The Military Guide


I’m A Boring Investment Competitor.


(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:

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:


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.

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.
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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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