Post #46

Part 3: Money and Investing (continued)

Decide on (and write down) your asset allocation strategy
I said in an earlier post that I give you some leeway in coming up with an asset allocation plan you can live with.  Start out with an allocation you think is OK and fine tune things as you feel your way along the risk/return curve.  What’s that?  It’s a hypothetical curve you can stick on a graph that shows how investments with greater risk usually provide greater returns (in the long run).  Check this link:  Understanding Volatility Measurements.

Maybe you’ll start out conservatively and realize after a while that you can take more heat.  Maybe you’ll be too aggressive at first and wind up with insomnia and hemorrhoids.  Whatever, this is not something that just comes to you in a vision.  A little experimentation is needed.

Within a year or two you need to decide on a final asset allocation strategy.  Otherwise you will have that thing they call analysis paralysis.  Make sure your spouse agrees with your allocations.  Write down a plan such as the one offered below.  Stick with the plan after that, through thick and thin.

Take a piece of paper, or open up your computer and write down the following:

My name is ___________________

The date is ____________________

I plan to save (15% or 20%) of my gross salary each year.

My company has a 401k plan.

1. I will join the 401K plan as soon as I am eligible.
2.  I will contribute ________% of my gross salary each year in my 401K plan.  
3. My company will match another _______% of my gross salary.
4. Above that, I will save another $5,000 (or whatever the upper limit is) each year in a Roth IRA if I meet the income limits.
5. Above that I will invest additional money in my 401K up to the max.
6. I will invest additional savings in a taxable account.

My company has a defined benefit plan.  I will work there for 30 years to collect this pension.  I will also save additional money to supplement this plan.

I have no company pension plan.

1. I will open a Roth IRA and a regular IRA.
2. I will contribute to the Roth up to $5,000 (or the upper limit) each year.
3. If I make too much money to contribute to a Roth, I will contribute to the regular IRA instead.
4. Above this IRA contribution, I will invest the rest of my savings in a taxable account.

I am XX years old.  My investment time horizon is 30-40 years.

I can sleep well at night with ____% of my money in stocks.  I will not panic if the market goes into a tailspin.  I know that if I stick with this written strategy I will do better than if I chase performance.

My portfolio goals are (this assumes 80/20.  If your allocation is different, please adjust):
Checking, Vanguard Prime Money Market fund and Vanguard
Short Term Investment Grade Bond Fund (VFSTX)              20%
Vanguard Total Stock Market Index Fund (VTSMX)              36%
Vanguard Small Cap Index Fund (NAESX)                           10%
Vanguard Total International Stock Index Fund (VGTSX)     19%
Vanguard Emerging Markets Stock Index Fund (VEIEX)         5%
Vanguard REIT Index Fund (VGSIX)                                    10%
Mad Money (if you decide to have a mad money position, spell out
the reasons and take 1% from 5 other funds)                      5%

Or, my portfolio goals, based on the specific asset classes are:

20% - Cash and bonds
33% - Large US stocks
13%- Small US stocks
15% - Stable International
 9% - Emerging Markets
10% - REITs

I will have all distributions re-invested and will not touch any of the above investments for at least 30 years.

Signed in Blood (You): __________________________________

Signed in Blood (Spouse): __________________________________

When do you change your strategy?
Once you’ve come up with the final plan don’t change your strategy unless there is a life changing event.  (Special note:  When you get older and more fogey-ish, you should become a little more conservative and put a larger percentage of money into bonds.  But that’s light years away, like when you hit 40 and 50.  Even with this change, the essence of your plan will remain intact).  

So what is a life changing event?

• You become disabled and can’t work any more.
• You inherit tons of cash.
• You cash in a load of stock options.
• You marry a rich person.
• You divorce, and your spouse takes all your assets.
• Your house burns down and you don’t have insurance.

These kinds of changes require you to completely re-evaluate your strategy.  You may have the luxury to become more of a risk taker, without any worries.  Or you may need to become much more conservative.