Category Archives: Investing

How to get Started with Airbnb

I am very excited about today’s post.  This is a guest post from my new friend Cubert from AbandonedCubicle.com.  In this post, Cubert shares how he is planning on retiring at age 46 and to abandon his cubicle for good.  As a more passive investor, this post has provided me with great insight into real estate investing as well as an introduction to what is required to operate an Airbnb business.  I hope you enjoy it and find it as educational as I did.

How to get Started with Airbnb

For those of you who don’t know my story, here’s a little primer. I go by the pseudonym Cubert to keep a little anonymity on my blog, AbandonedCubicle.com. I’ve been a student of early retirement since the fall of 2014.

Around that time I discovered that it is possible to retire early with very little actual sacrifice and much to gain. That’s a good thing. See, we’d had our first kids – twins – just a year earlier. If life wasn’t crazy enough with work, the home front changes pushed us over the line.

I’m now within a year and a half of ending my cubical days for good. I’ll be 46, which is nowhere near as exciting as others who’ve reached that milestone in their 30s. But then, I have no regrets. And honestly, who can complain about being done working for the man a good 15 or 20 years before Fidelity says you should?

My Plan

It’s interesting how life-changes sometimes come in bunches. Within a span of two years, we started a real estate rental business, changed jobs, had twins, and then locked in on early retirement. Whew. Makes my head spin just thinking about it!

The real estate rental business turned out to be crucial in our wealth building progress. We definitely went out on a limb, but with the help of a good friend already in the business, I had enough confidence to buy our first rental – a short sale single family house.

We weren’t flush with cash. I had to take out a home equity line of credit on our primary residence to afford the down payment. Once we closed, the list of improvements grew to a tally of almost $5,000. Man, what had we gotten ourselves in to?!?

Long story short – this first house got rented out within two months of closing. Rent checks started flowing in. We closed on our second rental just six months later, right around the time we welcomed our twins into the world. Rentals three and four followed in 2015 and 2016.

Ultimately, each of our four long-term rentals have paid off handsomely. Thanks to a strong market here in Minneapolis, we can command good rents. Plus, the tenants we attract have been great to work with. Never a late payment, and often they’ll put their own money into small improvements. We clear about $500 in net profit per house, per month.

1 Our First Rental – “Rental A”

How Airbnb Came into the Picture

In 2017, the pickins were slim. The housing market had really taken off in the Twin Cities. Houses that once sold for $100,000 were now going for $150,000. In my quest for our fifth rental, I kept running into windmills. Cash-on-cash returns just weren’t adding up on the overpriced dumps that were available.

About ready to give up, we visited my folks in Charlevoix, Michigan last August. I was perusing the local paper and decided to take a peek at the real estate listings on the back page. I noticed a condo for sale in the same development where my parent’s spend their summers. It was bare bones, with zero updates since having been built in 2005.

I figured, at $125,000 list price, what could it hurt to have a look? This area is a great summertime destination. A new vacation rental option started to dance around in my head.

What is Airbnb?

For those uninitiated (which included yours truly until a few years back), from Wikipedia:

Airbnb is an American company which hosts an online marketplace and hospitality service, for people to lease or rent short-term lodging including vacation rentals, apartment rentals, homestays, hostel beds, or hotel rooms. The company does not own any lodging; it is a broker which receives percentage service fees from both guests and hosts in conjunction with every booking. In January 2018 the company had over 3,000,000 lodging listings in 65,000 cities and 191 countries.

For a company that started nine years ago, that’s a pretty impressive number of lodgings. How long did it take Hilton to build that many rooms? All Airbnb’s founders had to do was harness the Internet, create the marketplace, and take their 3% cut from each booking. Genius.

As we worked through the offer process and closing on the condo this past fall, I was also digging into my research. We’d stayed at a couple of Airbnbs, but we sure as heck hadn’t hosted any. A few helpful sources: Pinterest (see Financial Panther) and a very helpful book called “Get Paid for Your Pad” by Jasper Ribbers and Huzefa Kapadia.

The Easy Parts

Setting up your digs, whether it’s a spare room in your house, or a wholly furnished separate dwelling is pretty straightforward on Airbnb’s interface. I give them credit for creating a highly intuitive experience for hosts.

I will warn, however, that there are a LOT of variables that come with hosting. You don’t just set your nightly price, upload a bunch of pics and wait (and hope!) Nope. You’ve got to figure out check-in, check-out times. You need to create a house manual.

There’s more. Do you want to set a strict or flexible cancellation policy? Do you want to include a security deposit? How much will you charge guests for cleaning? This is where that handy book “Get Paid…” was a real life-saver.

1 So many variables to set!

Once you do get everything all set up, there’s a certain amount of apprehension that sets in. You have ZERO ratings. Who in their right mind would rent from you? This is why it’s super important to channel your inner marketing skills.

Study this sh*t out of your area Airbnb market. Use the best photos. Make sure your prices are strategically set to account for seasonality and local events. Even after you think you’ve got a handle on everything, be prepared to wait patiently.

I’ve got four whole bookings set for the next 9 months. Once reviews (hopefully 5 stars) start coming in, I’m certain the bookings will ramp up.

The Hard Parts

Then, there’s getting a place ready for prime time. In our case, we had purchased a really solid condominium unit that was not much over 10 years old. As they say with houses, “the bones were good.”

That said, the place was used as a Coast Guard rental. The carpet was original, and the walls were beaten up all to hell. There certainly weren’t any improvements that I could see during that first walk through. All original fixtures, and a lot of wear and tear.

Before…

The bottom line is you’ll likely need to put in some good ol’ fashioned elbow grease to get your property ready for vacation rental use. A LOT of elbow grease. Remember, these types of rentals have to be fully furnished (unlike long-term rentals, where tenants furnish the space.)

After…

Conclusion

I’m really enjoying the journey to my early retirement. Over the past three-plus years of the countdown, I’ve come to appreciate all the trouble I can get into outside of a cubicle. Working on homes and managing properties gets me out of a seated-all-day position. I get to produce something tangible.

We’ll see how the Airbnb Experiment goes. I’m optimistic about its potential, but I’m still learning and researching as much as I can before the high season hits this summer. Just this week, I’ve opted to fire up a listing on VRBO.com. Marketing through more than a single channel is never a bad idea.

I’ll leave you with one last bit of advice: More than anything, I’ve learned that early retirement is simply a means to an end. It should never be just an escape from a bad situation. Instead, “early retirement” is best when you use it as a launch pad for big ideas, projects, and hustles that align with your passion. Endless vacations get a little stale after a while.

