I’m A Boring Investment Competitor.

I'm A Boring Investment Competitor - The Grow Your Dough Throwdown

(I recently returned from a three-week family vacation in Bangkok with very poor Internet bandwidth. We had a great time and I’ll write several posts about it.  However I’m also a couple of weeks behind on projects– one of them is today’s post.)

 

We bloggers love to write about financial independence group projects: contests, roundups, movements, and anything else that will attract a crowd of readers. In the personal finance niche, Jeff Rose is the Energizer Bunny of blogger projects. We’ve already inspired readers to open a Roth IRA, to pay off debt, and to start investing now. Last month he invited us to join him in an investing contest: the Grow Your Dough Throwdown.

The rules:

  • Open a new broker account of your choosing and deposit $1,000.
  • On January 1st, invest any way you want (stocks, ETFs, mutual funds, whatever). No margin allowed.
  • You can buy/sell as much as you want.
  • You cannot add any more than the original $1,000.
  • Write a blog post that publicly shares what you bought.
  • Track your return and report back to me so I can keep track of everyone that’s taking part.

I’ve invested for over 30 years. I’ve researched and experimented with nearly every type of active investing that works– and several that don’t. Despite my “not-so-brilliant active management” of our investment portfolio, we succeeded with our frugal lifestyle and our high savings rate. My military pension and our dividend income (plus a rental property) are about to exceed our beach-bum expenses. During the last few years, we’re just not spending it fast enough.

(Note: “#FirstWorldProblem.” Did we see that coming? No way. We just kept our expenses low, saved as much as we could, diversified our investments, started with the 4% safe withdrawal rate, and tried for a 90% success rate on a retirement calculator. If the 10% failure ever happened then we’d slash expenses until my military pension covered our lower spending.

In the last 12 years– including two recessions– our investment portfolio has almost doubled and our rental property cash flow has surged. I have no idea what’s next for the economy or the markets, but we rebalance and we’re ready for the next opportunity.)

I’ll enjoy yet another chest-pounding testosterone-poisoned contest to generate a huge steamin’ pile of filthy lucre, but I think active investing is too much work for busy servicemembers (and their busy families). Sure, put aside 5%-10% of your savings for “shoot-the-moon” opportunities if you just can’t leave it alone, but do it to satisfy your own hormonally challenged investment urges. After you lose win with the money in that sandbox, then hopefully it’ll keep you from doing stupid things with the rest of your portfolio.

There’s another reason that I picked my investing tactic, but it’s related to writing. It’s a cynical blogger secret: we all have to write in different ways. There are literally thousands of personal-finance bloggers, and even my little niche of military personal finance has dozens of writers all trying to be unique (at the same time). We each need to stand out from the crowd. Every other blogger in the Grow Your Dough Throwdown has already staked out their area of expertise (even dart-throwing monkeys) so I’m going for the niche that everyone else has overlooked:

BORING.

That’s right: I’m going to invest the way we’re supposed to. My spouse and I have picked an asset allocation. We stay invested in it, rebalance when it gets too far out of whack, and go surfing. I want my excitement (and my volatility) to come from the ocean, not the stock market.

The contest started on 1 January, but I was in Bangkok with crappy bandwidth and 12 hours out of sync with Wall Street. We came home to the usual backlogs and surprises, and it was another week before I put in my buy order. In the meantime my $1000 was sitting in a money-market account where it earned: half a cent. Even so, I bet my positive returns are still in the upper half of the pack to date.

What am I going to buy? Before I reveal that let me share our asset allocation. There are many paths to financial independence. What works for my spouse and me may be different from your solution. After 30 years of experimenting with actively-managed mutual funds and picking stocks, my spouse and I have finally built a low-expense portfolio that lets us sleep at night.

My military pension is most of our income, so our investment portfolio can be much more volatile aggressive. Because a military pension is the equivalent of income from I bonds, our investment portfolio has no bonds. We still need to ride out volatility (during recessions), so we keep two years of expenses in cash. After a good year we replenish the cash stash, but after a down year we keep spending it and hope wait for a recovery.

Here’s the asset allocation for our investment portfolio (and their tickers):

We’ve backed into this allocation over the last decade as we moved out of mutual funds and individual stocks and into passive indexes. We started with Berkshire Hathaway in 2001 and the Thrift Savings Plan in 2002 (when it first became available to military servicemembers). We put 92% of my spouse’s Reserve drill pay in the TSP until she retired in 2008. At the same time we gradually sold mutual funds and stocks to add the other funds, and we finished buying in 2009 (at the pit of the Great Recession).

