%

Extended Market Index Fund – 8%

Total International Stock Market Index Fund – 10%

Intermediate Term Bond Fund – 32%

TIPS Fund – 10

Cash – 8%

At retirement, we are planning on withdrawing only 1.8% per year from our portfolio.  Based on the Vanguard Monte Carlo Nest Egg Calculator, our success rate is projected to be 100%.  We also have a greater than 100% projected success rate on Firecalc.com and the Trinity study.

Between the pension and withdrawing 1.8% from our portfolio, we will have $112K per year to live on.  Just based on simple math, if we are taxed at 25%, we would have $7K per month to live on.  That would be more than double of what we live on now with less expenses.

For the first 10 years of retirement, we plan on withdrawing from our taxable account.  When my wife is age 70, we will be forced to withdraw from her Traditional IRA because of Required Minimum Distributions (RMD).  At that point, we will still be 8 years away from having to withdraw from my Traditional IRA.  We might never have to touch our Roth IRA accounts.  If we do use our Roth IRA accounts, it might just be to withdraw extra money without causing us to go into a higher tax bracket.

We are currently planning on being flexible when it comes to Social Security.  Our goal is to take it when my wife is 70 and I am 62.  We are, however, keeping the option open of taking it early based on retiring during a prolonged market correction. Otherwise, the amount that we will collect will compound 7% annually for every year my wife waits between age 62 and 70.

For some people, this plan might seem too conservative.  For me, being a little on the conservative side is important.  That is because I am retiring at a young age.  I have to plan on being able to fund a retirement of at least 35 years for both my wife and myself.

For me, I don’t see it as being overly conservative.  I see it more as being flexible.  By only planning on a 1.8% withdrawal rate, we have a great amount of flexibility.  If we had to increase it to 2.8%, our success rate only falls to 98% on the Vanguard Monte Carlo Nest Egg Calculator.  If my wife had to work two more additional years, her pension would jump to 80% of her last annual salary.  Also, I will most likely still work part-time because I want continue to take advantage of my catch-up contributions in my retirement accounts.

That is how our future plan looks.  It is over 11 years from now.  I don’t want to get too excited.  Between now and then, we will work hard, save, invest, take care of our health, and enjoy every day.

Also, please check out the following links from some of the top personal finance blogs to learn about the #DrawdownStrategy Chain:

Anchor: Physician On Fire: Our Drawdown Plan in Early Retirement

Link 1: The Retirement Manifesto: Our Retirement Investment Drawdown Strategy

Link 2: OthalaFehu: Retirement Master Plan

Link 3: Plan.Invest.Escape: Drawdown vs. Wealth Preservation in Early Retirement

Link 4: Freedom is Groovy: The Groovy Drawdown Strategy

Link 5: The Green Swan: The Nastiest, Hardest Problem in Finance

Link 6: My Curiosity Lab: Show Me The Money: My Retirement Drawdown Plan

Link 7: Cracking Retirement: Our Drawdown Strategy

Link 8: The Financial Journeyman: Early Retirement Portfolio & Plan

Link 9: Retire by 40: Our Unusual Early Retirement Withdrawal Strategy

Link 10: Early Retirement Now: The ERN Family Early Retirement Captial Preservation Plan

Link 11: 39 Months: Mr. 39 Months Drawdown Plan

Link 12: 7 Circles: Drawdown Strategy – Joining The Chain Gang

Link 13: Retirement Starts Today: What’s Your Retirement Withdrawal Strategy?

Link 14: Ms. Liz Money Matters: How I’ll Fund My Retirement

Link 15a: Dads Dollars Debts: DDD Drawdown part 1: Living With a Pension

Link 15b: Dads Dollars Debts: DDD Drawdown part 2: Retire at 48?

Link 16: Penny & Rich: Rich’s Retirement Plan

Link 17: Atypical Life: Our Retirement Drawdown Strategy

Link 18: New Retirement: 5 Steps for Defining your Retirement Drawdown Strategy

Link 19: Maximize Your Money: Practical Retirement Withdrawal Strategies Are Important

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.

Balanced-Growth Portfolio

Welcome to Part-3 of my series on asset allocation.  In my last post, I wrote about Adding Bonds To Reduce Volatility in the portfolio that my wife and I held for the past ten years.  In this post, I am going to write about our new asset allocation.  This is the allocation that we will hold until we reach early retirement (FIRE).

As a Financial Independence (FI) blogger, I have always been a portfolio nerd.  The Lazy Portfolios made popular by Paul B. Farrell on marketwatch.com and his book The Lazy Person’s Guide to Investing have always been something that I have enjoyed following.  It is interesting to analyze the performance of famous portfolios like the Coffeehouse Portfolio, Yale’s Unconventional Portfolio, the Second Graders Starter Portfolio, as well as others.