Fire Your Financial Adviser

I have been on the journey toward financial independence for a long time.  I started saving and investing to reach financial independence at age 20.  When I decided that I wanted to become wealthy, I knew that I needed to be educated on how to turn this goal into a reality.

While at college, I studied Business Management.  Even though I tried to take as many finance classes as possible, I did not learn much about personal finance.  Sure, I studied financial analysis and other classes, but the content was mostly geared towards learning how to dissect financial statements.  It was taught more from the standpoint of learning how to become an administrator.  Those classes have helped me during my career, but not so much as an individual investor.

My goal was to learn how to invest to receive optimal returns.  There are many mixed messages when it comes to investing.  My focus was to learn how to become a successful investor.  In order to do that, I had to learn how to sift through the noise and to find the most practical content to help me learn how to manage my finances.

Since 1997, I have read almost 100 investing books.  Over the years, I have subscribed to many different personal finance magazines and journals.  Most of the time that I spend online has been reading investing articles, forums, or blogs.

I have read many great financial journalists, bloggers, and random forum posts that have helped me with my financial planning.  There has been one person, however, who I have always enjoyed reading.  That person is Doctor James Dahle.  Before I knew him by his actual name, I knew him as The White Coat Investor.

The first time that I came across The White Coat Investor was in 2007.  This was a very volatile time for investors.  The Great Recession was on the horizon.  There were many posts on the Bogleheads.org forum from The White Coat Investor that helped me to stay the course, tune out the noise, and to focus on investing for the long-term.  I am thankful for those posts by The White Coast Investor and grateful that I followed his advice.

The White Coat Investor’s target audience is primarily Medical Doctors and other high-income folks.  Most of what The White Coat Investor writes about, however, transcends profession and tax brackets.  His financial advice can be applied to anyone who is working, saving, and investing to reach financial independence.

To help Doctor’s and other high-income professionals reach financial independence, The White Coat Investor has recently launched a new course.  The focus of this online course is to teach high earners how to create a financial plan that is tailored to their unique financial needs.  It is a step-by-step course for creating and implementing a financial plan without having to use a financial advisor.

The course is based on 12 learning modules.  I have reviewed the content.  It is truly a bargain for only $499.

There is a reason why this course is titled Fire Your Financial Advisor.  After you complete this comprehensive course, you will no longer have to pay a financial advisor for their services.  You will be prepared to manage all of your finances by yourself.

This class goes a step beyond what a financial advisor traditionally helps with.  Fire Your Financial Advisor is not just another way to promote passive investing in index funds.  It is tailored to the needs of physicians and other high-income professionals.  After finishing the course, you will be more confident on how to manage your student loans, insurance, taxes, estate planning, legal protection from lawsuits, as well as everything you need to know about managing your investments.

As part of the 12 modules, you are provided with 7 hours of lectures, videos, and screenshots that you can refer to at any time.  As you advance through the material, there are pre-tests, quizzes for each section, and a final exam.  Upon completion, the course is set up to ensure that you have total mastery of the material.

It would take hundreds of hours of independent research to learn what The White Coat Investor provides in Fire Your Financial Advisor.  As a busy professional, do you have the time to read 30 or 40 books on these subjects?  Even if you do, you will not find many where the content has been written by a physician who understands your unique situation.  The White Coat Investor does all the heavy lifting for you.  He provides you with what you only need to know.  There is zero waste in this course.

Another great feature about the Fire Your Financial Advisor course is that there is not any risk.  Buy it and check it out.  If you find that it does not provide you with what you need to optimize your finances, there is a 7 day, risk-free, guarantee to return it.  It would be difficult if not impossible to hire a financial advisor who offers a money back guarantee.

The White Coat Investor is one of the good guys in the world of personal finance.  If you are a doctor and want to take control of your finances, check out Fire Your Financial Advisor.  You truly have nothing to lose other than $10,000 or more in annual fees that your financial advisor will charge you for what you can be doing yourself for free.

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Individual vs. Institutional Investing

As an individual, it is important to know where you stand as an investor.  To succeed, you need to know your goals.  For most individual investors, their goal is to be able to fund their retirement expenses or even to be able to retire early.  Other goals might be paying for a child’s education, starting a business, or building a dream house.

To reach those goals, there is a simple path for an investor to follow:

  •       Earn a reasonably priced college degree that will lead to a high paying profession
  •       Limit debt
  •       Live below your means
  •       Max out your 401K and Roth IRA
  •       Invest in low-cost mutual funds that meet your age and risk tolerance

That is the basic formula for an individual investor to succeed.  It is easy, however, for an individual investor to stray from these simple steps.  It does not just occur.  The marketers who work for the financial industry muddy this simple message.  They tell you that being average is for losers.  To succeed as an investor, you must do hours of research and trade like a professional stock picker.  If that message sounds too overwhelming, the next best thing that they can offer you is a commission based financial advisor who will sell you overpriced mutual funds or an annuity that will more than likely underperform the S&P 500.

Know Your Competition

Despite most people having a 401K that holds stock and bond mutual funds, individual investors do not control the stock market.  As recently as the 1970’s the majority of trades were conducted by individual investors.  People would follow the performance of their stocks by reading the investing section of the newspaper and call in trades to their stockbroker.

Those days are long gone.  People no longer track their investments in the newspaper.  They now use online investing platforms.  They also no longer control the volume of trades.  Today, almost 95% of the trades are performed by institutional investors.

Scale

If an individual decides to try to invest as an institution does, they are trying to compete with institutional investors.  Individual investors do not possess the resources that institutions possess.  Individual investors lack the scale that institutional investors have.  They have access to investments that non-accredited investors do not have.  Large institutions such as Pension funds, university endowments, foundations, and fund managers have billions of dollars in assets under management.

Institutional investors employ teams of professional investors who have attended the best Ivy League Universities and business schools.  Only the best and the brightest are hired to manage these large pools of assets.  They hire teams of professional investors who are experts in specific markets.  It is beyond a David vs Goliath comparison to compare the resources of an individual investor to an institutional investor.  The individual investor is simply out of their league.

Information

When an individual investor buys shares of a security, that purchase is not just an exchange of money for shares of a publicly traded company.  It is a statement.  The trade can be interrupted to mean that the investor knows that the stock is undervalued.  It is not correctly priced in relation to the market.  It is a vote of confidence that they know more than what the entire financial industry knows about that stock.  The individual investor knows that the company has the management, financials, and potential for revenue that nobody else is aware of at that moment.