The ETFs have an annual expense ratio between 0.25% and 0.40%, but the TSP expense ratio is 0.02% and Berkshire Hathaway stock has an expense ratio near zero (the commissions & fees to buy/sell shares). We paid 2%-3% sales charges in the 1980s and 1.4% expense ratios in the 1990s, so today we’re willing to pay a small fee to concentrate on the passive-index equities that we feel comfortable with.

I can already predict a reader comment: Sheesh, Nords, just stick it in a Vanguard total market index fund with a 0.10% expense ratio. Why make it so complicated? You’re absolutely right. If I had no military pension (and no TSP, and no rental property) then I’d eventually get around to that. I may still do that in 2042 (when I turn 82 years old) to make it easier for my spouse to manage the finances. This portfolio is left over from my active-investor days and it’s grown faster than our spending. There’s been no compelling reason to sell everything (and pay humongous capital-gains taxes) and some years we’ve even “rebalanced” by donating appreciated shares to charity. Our portfolio works for my spouse and me. If a Vanguard index fund works for you, then you should start buying it today.

Here’s another reason that I’m reluctant to cash out for cheaper index fund: dividends. I get a little thrill every time those ETFs pay out a dividend, and we spend them if we want to. (Berkshire Hathaway is widely expected to start paying a dividend after Buffett & Munger step down.) Dividends also help us ride out stock-market volatility because a diversified portfolio’s dividend payments stay about the same despite fluctuations in the fund’s underlying share price. Again this was not part of the plan when I retired, but I’ve grown to appreciate the security of avoiding volatility: a pension deposit, quarterly dividend payments, and a couple years’ expenses in cash. When you’re in your 20s or 30s you should invest aggressively, but when you’re in your 50s (or separating from the military, or starting a family) then you may appreciate a steady flow of income.

We rebalance as seldom as possible, and we eventually decided on a band of five percentage points. In other words, we rebalance back to 23% whenever an asset falls below 18% or rises above 28%. That only happens every 2-3 years. Frankly, another reason for the wide rebalancing band is so that we don’t have to discuss it very often. My spouse is always eager to take some off the table, and I’m always pushing to let it ride.

If we were going to rebalance right now, we’d sell off some of the small-cap value ETF (up over 30% in 2013!) and buy more of the international value ETF (up “only” 13% last year). International markets are improving, but they look anemic compared to the American market. I don’t know which market will turn first, but the international markets have plenty of room to recover.

 

What did you buy?

Back to the Grow Your Dough Throwdown contest. My spouse and I opened our joint investing account at Fidelity in 1986 (just like the two previous generations of Ohana Nords) so I’ve added an individual account there. On 1 January, my $1000 was sitting in the Fidelity Cash Reserves money-market account. On Tuesday 21 January I put in a limit buy order for the iShares MSCI EAFE Value Index ETF (EFV). I spent $972.74 for an odd lot of 17 shares (@ $57.22/share) and paid a commission of $7.95. I’m going to take the quarterly dividends in cash.

I’ll also report the 2014 performance of our joint investment portfolio. We don’t plan to make any trades there unless we need to rebalance. In the meantime we’ll be using those dividends to fund our travel budget!

 

Now it’s your turn to make investing boring.

  • First, whether you’re just starting out or you’ve been saving for 20 years, figure out your asset allocation.
  • If you’re in the military (with a steady paycheck) or if you have some form of annuity income (like a military pension) then consider a portfolio that’s at least 70% in equities (to stay ahead of inflation). Save the rest in the TSP’s “G” fund, real estate, REITs, or a short-term bond fund.
  • Sign up for an allotment to the Roth Thrift Savings Plan and try to maximize your contribution.
  • Next, try to save even more in a Roth IRA and taxable accounts. Pick a fund company like Vanguard or Fidelity or Schwab and buy the passive index funds that meet your criteria with the lowest expense ratios. Use automatic transfers from your paycheck or your checking account so that you don’t have to deal with decision fatigue. Once you’ve maximized your Roth IRA contribution then keep saving more in taxable accounts.
  • When you’re saving for financial independence, you can rebalance your asset allocation by shifting your contributions to the funds that are lagging the rest of your portfolio. Take dividends in cash and then invest them in the laggards. Let your asset allocation have wide bands around your percentages so that you only have to change your allotments every year or two.

