My investing strategy isn’t just buying index funds – any lay person can do that. I have a specific investing strategy when it comes to my index funds and my asset allocation is one of my strategies.
An asset allocation needs to be maintained – it’s not a set-it-and-forget-it sort of deal. Not only must we rebalance our portfolio to maintain our desired asset allocation but we also need to change our asset allocation when our life circumstances change.
A very lazy way of doing this would be to invest in a balanced fund which is a single mutual fund holding several different investments such as a stock and a bond. Vanguard has a whole lineup of these and so do other brokerages. I’ll discuss the pro’s and con’s of this in a moment.
Stock & Bond Portfolio
In my private brokerage portfolio where I hold 2 funds, a stock fund and a bond fund. These never perform the same so one asset class always appreciates much more than the other.
The stock index fund (VTSAX) has been doing incredibly well the past few years while my bond fund (VMLTX) is only going lower and lower.
From the Morningstar graph above you can see that over the past year my VMLTX bond fund has been losing value. In fact, I have lost money investing in that fund over the past few years of investing in it.
On my Vanguard website I can click on ‘cost basis’ to see where I’m at. For all the years that I’ve bought and sold this particular fund in my portfolio the cost basis analysis tells me where I stand.
You can see that I have a $421.17 loss with nearly $30,000 invested.
Here is a comparison view of how my stock fund has performed compared to the bond fund. Orange is the stock fund.
As investors we might be inclined to invest in what’s already doing well. This is a perfectly fine strategy in the right setting but it isn’t my strategy.
My Investing Strategy
My investing strategy might be different from yours and it’s necessary to figure out your own unique investing strategy after discussing it with a good financial advisor.
My asset allocation is set at 90% and 10% favoring stocks. That means that if I have $100k invested in the market I would want to see $90,000 in stocks and $10,000 in bonds.
In a scenario when my bonds start losing value and my stocks start going up then I might end up with a portfolio of $120,000, up from that initial $100,000 where $115,000 are stocks and $5,000 are bonds – an asset allocation ratio of 96%/4%.
To get my asset allocation back to 90%/10% I need to shift some of my stocks into bonds. This can be painful when you hear all the bad stuff about bonds in the news. But that’s what makes me a real investor as opposed to lay person with a brokerage account.
My investing strategy doesn’t have an emotional component built in. I don’t look at the news to have some dude on TV telling me that a particular fund is going to outperform another.
I also don’t sell a fund because the company’s CEO’s got caught doing something illegal or immoral.
I am sure that there is a way to make money in the securities market by trying to guess which fund is going to do well in the future but I don’t gravitate towards that strategy nor do I have the skills for it.
I am a market timer – I admit it and proud of it. My timing strategy involves playing the odds of time. I am going to hold on to my investments for as long as possible.
As I get closer to that age when my body can’t work anymore then I’ll have slowly converted some of my money into less volatile assets.
When I turn 60 and the market is doing as hot as it’s been performing in 2018 then I’ll most definitely be pulling some of the cash out and invest in a CD or in TIPS – with the guidance of my financial adviser Andrew, of course.
There is nothing pleasurable or exciting about buying a fund that’s going down in value. In fact, if you tell others that you’re buying bonds right now while stocks are the hottest things, you might get some raised eyebrows.
Nevertheless, every 2-3 months I will log into my brokerage account, look at my asset allocation, and decide what I have to do in order to bring the shifted AA back to my desired 90%/10%.
I had some money in my settlement fund which are from dividend income from my stock portfolio. Today I took that income, which was $464, and used it to buy more bonds – VMLTX.
Today I’m gonna go to the gym even though I would rather sit down and read a book. The long-term benefits of going to the gym outweigh my lazy inclinations.
The long-term benefits of maintaining my asset allocation is that I’ll end up with more money in my investment account in the long-term.
If this bull market continues and my bonds keep dropping and my stocks keep going up then I’ll end up with a really shitty portfolio when the market corrects.
Instead, when I sell some of the appreciated funds and buy the underperforming funds then I’m actually buying the cheaper asset at a discounted price. At least that’s the working theory. Is it perfect? No, fuck no. Is it reliable? Meh, it’s better than throwing darts.
More importantly, it has worked for other investors in the past and it’s worked really well for me so far.
I mentioned the benefits of a balanced fund for the lazy person. If you are someone who wants to be invested in both bonds and stocks then you can invest your money into a Target Date Fund and not worry about a damn thing.
Conversely, you could invest your money with a company such as Betterment which will handle all the mundane rebalancing tasks for you.
I won’t go into too much detail but a single-fund investing strategy is designed for simplicity – you invest in one single fund which holds a little bit of everything:
- US stocks
- International stocks
- Money market
As you get older (going to the right on the graph) the fund automatically adjusts for a more conservative asset allocation without you having to do anything. It takes some of the stocks and trades it for bonds, etc.
Betterment is like a digital, automated financial adviser. Their software algorithm will buy stock funds and bond funds in a specific ratio based on your risk profile and age.
As you get older they can adjust that ratio for you by, again, selling some stocks an positioning you into a bond.
Downsides to Automation
The downsides to automation is that you are relying on a limited strategy to ensure that you will have a secure financial future.
You are also giving up some money by paying slightly higher fees for the balanced funds or for the services of Betterment.
Are these both big deals? If you are otherwise very frugal and your personal finances are optimized and you can avoid any emotional decisions when it comes to investing then you’ll do fine with this lazy strategy.
A Financial Adviser
I hate to say this because it’s negative but the reason that I can do well as an investor is because I am willing to pay a measly couple hundred dollars a month to my financial adviser.
The rest of the US population who thinks that paying for the services of a financial adviser is a waste of money will consistently give up profits – which ends up in my pockets.