Odds are, the individual investor does not know anything that the whole world already does not know.  Individual investors are actually the last ones to know.  The first ones to obtain the facts about management, financial statements, and the potential for growth of a company are the industry experts, insiders, professional analysts, and then the financial media.  Unless you have insider information, you are getting your information from the financial media.  At that point, the price of the security is priced based on its business fundamentals and potential for growth.

Analysis

The stock market is efficient over the long term.  Yes, an individual investor can occasionally find an undervalued stock.  When that does occur, it is more than likely the result of luck than analysis.

Most individual investors do not have the education or analytical training to properly research securities.  They also do not have the time if they already have a full-time job.  Yes, the commercials for trading platforms state that anyone can do it, but it is just not true.  If it were true, individual investors would not underperform the market the way that they generally do.

When there are rare buying opportunities like the fall of 2008, most individual investors do not take advantage of this buying opportunity when almost the whole stock market goes on sale.  Rarely do individual investors have the courage to go against the grain and buy when the world is selling.  When these opportunities do become available, most individuals are selling low and waiting on the sideline to buy when the prices increase.

It is a better practice for individual investors to let professional financial analysts try to analyze hundreds of companies to find the best stocks to invest in.  They get paid to try to outperform the S&P 500.  Over the long haul, most of them fail too.  If institutional investors with almost unlimited resources and talent cannot consistently beat the market, what chance does an individual investor have?

Time

For an individual to be a successful investor, they must invest for the long term.  Dollar-cost-averaging, rebalancing, and compound interest are the tools that will drive the success for the individual investor.  By dollar-cost-averaging a fixed amount into a 401K, an investor will get to purchase stocks when they are priced both high and low and capture the average price and return.  That along with holding those stocks for decades will allow for compound interest to work.

For example, let’s examine the performance of a portfolio composed of 60% in the S&P 500 and 40% in The Total Bond Fund that was rebalanced annually.  How did this portfolio perform 1996 to 2016?   If an individual investor invested $500 per month into this balanced portfolio that portfolio would have averaged a return of 7.4% per year.  That portfolio would have grown to $192,000.

This is where the individual investor has an advantage over the institutional investor.  The institutional investor must work to beat the S&P 500 or whatever benchmark they are compared to depending on the type of securities they invest in.  The advantage that the individual investor has is that they just have to capture the market average that the index produces.  The fund manager is highly compensated for short-term performance.  If the fund manager does not perform, they will be replaced.  If the fund continues to underperform, they normally merge with another fund.  It is getting harder and harder for professional investors to beat the market due to the Shrinking Alpha.  Based on the data provided by SPIVA, Over the past 10 and 15 years, only 18% of domestic funds outperformed the S&P 500.

By focusing on being average, time is the ally of the individual investor.  The individual investor does not have to get bogged down with quarterly earnings reports or making a second career out of managing their investment portfolio.  There will be positive and negative quarters.  When there are negative quarters, it is a time to buy low.  When there is a positive quarter, it is still a time to buy, but also a time to watch those low-priced shares that were purchased grow in value.

Conclusion

Be true to yourself.  Know your strengths and limitations.  If you are not David Swenson, Bill Gross, Peter Lynch, or Bill Miller, you should not try to replicate how they invest.  How they invest is not useful to you.

Establish your goals.  Write a financial plan.  Identify what you want to achieve and experience.  What are you saving for?  How do you plan on using your money to improve your life and the lives of others?

If you are not a professional investor, stop pretending.  Stop trying to time the market.  You are just buying high and selling low.  You are wasting time, energy, and money.

Stick to the basics.  Establish what your risk tolerance is as an investor.  How much of a loss can you tolerate before you sell low? When will you need the money that you are saving/investing?  A good place to start is with a balanced portfolio of stocks and bonds.  If you are in your 20’s, you might want to allocate more in stocks.  If you are in your 50’s, you should probably consider holding less in stocks if you are retiring soon.  After that, let dollar-cost-averaging, rebalancing, and compound interest work for you.

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Always consult with a financial professional before making an investment decision.

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Bitcoin: Just Say No

Since I started studying investments, I can recall that there has always been a hot investment that was sure to make anyone who invests in it rich with little effort.  In the 1990’s, it was the dot.com stocks being traded on new online trading platforms.  In the mid-2000’s, it was flipping real estate.  Currently, it is hard to find a financial media outlet that is not talking about Bitcoin.  I don’t know if Bitcoin is a bubble like the dot.com stocks and Las Vegas real estate market.  The one thing that I can tell you is that I will not be investing in Bitcoin.

Since the first time I heard about Bitcoin, it did not sit well with me.  About three years ago, I was at a birthday party for my best friends Dad.  My friend’s nephew Denis who was fresh out of drug and alcohol rehab was also at the party.

I have known Denis since he was a little boy.  Denis seemed happy that I was at the party and struck up a conversation with me.  He told me that he was grateful to be sober and that his family has welcomed him back into their life.  He went on to tell me a few of his war stories from his addiction.  The one story that he told me was that he was using Bitcoin to buy drugs from the dark web.

As a teetotaler, I had no idea what Bitcoin or the dark web was.  At that time, I thought the dark web was a cheesy Lifetime movie.  He explained it to me as being a web portal where you can buy just about any type of contraband and the cryptocurrency that you use to conduct these illegal transactions was Bitcoin.  It might not be fair, but as the result of that conversation, I now always associated Bitcoin as the PayPal for the online black market.

My second real-life encounter with Bitcoin came last fall.  My own nephew told me that he was investing in Bitcoin.  Not to be harsh on this kid, but he is not as sophisticated as my friend’s nephew Denis.  He is just a nineteen-year-old boy who is working as a dishwasher at a nursing home.  He is debating on going into the military but has not decided what he wants to do with his life yet.

He told me that his friend at work invested $5 in Bitcoin and it grew to be worth $85.  He also invested a few bucks of his own and was hoping for the same return.  During this conversation, I think I knew how Joseph Kennedy felt when a shoeshine boy was talking about stock tips with him prior to the market crash of 1929.

I generally do not get involved in other people’s personal business.  That is especially the case when it comes to family.  The angles have taught me that only fools rush in.

The issue that I have with my nephew messing around with Bitcoin is that it will give him the wrong idea about what investing is all about.  Odds are, he will mature one day and have to save for retirement.  If his Bitcoin adventure blows up in his face, he might be afraid to invest for retirement.  That would be a tragedy.

The last conversation that I had about Bitcoin was over the holidays with my sister-in-law who was up north visiting from South Carolina.  She told me that she was going to invest in Bitcoin because she thinks that it has huge growth potential.  She even thinks that it might overtake the U.S. Dollar as the main currency in the United States.