The portfolio that I would like to introduce to you is what I call The Sweet Dreams Portfolio.  The portfolio is named after what it provides for us.  It is a portfolio that allows us to sleep well at night in spite of all the scary headlines that can easily cause nightmares from the sensationalized financial and political media.

This portfolio has a balanced-growth asset allocation.  Based on the Vanguard portfolio allocation model, a portfolio made up of 60% stocks and 40% bonds is classified as a balanced portfolio.  Vanguard classifies a portfolio of 70% stocks and 30% bonds as a growth portfolio.  The Sweet Dream’s portfolio is 65% stocks and 35% bonds.  The Sweet Dreams portfolio is made up of the same funds that we used in our previous asset allocation.

The Sweet Dreams Portfolio:

S&P 500 – 38%

Extended Market Index Fund – 11%

Total International Stock Market Fund – 16%

Total Bond Market – 35%

You might be asking, why not just use the total stock market instead of using a S&P 500 and an extended market fund?  The answer to that question is that these are the options that my wife and I have available in our 403B accounts.  A total stock market fund has the same market weighted allocation of a 4:1 ratio and can be used in place of those two funds.

You might also be asking, why don’t I have the names and ticker symbols listed for these funds?  Again, the answer is based on what we have available for investment options.  Our Roth IRA’s and taxable funds are invested with Vanguard.  My 403B has index funds from Fidelity.  My wife’s 403B plan has index funds from Charles Schwab.  This asset allocation can be created with index funds from any of those companies.

In my first two posts in this series, I wrote from a position of experience.  In those two posts, I was able to look back at how my asset allocation performed over long periods of time.  Those posts were also about how I responded during different market conditions.

The Sweet Dreams Portfolio is a brand new asset allocation model for us.  There is no such thing as a crystal ball that I can use to see into the future.  We can only look backwards at how an asset allocation performed during different market conditions.

Over the past 10 years, The Sweet Dreams Portfolio returned an average of 6.34% per year.  The largest one year loss was in 2008 with a -24% loss.  An initial investment of $10K would have grown to nearly $20K if re-balanced annually.

Over the past 20 years, The Sweet Dreams Portfolio returned an average of 6.91%. The worst one year loss over the period of 20 years was still in 2008.  An initial investment of $10K would have grown to more than $38K if re-balanced annually.

At the age of 40, I still have a long investing horizon.  It is not as long as others because of our goal to retire in less than 12 years.  We are comfortable with the 65% invested in equities for growth.  We are also comfortable with the 35% invested in bonds to use as a re-balancing tool during market corrections.  Ultimately, we are comfortable with the thought of having restful nights and sweet dreams as we work toward our next goal on this financial journey.

Please keep an eye out for the 4th and final part of this series.  The final post in this series will be about how we plan on structuring the asset allocation of our retirement portfolio when we reach early retirement (FIRE).  The final post will also include how we plan on funding our retirement based on investment withdrawal rates, pensions, and Social Security.

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.

Bonds to Reduce Volatility

During the first ten years of my investing career, my asset allocation was solely invested in stocks.  From 1997 until 2007, my portfolio returned 8.5%.  I wrote about that period in my first post of this series 100 Percent Invested in Stocks.  In this post, I will write about how adding bonds to my portfolio reduced volatility during the decade that followed.

By the year 2007, my portfolio had five years of positive returns.  At that time, I was reading a good amount of Jack Bogle’s writings on asset allocation.  He suggested holding (100 – your age) in stocks.

After investing for 10 years, it made sense for me to reduce the volatility of my portfolio.  However, I still was focused on aggressive growth because I had the goal of retiring early.  I felt an asset allocation equal to my age in bonds was too conservative.

Another factor that I had to consider was that I was newly married.  Prior to getting married, my wife and I decided to manage all our finances together.  We sat down and evaluated how we wanted to invest our money after we were married.

At that point, I was 30 years old and my wife was 37.  We decided on adding 25% of our portfolio to bonds.  It was close to equaling (110 – our average age) in stocks.

This is how our new asset allocation looked:

S&P 500 Fund – 43%

Extended Market Index Fund – 13%

Total International Stock Market Index Fund – 19%

Total Bond Market Index Fund – 25%

My second decade as an investor was equally as volatile as my first decade. In 2007, our portfolio was off to a solid start by returning over 10%.  Then 2008 came.  That was the beginning of the great recession that resulted from the subprime mortgage bubble bursting.  In 2008, our portfolio had a loss of more than -30%.  If I had my original asset allocation of 100% invested in stocks, we would have lost more than -40%.

Just as during the dot.com bubble and the three years of negative returns that followed, we just kept investing and moving forward.  We stuck to our normal schedule of dollar cost averaging.  We also stuck to our plan of semi-annual re-balancing.

Fortunately, the market bottomed out in March of 2009 and one of the greatest bull markets began.  By the middle of 2010, we had recovered all of our losses. From 2009 to 2016, our portfolio averaged over 10.5% annually.

