First I want to make sure I am clear here. I am not a financial advisor nor am I some investing guru. I’m not telling anyone what to invest in nor am I guaranteeing anyone a certain return in this write-up. I just have been asked a few time what am I invested in and could I break it down.
If you have been reading my blog you might have guessed I am big on using low-cost index funds to do the trick of building wealth. Now I also want everyone to realize there are many roads to Dublin. I’m not very dogmatic about investing yet I just hope everyone understands the principles and math behind each one.
Index Fund Investing
Historically choosing low-cost index funds will net you 8%-10% return on average for literally no work at all. This is the opportunity you lose by not investing and spending your money or just keeping it all in cash due to fear. Statistically low-cost index funds beat managed funds 80% of the time for returns. Meaning an advisor is only likely to beat out VFIAX (S&P 500) 20% of the time for returns. Yet I have seen people really believe that an advisor is some type of guru and can guess the winners and losers in the market. This is what I call mathematical suicide. Most people don’t know the math behind the probability of their advisor beating the market. This is where self-education comes in this is where research is needed. A great book that covers this in depth is the “The Little Book of Common Sense Investing”.
My Asset Allocation
Asset allocation is one of the harder things to tackle once we start investing in my opinion. It’s something that I still struggle with today. I have kept the same asset allocation for the last year and plan to keep it pushing forward for now. It’s not complicated but I have thought about simplifying it a bit more. I often feel when building wealth the simple approach most of the time is the best approach. Asset allocation is defined as “an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon.” My take is it’s simply choosing different investment classes that you feel will do well and are aligned with your risk tolerance. Investment classes can be but not limited to Large Cap Value, Large Cap Blend, Large Cap Growth, and so on. Now I know that is not an in detail breakdown yet for the purpose of this write up I fell that will work. My asset allocation is below.
- 50% S&P 500
- 35% Small Cap Value (SCV)
- 10% Large Cap Value (LCV)
- 5% REIT’s
My allocation is really this simple. As you can see above I do tilt to value especially that of small cap. This allocation is my total allocation. Meaning this is for my 401K (TSP) and Roth IRA. I simplified this by making my 401K 100% S&P 500 and making my Roth IRA the rest of the above classes. Now Eventually my 401K will outgrow the IRA at which point I plan to start allocating some of that to either a Total Stock Market fund or an International fund.
Now some people might be thinking “ok that is all fine and good but what funds exactly are you invested in?”. I hold pause when telling people what funds I am invested in because I don’t want people simply investing in a fund because I do. They should do their research and select based on that research. I do solely use Vanguard for my IRA and Taxable account. Another great book I can not recommend enough is the “Simple Path To Wealth”.
Investing can be very simple. I see far too often people overcomplicate it and also get paralyzed with fear to start. Trust me I was super confused at first as well and was scared of losing everything by investing. I have found index fund investing the best approach for me currently. I let the market do its work combined with my savings rate. Of course, my net worth goes up and down based on the market. The two biggest factors for building wealth are below.
- Savings Rate
I have used this simple strategy to lay the foundation for my house of freedom so to speak. Remember there are many roads to Dublin this is simply mine.
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