I asked her why she thought that would occur.  She explained that her Mother who owns a beautiful bed & breakfast in Ashville, North Carolina is losing business because she does not accept Bitcoin as a source of payment.  She is considering making the change to accept Bitcoin to grow her business.

Now my Sister-in-law is far from being a dummy.  I have a ton of respect for her.  She is a Psychologist and is exceptionally intelligent.  She is an expert in PTSD and works for the VA helping veterans who are trying to readjust to civilian life.  Unfortunately, when it comes to greed, logic and reason sometimes go out the window.

I see Bitcoin as speculation.  It is not an investment.  When a person invests in stocks,  they are buying shares of a company that produces a product or service.  It is an entity that has financial statements to indicate why it is worth its current value.

Bonds are also an investment.  Bonds are a loan to the government or corporation.  They have a quality grade and risk associated with the term length.  Shorter-term bonds are generally less risky.  Most investors use them to offset the risks of owning stocks or for income.

I did not think that I would ever write a post on Bitcoin.  I have no interest in it.  I am only writing this because I fell that I owe it to anyone who is considering buying Bitcoin.

Bitcoin is not an investment.  It is pure speculation.  I consider it speculation because people are just buying it with the hopes that it will go up in price.  Hope is not a strategy or logical reason to buy an investment.  Bitcoin does not produce anything.  It does not provide a service to help anyone.  There is no reason to invest in Bitcoin other than the illusion of striking it rich.  I see it as simply gambling with your money.

Some people consider the Blockchain technology that Bitcoin uses to be truly cutting edge.  Blockchain is software that allows two people or computers to conduct a transaction when there is not a relationship between them.  Maybe that is why foreign drug dealers are using it as a means to sell poison to kids in the suburbs.

I imagine that there is far more good to Blockchain than bad.  Yes, I have a biased point of view.  However, my friend almost lost his nephew as the result of being able to use this technology to buy drugs on networks such as Tor.

As for those who want to invest in Bitcoin, my advice is simple.  Just say no.  Don’t walk away from it, run away from it.  If you feel that you absolutely must invest in Bitcoin, Limit your exposure to a very small percentage of your portfolio.  It is an alternative asset class.  If It continues to climb in value, you can brag about owning it to your friends.  If it crashes, you won’t lose all of your life-savings.

If you want to become a serious investor, think long-term.  Look for a balanced mutual fund that holds the right mix of stocks and bonds for your individual situation.  Take advantage of your employers 401K or open an IRA.  Don’t pay attention to investment manias.  They come and go and most of them wipe out wealth along the way.

Do you invest in Bitcoin?

If you do, please share why you see it as a valid long-term investment option.

Always consult with a financial professional before making any investment decisions and please read the Disclaimer Page.

The Benefits of a Balanced Portfolio

Balance is important in almost every area of life.  We should eat a balanced diet including food from every food group to ensure our bodies get proper nutrition.  We should balance the type of exercise we perform including strength training, cardio, and stretching.  Having a good work-life balance leads to improved productivity and happiness.  There should also be a balance in how we invest.

To add balance as an investor means to invest in different asset classes that have an inverse relationship.  A balanced portfolio is an asset allocation that has balanced percentages of stocks and bonds.  It could be 50% invested in stocks and 50% invested in bonds.  Most balanced portfolios utilize an asset allocation of 60% in stocks and 40% in bonds.  However, the asset allocation might be outside of those bands.

The concept of the balanced portfolio was made popular by Harry Markowitz.  In 1952, Harry Markowitz wrote a paper in the Journal of Finance where he introduced his hypothesis on Modern Portfolio Theory (MPT).  The basic theory of Modern Portfolio Theory is that an investor can balance the expected return of a portfolio and risk by using diversification.

Modern Portfolio Theory suggests that an investor can construct an efficient frontier based portfolio by investing in more than one equity or fund.  Portfolios that are based on the efficient frontier are highly diversified.  The efficient frontier is a balance of diversifying across risky investments with a high potential for return with a low-risk investment that produces a lower return.  The optimal portfolio is designed to strike a balance between securities that produce the highest potential returns with securities that have a lower potential for return but balance out the risk.

 

Sample Balanced Portfolios

There are many ways to construct a balanced portfolio.  Below are two popular and simple balanced portfolios.  They are both based on a 60/40 asset allocation.  They incorporate a slightly different approach based on market capitalization.

Value Tilting

The Coffee House Portfolio was created by a Bill Schultheis.  Bill is a Seattle based financial advisor who created the Coffee House Portfolio for investors to build wealth, ignore Wall Street, and get on with their life.  The Coffee House Portfolio is considered a lazy portfolio.  Bill also published a book The Coffeehouse Investor that covers The Coffee House Portfolio in greater detail.  The Coffee House Portfolio uses a tilt towards small cap stocks as well as value stocks.  Small and value stocks have historically outperformed growth stocks.  Value stocks are undervalued based on fundamental analysis.  Please keep in mind, however, that there is no guarantee of this moving forward.  This asset allocation is well suited for investors who prefer a slice-and-dice approach to asset allocation.

Portfolio:

Large Blend – 10%

Large Value – 10%

Small Cap Blend – 10%

Small Cap Value – 10%

REITS – 10%

Total International – 10%

Total Bond Market – 40%

Performance:

1-Year Return = 10.94%

5-Year Return = 6.63%

10 Year Return = 5.97%

Market Capitalization Weighted

Another lazy portfolio is the three-fund portfolio.  While I am not sure if it was created by Taylor Larimore, it was made popular by him and the other Bogleheads in their book The Bogleheads’ Guide to Investing. The three-fund portfolio is made up of three mutual funds.  Even though it only invests in 3 mutual funds, it invests in 10,000 stocks.  This portfolio is highly tax-efficient because there is little turnover.  It contains every domestic and international large-cap, mid-cap and small-cap stock.  The three-fund portfolio is market cap weighted to prevent any front-running.  There is not any risk of underperforming the market like with value tilting because this is the market.  It is truly a simple portfolio to manage.  It can be allocated in many ways to suit an investors goals and risk tolerance.  Below is an example of how it can be used as a balanced 60/40 portfolio:

Portfolio:

Total Stock Market – 40%

Total International Stock Market – 20%

Total Bond Market – 40%

Performance:

1-Year Return = 7.05%

5-Year Return = 8.62

10-Year Return = 5.26

The Benefits

The best aspect of a balanced portfolio is that it allows the investor to control risk.  It is not risk-free like an FDIC backed certificate of deposit.  The risk is controlled by way of rebalancing.  A balanced portfolio is easy to manage and rebalance when it falls out of alignment due to market performance.