That 10.5% return did not occur without volatility.  During this period, there were peaks and valleys along the way.  There were budget crises, polarizing politics, debt-ceiling debacles, federal government shutdowns, and threats of austerity.

Over the course of those ten years, our portfolio had an average return of 5.24%.  If we were invested in 100% stocks the average return would have only been 5.58%.  By adding 25% in bonds, there was almost zero impact on growth.  The bonds did help to reduce volatility.

If you are not comfortable with having 100% of your portfolio invested in stocks, consider adding some bonds to your allocation.  Bonds are susceptible to interest rate increases, currently have low yields, and do not hold up as well as stocks during periods of inflation. Bonds do, however, reduce volatility when the stock market is in decline.  That is the main reason why they have an important role in our asset allocation.

Please keep an eye out for Part-3 in my series on asset allocation.  In Part-3, I will write about the balanced-growth asset allocation that we will hold until we reach early retirement (FIRE).

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.

100 Percent Invested in Stocks

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Do you think you have the risk tolerance to invest 100% of your portfolio in equities?  I had an asset allocation of 100% invested in equities for over 10 years.  At this stage in my life, However, I no longer have the need or desire to have that asset allocation.  That was how my portfolio was invested when I reached my first milestone of Saving $100,000 by age 30.

This is the first of a 4-post series about my asset allocation.  This series on asset allocation is about my asset allocation at different points in my investing career.  The series is based on where I started, what happened, where I am at now, and were I will be heading based on age and risk tolerance.

My investing career began in 1997.  This was a time Alan Greenspan referred to as a period of irrational exuberance.  The stock market was soaring.  The S&P 500 had an average return of over 15% per year from 1989 to 1999.  If a person invested $100 in the Vanguard 500 Index Fund (VFINX) in 1989, it would have grown to $692 by 1999.

In 1997, I purchased my first mutual fund.  My first fund was the Vanguard 500 index fund (VFINX).  This was the only investment that I owned from 1997 until 2000.  I would purchase at least $500 worth of this funds shares per month.  Over that 3-year period, the Vanguard 500 averaged a return of nearly 20% per year.

In 2000, as the result of my savings and market returns, my portfolio was large enough to add more funds.  To improve my diversification, I wanted to add small caps and international stocks to my asset allocation.  I added the Vanguard Extended Market Index Fund (VEXMX).  By adding the Vanguard Extended Market Index fund to my portfolio, I could replicate the total stock market because I already owned the Vanguard 500 Index Fund.  The third fund that was added was the Vanguard Total International Stock Market Index Fund (VGTSX) for international exposure.

My asset allocation was:

Vanguard 500 Index Fund – 60%

Vanguard Extended Market Index Fund – 15%

Vanguard Total International Index Fund – 25%

As far as equities are concerned, my new portfolio was diversified.  It contained every major publicly traded U.S. and international stock.  In my mind, I was ready for the new century and another decade of 20% annual returns.

It did not take long for things to change for the worse.  In March of 2000, the dot.com bubble burst.  On September 11, 2001, New York City and Washington D.C. were attacked by terrorists.  By 2003, the U.S. was fighting two wars in Afghanistan and Iraq.  Those unfortunate events drove the U.S. economy into an extended recession.

As the result of those events, the stock market posted losses for three consecutive years.  The average annual  return on my portfolio was a loss of -16%.  In other words, if I invested $100 in January or 2000, it was worth $61 by January of 2003.

How did I handle the prolonged recession and market contraction of the early 2000s?  Honestly, I stayed the course.  I dollar cost averaged the same amount of money into my investments every month.  My goal was to reach financial independence, so I rode out those volatile markets and took advantage of buying equities at a reduced price.  I would, however, feel unnerved when I paid attention to the media.  Fortunately, I was too busy working and going to college to become obsessed with the media.  I honestly do not remember ever feeling overly panicked during this period.

My patience did ultimately pay off.  By sticking with my allocation, I was rewarded handsomely between 2003 and 2007.  Over the course of those next five years, my portfolio had an average return of more than 16% per year.

During my first 10 years as an investor, my portfolio returned slightly more than 8.5% per year.  This asset allocation, however, was extremely volatile.  The best year returned 34% and the worst year had a loss of -20%.

An asset allocation of 100% invested in stocks is not suited for every investor.  It worked for me because I was young and able to dollar cost average when the market was both up and down.  This type of volatility does cause many investors to sell low and buy high.  That is a losing game if you want to reach financial independence.  If you cannot honestly handle a -40% drop in the value your portfolio, then a portfolio made up of 100% stocks might be too aggressive for you.

There is a simple solution if the volatility of a portfolio invested in 100% stocks causes you to feel insecure.  Add a percentage of bonds to your portfolio that matches your risk tolerance.  In my next post, I will write about how adding bonds to my asset allocation reduced the market volatility of the next decade.

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.