Every few years, review your asset allocation and see how you feel about it. Too volatile? Research how to get comfortable with that, or reduce your allocation to equities by a few percent. Too many decisions to make? Rebalance less often, or pick a quieter time of year for that chore. Growth seems too slow? Seek patience or try to raise your savings rate. Save at least 80% of every pay raise, longevity raise, and promotion.

Once you have your money flowing into your investments, go find something more exciting to do!
*My daughter (and a few close friends) would point out that we should also count our angel investments and our rental property. I’ve left them out because they’re a much smaller portion of our net worth and don’t affect our asset-allocation decisions. We hold the rental property for family reasons (although it’s nice to finally have cash flow) and the angel investments are my shoot-the-moon fund that (mostly) keeps me from doing even stupider things with our money.


I’ll blog about both of those assets someday, but in general an active-duty servicemember should avoid both landlording and angel investments.

(Click here to return to the top of the post.)

 

Related articles:
Save or invest?
Save just one percent more
Education of an investor
Simple ways to start saving
Saving base pay and promotion raises
Building the ultimate investment portfolio
So where should I invest my money now?!?
Tailor your investments to your military pay and your pension

 

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7 Comments
  1. […] The Military Guide […]

  2. Reply Mel M. January 26, 2014 at 8:53 PM

    Doug,
    Thanks for another great post that I hope more of our younger service members would take note of and heed. Ever since I started lurking in bogleheads.org back in 2008, I slowly transitioned from actively managed funds to low cost, well diversified index funds, and of course the TSP. I still hold on to a couple of actively managed funds that perform well with ERs below the median (though my wife and I have sold/transferred funds from no less than seven actively managed mutual funds over the past couple of years), but the vast majority are either in TSP or index funds.

    Even though I have my military pension and my wife will have hers in a couple of years when she plans to retire from the military, we have recently reduced our equities to fixed income ratio from about 70/30 to more like 30/70, with fixed income in TSP G Fund, CD ladder, and I Bonds. I realize that we could afford to take more risk and can have a higher allocation for equities since we would have our
    combined pensions covering our living expenses…but an article in Money magazine back in September 2012 written by Dr. Bernstein kept resonating in my head. He basically cautions investors: “When you’ve won the game (saved enough for retirement), why keep playing it?”, i.e. why take on more risk with equities when you don’t need to. So, back in late November of last year, we transferred about 40% of our net worth from Lifecyle 2030 to the G Fund. Maybe I was influenced by all the talk about the CAPE being over 26 indicating a “frothy” market (not very boglehead-like, I know…and even ran counter to my IPS), but it made sense. I might revisit this later…who knows.

    Incidentally, I too have my “play money” of about 1.3% of our net worth that I use to dabble in individual stocks. I Figure that is enough to satisfy my desire to “play the stock market”.

    • Reply Doug @ The-Military-Guide January 28, 2014 at 10:13 AM

      Thanks, Mel, great comments.

      I still wrestle with the perpetual debate about what to do with assets that you don’t “need”. I don’t have answers yet but I’ve heard plenty of pros & cons. “Sleep at night” comfort is the key!

      When you get back on the island I’ll be happy to host you as a guest at a Hawaii Angels lunch. The startup companies have all sorts of good ideas on what to do with investor money…

      • Reply Mel M. January 28, 2014 at 11:23 AM

        Doug,
        I’ll be interested in learning about some angel investments. I am on island and not scheduled to leave for my next adventure until a couple of months from now.

  3. Reply Kate Horrell January 23, 2014 at 5:07 AM

    Great post, Doug. I bet I am even more boring than you are…but I can’t be sure. I need to do a good general assessment of our boring portfolio.

    I don’t see your rental real estate listed as part of your portfolio. I am curious why you left it out, and (if you want to share), it’s position within the portfolio.

    Can’t wait to hear about the trip!

    • Reply Doug @ The-Military-Guide January 24, 2014 at 11:35 AM

      As the original Star Trek LT Uhura used to say, “Boring is good.”

      I’ll have to write a separate post for our rental property. We became landlords because it was easier to rent than to sell when we bought our new residence (a familiar story), and then it was rented to in-laws for nearly six years (a sad story) and after they left it needed a lot of capital expenses (a sadder story). The good news is that it’s finally earning market rent and flowing cash.

      Now we’re hanging on to it in case our daughter returns to Hawaii after Navy… whenever that may be. Apparently my landlord exit strategy is “probate”.

      In the meantime, rental property is another reason to avoid REITS and bonds. If I was looking for an equivalent asset then I guess it’d be a high-yield junk bond: lots of cash when the market is good, no cash and no value when the market is bad?

      I’m writing the Bangkok post now!

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