Let us assume that there is a market correction and a decrease in the price of stocks.  The portfolio that was once 60% in stocks and 40% in bonds is now out of alignment.  The asset allocation is currently 55% in stocks and 45% in bonds.  By rebalancing, the investor can sell bonds high and rebalance to the original asset allocation.

This systematic approach takes emotions out of the process and stands in the way of an investor making a poor decision.  This prevents investors from chasing performance.  It always forces the investor to buy low and sell high.

Just keep in mind that if this is done in a taxable account, it could trigger a tax consequence.  It is best to rebalance in a 401K or IRA because it has zero impact on taxes.  It is also wise to limit rebalancing to only once every year or no more than once every six months.

Unlimited Options

When it comes to investing, there is no such thing as having the perfect portfolio.  By using a balanced portfolio, an investor can avoid putting all of their eggs in one basket.  If an investor only invests in bonds their holdings will be secure, but the low returns might not keep up with the long-term rate of inflation.  On the other hand, if an investor only invests in equities, a major market crash could cut the value of their life savings in half.

A balanced portfolio is a diversified portfolio.  It reduces risk and can increase returns over the long term.  A balanced portfolio can be customized to meet the risk tolerance and investment goals for investors in every age group.  It can be created for both growth investors and for those who are seeking income.

A balanced portfolio can be constructed with many different funds or ETFs across various asset classes like the two above examples.  Individual securities can be used as well.  A balanced portfolio can also be made up of one mutual fund.

There are many options for investors who want to just use a single mutual fund.  There are options for investors who like to use low-cost index funds.  There are balanced funds for investors who prefer active management.

For investors who are near or in retirement, the Vanguard Wellesley Income Fund (VWINX) is a good option.  The Wellesley Income Fund (VWINX) is actively managed and is composed of 40% in stocks and 60% in bonds.  Even though it is an active fund, the Wellesley Income Fund (VWINX) has a low expense ratio of  0.22%.

Younger investors might want to own more stocks than bonds.  A more aggressive balanced fund for them to consider is the Vanguard LifeStrategy Growth Fund (VASGX).  The Vanguard LifeStrategy Growth Fund (VASGX) uses index funds for its allocation of 80% in stocks and 20% in bonds.

Conclusion

Just be aware that there is still a risk when investing in a balanced portfolio.  A balanced portfolio just helps to reduce risk.  It does not eliminate it.

An investor can design their own balanced portfolio.  There are also mutual funds that allow investors to own a balanced portfolio with one single fund.  There are options for investors of every age and risk tolerance profile.  A balanced portfolio is a good option for both new as well as experienced investors.

This post might include affiliate links.

Please consult with a financial professional before you ever make any investment decisions and read the Disclaimer page.

Crowdfunding 101

INTRODUCTION

As the saying goes, necessity is the mother of invention. The economy of the world is expanding even though it has passed through some turbulent waters since the start of the new century. Business must make progress and innovative business minds will discover how to survive and grow even during times when credit is tight.

There are many projects and opportunities out there.  Many are begging for the needed funds to enable them to see the light of day. The reality of the above gave birth to this child of necessity called crowdfunding.

The objective of this post is to explain the basics of crowdfunding. Is it a viable opportunity for investors? What are the merits as well as the shortcomings of the system?

DEFINITION

Crowdfunding is the practice of raising money to fund a project through the collective efforts of many people whose resources are pulled together to fund the project. It derived its name from the many people that come together with their money to fund the project. It is a form of alternative investing.

The JOBS Act of 2012 has expanded the investment opportunities for small businesses to raise capital.  Prior to this bill, only Accredited Investors had access to this type of investing.  Following the JOBS Act of 2012, every American can now invest in new businesses or start-ups that were once only available to hedge funds or Venture Capital Firms.

In 2015, the total global sum invested in crowdfunding projects was put at $34 billion. That total also includes Peer-to-Peer Lending. That goes to show the strength and interest of this alternative method of raising capital.  There are different categories of crowdfunding:

REWARDS FUNDING

In a sense, this is entrepreneurship on open display.  An entrepreneur has goals for their new venture, but limited funds. A brilliant new product or service is set to be launched, but to bring this idea to market, an entrepreneur needs funding.  A wise businessman knows to avoid high-interest rates.  Entrepreneurs do not want to incur debt, nor do they want to sell equities/shares at this early stage.  In such a scenario, the soft landing is to pre-sell their product or services. The payments are sourced from people ahead of actual delivery and it is called rewards funding.

EQUITY CROWDFUNDING

This method of operation is one by which the backer pledges an amount of money and in return receives equity shares of the company. This is basically investing in a privately held company. This usually happens in the early stages of the venture.  It is a common form of funding for new real estate projects. There is a high potential for returns on investment in this system.  However, like with most securities, there are not any guarantees in place to protect principle.

Donation Crowdfunding

Just as its name implies, Donation Crowdfunding is a way to raise money for a cause.  There is not a return on investment.  The money is used to support a community project, pay for the medical expenses for someone who is in need, or support a cause.  This type of crowdfunding attracts resources from sources that tend to have an emotional attachment to a cause.

Lending Based Crowdfunding

Lending Based Crowdfunding is also known and Peer-to-Peer Lending or P2P Lending.  This is the practice of one individual lending money to another individual.  The lender acts as a bank normally would.  The individual who borrows money pays back the principle along with interest.  These transactions occur on online platforms.  Borrowers interest rates are based on their credit history.

Who Can Invest

Before you consider investing in a venture that is raising capital by way of crowdfunding, you first need to know some of the rules and qualifications:

  • An investor can invest $2,000 per year if both their annual income and net worth are less than $100,000.
  • An investor can invest up to 10% of their annual income or net worth per year if their net worth and annual income are equal to or greater than $100,000. An investor cannot exceed an annual investment of $100,000 per year.

How to Invest

There are many online crowdfunding platforms.

Below are some of the most popular:

  • Kickstarter.com: is a funding platform for various creative projects including new technology, gaming, artistic design, and films.
  • Gofundme.com: is a donation-based crowdfunding platform that allows people to raise money for various causes that include different life events.
  • RocketHub.com: uses its online platform to raise capital for scientists, technology-based projects, philanthropists, various artist projects, and business ventures.
  • Indiegogo.com: is an international crowdfunding platform that provides funding for films, start-ups, and charities.

WHY DO PEOPLE SUPPORT CROWDFUNDING? 

You might be wondering what magic makes people support a cause with their financial resources even when they know next to nothing about a project.  Four main reasons can be attributed to this behavior in people:

  • The greater purpose of the campaign is a source of attraction. They feel an emotional connection.  This campaign can make a positive difference.
  • There is the physical aspect of the campaign. The people see the business wisdom in a campaign. People take a calculative look at the rewards and project an above average return on investment.  They feel convinced based on the potential for financial gains.
  • There is the aspect of the marketing campaign that is so compelling and convincing that people are attracted to the project or the idea.
  • Above all, people are aware that they can sit at the remotest corner of the world and conduct their business through online means. The world is now a global village where even the smallest of business endeavors are transacted online.

THE ATTRIBUTES OF A GOOD CROWD FUNDING CAMPAIGN

For a successful crowdfunding campaign, there must be great preparation before results are achieved.  The marketing must be well structured for a campaign to get off the ground and pull together the needed capital for the project.  The preparations should include:

  • Social media is a vital marketing tool. This is where the market is. You will get the crowd that you want and bring them together online. Maintaining a strong and aggressive campaign online is important to success.
  • Before the project is launched, there is the need for the creation of an email distribution list. Members on the list are those that will form the mainstream of the needed crowd.
  • The local media also has a role to play in the scheme of things. They can be helpful for promoting the publicity of the campaign. They can bring about local buy-in.  This can help with the project going the distance. 

THE BENEFITS

  • Potential for High Returns (above market averages)
  • Adds diversification to an investors asset allocation (beyond equities & fixed income)
  • Access to investments that were once only available to high net worth investors
  • The satisfaction of being able to contribute to a cause, project, or start-up 

THE RISKS

  • Loss of capital (riskier than micro-cap stocks)
  • Liquidity (capital can be tied up for many years)
  • Lack of transparency in financial records (who audited the books?)
  • The project team is creative but has limited management skills

CONCLUSION

Based on the amount of capital that Crowdfunding has attracted, it appears that it has come to stay.  While there are benefits for both the creator and investor, this is a highly risky type of investment.  Equity crowdfunding is as speculative as investing in penny stocks.  If an individual investor decided to invest in a venture that is being funded by way of equity crowdfunding, they should consider limiting their exposure to 3% or less of their asset allocation.  That rule also applies to lending or rewards-based crowdfunding.  Donation-based crowdfunding is not an investment.  Limit the funds that you contribute to any crowdfunding cause to as much as you normally tithe or donate to charity.  That is a prudent rule of thumb for investing in any type of alternative investment.

Please remember to check with a financial professional and to read the Disclaimer Page before you make any financial decisions.

How we reached a $1,000,000 Net Worth

What does it take to reach a $1,000,000 net worth?  In our case, it took a long time, hard work, saving a large percentage of our income, and putting our money to work for us by investing wisely.  Rob from Mustard Seed Money has a great post on how much you have to save each month to reach a $1,000,000 net worth.

I initially was going to title this post “reaching a $1,000,000 net worth by age 40”, but that would have been misleading.  Even though I was, in fact, age 40 when I reached this financial milestone, I did not do it alone.  Individually, I would not have reached this milestone.  My wife and I worked as a team and did it together, so I must give her the credit she deserves.

When we got married, I had over $100,000 saved up in my investment accounts.  As far as assets go, she brought our current house to the marriage. There was a mortgage on the house, but she had about $100,000 in home equity at that time.  By combining our assets, we started out with about $200,000 based on our investment accounts and home equity.

Career Growth

Over the past 10 years, we managed to double our household salary.  Considering that we both have college degrees, we never earned a large salary.  When we first got married, my salary was only $30,000 per year.  My wife was teaching for a few years and was earning about $50,000 per year.  In the past 10 years, our combined salaries have grown to over $150,000 per year.

Savings

When we first got married, our savings rate was 38% of our gross earnings.  We started by maxing out our Roth IRA accounts, I contributed 15% per year to my 401K, my wife contributed 10% to her 403B, and 8% to her defined contribution pension plan.  We also built up a large emergency fund and invested money in taxable accounts.

Every year, we have tried to increase our savings rate by 1% or more.  Our current savings rate is 50% of our gross earnings.  We still earn under the IRS threshold that allows us to max out our Roth IRA accounts.  I now work at a not-for-profit and max out my 403B.  My wife is close to maxing out her 403B and still contributes 8% to her pension.  We are happy with the size of our emergency fund and now just add to our taxable accounts.

Lifestyle Creep

We are always aware of how much we are spending each month.  While some lifestyle creep has occurred, we manage it well.  We travel, but do not fly first class or stay in 5-star hotels.  We buy reliable new or 1-year old certified used cars and drive them for over 12 years/200,000 miles.  We eat at home during the week and only go out to eat on the weekends.  We closely monitor the cost of monthly subscription expenses such as internet, electricity, Netflix, and other bills.  When we do spend money on needs or wants, we always shop around for the best value.

Investing

Our approach to investing has been very simple.  We have invested primarily in index funds.  Our asset allocation has been 25% in bonds and 75% in stocks for the past 10 years.  In the stock allocation, it was well diversified with large-cap, small-cap, and broad international index funds that included emerging markets. From 2007 until 2017, that asset allocation averaged a return of 10.5% per year.

Asset Breakdown

House (appraised in 2012): $220,000

PSERS Pension (Cash Value): $100,000

Taxable Accounts: $240,000

Combined IRA & 403B Accounts: $480,000

Other assets not included (cars, firearms, collectibles, jewelry, electronics, etc)

Debts

Mortgage Balance: $30,000

Monthly Expenses: $2,800

What’s Next

We have more work to do.  We have ambitious goals.  Our next goal is to reach $1,000,000 in investable assets.  We should be able to reach that in the next 3 years based on savings and historical returns for our asset allocation. We also want to pay off the balance on our small mortgage over the next five years.  Our goal is to have $2,500,000 saved by the end of 2028 (see the countdown to FIRE on the right margin).  To reach that goal, we have to keep up our savings rate and have our investments return an average of 6.5% per year.  That is well within reason with our current asset allocation of 65% invested in stocks and 35% invested in bonds.

Conclusion

The main purpose of this post was to share that it is possible to reach a $1,000,000 net worth by just being average.  My wife and I went to average universities, have average jobs, live an average lifestyle, and accept average market returns.  Yes, our savings rate is above average, but that too is possible for almost anyone to achieve if they create a solid financial plan.

If you want a more comprehensive list of steps to follow, check out The K.I.S.S. Approach to Financial Independence.  That is the foundation of our financial plan.  For more reading on reaching financial independence, please check out the Resources page.  It is full of a collection of great books, blogs, and forums that will provide you with unlimited wealth building information.

Where are you at on your journey toward financial independence?

Please share your financial milestones and what you did to achieve them in the comment section.

Keep Your Hands Off My 401K

This morning, I sent an email to my Congressman.  The Financial Journeyman is not a political blog.  This blog is not right or left-leaning.  In general, I do not oppose or support any political party.  The only time that I will write about politics is when it is related to personal finance.

Over the past few weeks, there have been many news reports about Congress wanting to reduce the amount that an employee can contribute to their 401K from $18,500 (2018 limit) to only $2,400.  There have been other reports that suggest it might be capped at $9,000.  There are even other conflicting reports that state it will be increased to $20,000, but switched to a Roth based format.

The reason for these proposed limits on 401K contributions is due to the tax cuts and the tax overhaul that is being drafted by Congress with the 2017 Tax Bill.  To fund these tax cuts, Washington will need a boost in revenue to prevent the deficit from skyrocketing.  A quick solution is to drastically reduce the amount of money that 55 million American’s put into their tax-deferred retirement accounts.

As a member of the financial independence community, being able to save as much as possible in a 401K account is important for me to reach my retirement goals.  Since most American’s do not have a defined benefit pension, they are left with a defined contribution plan such as a 401K.  If these accounts are capped at $2,400, it will have a negative impact on how many people are saving for a secure retirement.  That can ultimately lead to more people having to rely on government assistance later in their life.

You might be thinking, there is nothing that I can do about this.  The next election will not be held for a year.  All I can do is sit back and hope for the best.

That is not entirely true.  Yes, the next election is not for twelve months, but you still have a voice.  You have a voice and there are many channels to express your concerns to your Congressman.

You might not realize this, but your Congressmen whats to hear from you.  They want to know what they can do to help the constituents they represent.  They do not want to wait until Election Day to learn if they are doing a good job or not.

If you feel as strongly as I do about reducing the limits on how much you can save in your 401K, reach out to your Congressman.  You can send them an email, a fax, or a written letter.  Below is the email that I wrote and sent to my Congressman Tom Marino:

Sample Email

Subject: Tax Cuts & Reducing the Contribution Limit on 401K Plans

Dear Congressman Marino,

As one of your constituents, I am writing you this email to voice my concern over the proposed reduction in contribution’s that people will be able to make to their 401K retirement accounts.

Since most employees do not have access to a defined benefit plan, making contributions to their 401K is their primary source for retirement savings.

While tax cuts are important, they are not more important than middle-class Americans having access to an adequate retirement savings plan.

Without having enough money saved for retirement, people will be forced to demand more out of entitlement programs such as Social Security and Medicare.

I strongly suggest that you vote “No” when it comes to reducing how much your constituents can save to secure their financial future.

Based on your history of being a fiscal conservative, I know that I can count on you to not jeopardize the defined contributions retirement system that most of your constituents are relying on to support themselves when they retire.

Thank you,

My Name

My Contact Information

Keep it Simple

The email that I wrote was short and to the point.  Contrary to popular belief, these are extremely busy people and are always being pulled in many different directions.  I feel that there is a better chance of having your email or letter read if it is not full of fluff.

In this email, I stated my concern, why he should be concerned, and what he can do about it.  Be positive, show support, and be respectful.  Do not be condescending or threatening in any way.

Who to send it to

It is important that you send your letter to the correct legislator.  To find out who your Congressman is, go to https://www.house.gov/representatives/find/.  Other than being able to identify who your Congressman is, you will be able to find their email, address, phone number, and fax.  You can call their office, but I suggest a written communication.  That way you can be sure to not come off as being subversive.

Conclusion

Now is the time for you to communicate your concerns to your Congressman.  Remember, even if you did not vote for them, they work for you.  If your goal is to reach financial independence and retire early, voice your concerns over these proposed changes that could prevent you from reaching your financial goals.

I am challenging you to become an advocate for your financial future.  Please take 10-15 minutes of your time and send an email to your Congressman.  If you don’t communicate this message to them, how will they know that it is such an important issue?

How to Invest A Million Dollars

While a million dollars might not have the purchasing power that it once had, it is still a large sum of money.  If you watch professional sports on ESPN, follow entertainment gossip on TMZ, or read Forbes, you are sure to come across stories about the huge salaries that some high-profile people earn.  NFL quarterbacks earn over $25M per year.  Hollywood actors earn over $22M per movie.  The CEO’s of the Fortune 500 earn 600 times more than the average employee.  The late Dr. Thomas J. Stanley would refer to those people as the “glittering rich”. Compared to the salary that the average person earns, those people are more along the lines of a rare commodity.  While it is interesting to pay attention to what those people earn, it is not something that the average person should use as a benchmark of their financial success.

Today, the average household salary in the U.S. is about $58,000.  With that being the current financial situation, having one million dollars would be a game changer for most people.  It would not be enough to live as the rich and famous do.  It is enough, however, to give the average person some financial freedom and peace of mind.

One million dollars is seventeen times the annual earnings of the average household salary.  Many financial experts consider having 25 times your annual expenses in savings to qualify as being financially independent.  If you had one million dollars, you would be well on your way as long as you do not drastically upgrade your lifestyle.

How would I suggest that someone invests a million dollars?  For me, I like to follow a keep it simple approach.  The core of the portfolio should be largely invested in stocks.  Stocks are important for growth and keeping ahead of inflation, I also believe that there should be some fixed assets in a portfolio.  Bonds are used to reduce the market volatility that comes with investing in stocks.

How should you construct this portfolio?  You should consider your age and your risk tolerance.  A young person has more time to recover from a major market correction than a person who is retired and is drawing down money from the portfolio to pay for living expenses.  The second factor to consider is how much of a loss can you can tolerate before you sell off your equities at the wrong time.  If you can stomach a 50% loss in value, consider investing 100% the money in stocks.  If you are more risk adverse and think that you could handle a 20% loss in value, consider a balanced portfolio of 60 invested in stocks and 40 percent invested in bonds.

Jack Bogle suggested that an investor should subtract their age from 100 and that would equal how much they should invest in equities.  For example, if you are 25 years old, you should have 75% of your portfolio in equities.  If you are more aggressive or not a fan of the current bond yields, subtract your age from 110 instead of 100.

While bonds might not be an attractive option for growth, they do serve a role in almost every diversified portfolio.  They allow investors to buy low and sell high in the form of rebalancing.  If the stock portion of a portfolio has a negative return for the year, an investor can exchange money from the bond portion of their portfolio and take advantage of buying stocks low while selling bonds high.

I am not a financial planner or a professional investor.  I can only share my experience, what I have learned, and what I hope to achieve as an investor.  When I was a new investor, I held 100% of my portfolio in stocks for over ten years.  That period included three years of negative returns from 2000 until 2003.  I have also followed the rule of 110 minus your age in equities.  By adding bonds to my asset allocation, it helped to smooth out the market volatility of the great recession. 

Since the purpose of this post is to give advice on how to invest a million dollars, I would suggest the Sweet Dreams Portfolio.  The Sweet Dreams Portfolio is my current asset allocation.  It is a balanced-growth asset allocation of 65% in stocks and 35% in bonds.  This portfolio allows you to own every U.S. and international stock including emerging markets.  It is based on 110 minus the average age of my wife and myself in equities.  Let’s examine the growth and performance of one million dollars over the course of the past 20 years.

The Sweet Dreams Portfolio

Vanguard S&P 500 or Large Cap Index Fund = $380,000

Vanguard Extended Market or Small Cap Index Fund = $110,000

Vanguard Total International Stock Market Index Fund = $160,000

Vanguard Total Bond Market or Inter-Term Tax-Free Bond Fund for a taxable account = $350,000

20 Year Performance

5-years = 8.16%

10-years = 6.82%

15-years = 6.88%

20-years = 7.18%

Best Year = 23.93%

Worst Year = (23.32)

$1,000,000 grew to = $4,188,631 (Rebalanced Annually)

Average Expense Ratio = 0.06% (Admiral Shares)

Conclusion

Dr. William Bernstein wrote, “that if you won the game, quit playing”.  While a million dollars might not be enough to declare victory for everyone, it is a nice lead to have.  For me, I recommend holding on to that lead by running the ball and playing great defense.  To translate that football analogy into financial advice would mean to shoot for a nice conservative return of 6.8%.  That would enable you to double your money about every decade.  

This post was entered into the “How to invest a million dollars” contest.  

Please visit www.howtoinvestamillion.com to check out all of the sample portfolios. 

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

 

Schwab 1000 Index Fund (SNXFX)

I recently received a letter from the third-party company that manages one of our 403B Plans.  It was the standard quarterly letter that provides updates on account performance, fees, and if there were any changes to the list of mutual funds available to select from.  Since we generally invest in index funds, I normally just do a quick review of the updates and move on.

There was a change mentioned in this letter that grabbed my attention.  A new mutual fund was added.  The new fund is the Schwab 1000 (SNXFX).  I have seen the Schwab 1000 (SNXFX) mentioned in various articles over the years, but have never really paid much attention to it.

Now that the Schwab 1000 (SNXFX) was presented to me as an option, I wanted to learn more about it.

History of the Schwab 1000 (SNXFX)

Charles Schwab created the Schwab 1000 (SNXFX) in 1991.  The fund was created to capture the returns of the fastest growing large and medium-sized publicly traded domestic stocks.  The Schwab 1000 (SNXFX) was created to give investors a broader index than the S&P 500.  While the S&P 500 is made up of 470 American companies, the Schwab 1000 (SNXFX) has more than twice as many companies as the S&P 500 index.

The Schwab 1000 (SNXFX) is an index fund.  When a change is made to the fund’s holdings, it is based on changes to the S&P 500.  The fund is weighted based on market capitalization.  The fund’s holding are reviewed once per year.

Performance

Is 1000 greater than 500?  Over the past 25 years, the Schwab 1000 (SNXFX) has slightly outperformed the Schwab 500 (SWPPX).  I was not surprised by that based on the fund having an allocation of mid-cap stocks.

Schwab 1000 Index (SNXFX)

  • 5-year return = 14.55%
  • 10-year return = 7.12%
  • 15-year return = 7.06%
  • 25-year return = 9.35%

Schwab 500 Index (SWPPX)

  • 5-year return = 14.66%
  • 10-year return = 6.95%
  • 15-year return = 6.69%
  • 25-year return = 9.15%

Expense Ratio

Since the Schwab 1000 (SNXFX) has slightly outperformed the S&P 500, why has this fund not received more attention by the financial media?  In my opinion, the answer to that question was based on the fund’s expense ratio. The Schwab 1000 (SNXFX) had a higher expense ratio than other index funds.

To compete with Vanguard and Fidelity, Schwab lowered the expense ratios on many of their index funds.  For most of Schwab’s index funds, the expense ratio was lowered to less than 0.10%.  To win the war of who has the lowest expense ratios, Schwab lowered the expense ratio on the Schwab 500 Index Fund (SWPPX), the Schwab Total Stock Market Index Fund (SWTSX), and the Schwab Total International Index Fund (SWISX).

Schwab did not, however, reduce the expense ratio on the Schwab 1000 (SNXFX).  That has recently changed.  The expense ratio is now 0.05%.  Prior to that decrease, the expense ratio was 0.29%.  While 0.29% is not a high expense ratio, it was much higher than a similar fund the Vanguard Large Cap Index Fund (VLACX) that has an expense ratio of 0.18%.

How does the Schwab 1000 (SNXFX) fit into an Investment Portfolio

The Schwab 1000 (SNXFX) is designed as a core holding.  It is a large-cap blend fund.  It can be used in a similar way as an S&P 500 index fund or large cap index fund.

What if an investor wants to try to approximate the total stock market?  To approximate the total stock market, an investor can match the Schwab 1000 (SNXFX) up with the Schwab Small Cap Index Fund (SWSSX) or a similar small-cap fund.  To approximate the total stock market, an investor should allocate 87% to the Schwab 1000 (SNXFX) and 13% in the Schwab Small Cap Index Fund (SWSSX).

Where Should the Schwab 1000 (SNXFX) be used 

In my situation, the Schwab 1000 (SNXFX) is offered as an investment option in a 403B plan.  The Schwab (1000) can be used in many ways.  It is a good option for people who have a limited amount of money and want to open an IRA because there is no initial minimum amount required.  This fund is also a good option for a brokerage account because the turnover is only 3% and that makes it a good tax efficient option.

Conclusion

In the 403B account that I now have the Schwab 1000 (SNXFX) as an option, I currently use the Schwab 500 Index Fund (SWPPX) for my large cap allocation.  While there is nothing wrong with the Schwab 1000 (SNXFX), I think that I am going to stick with the S&P 500 fund.  If the company that manages the 403B decides to eliminate the S&P 500 fund, I would have no problem with investing in the Schwab 1000 (SNXFX) as my large cap option.  In the meantime, I currently make up the slight difference in exposure to mid-cap stocks by approximating the total stock market with an extended market index fund and small-cap index fund.

Do you own shares of the Schwab 1000 Index Fund (SNXFX)?

Please share your thoughts about this fund in the comments section.

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