As I got married earlier this month, I have modified my investment policy statement slightly to include an exposure to TIPS and Real Estate, increase my international stock exposure, and document some additional considerations that I had not yet put on paper but was considering.
Here's my previous version of my investment policy statement:
http://forum.mrmoneymustache.com/investor-alley/my-investment-policy-statement/Feel free to critique and provide feedback.
----------------------------------------------------------------------------------------------------------------------------------------------
Investment Policy Statement:
Allocations:
- Cash = 5%, increase to equal 6 months of expected expenses, the balance of house savings, or 10% upon retirement.
- Bonds/TIPS = half of age, split evenly.
- Real Estate = 10% up to age 25, increase 1% every 5 years, maximum 15%.
- Stocks = split 60% U.S. and 40% International.
Example holdings:
- Cash = VMMXX Prime Money Market
- Bonds = VBTLX Total Bond Market Index
- TIPS = VIPSX Inflation-Protected Securities
- Real Estate = VGSLX REIT Index
- U.S. Stocks = VTSAX Total Stock Market Index
- Int. Stocks = VTIAX Total International Stock Market Index
Holding considerations:
- Hold only low cost index funds with expense ratios of less than 0.50%.
- If 401k does not offer Vanguard funds, use equivalent investments or target retirement funds.
- Hold International Stocks in Taxable Accounts (as foreign tax credit can be claimed) or Tax-deferred Accounts.
- Hold Bonds and Real Estate in Tax-deferred Accounts (as interest and dividends are taxed at ordinary income tax rates).
- Hold U.S. Treasury Bonds in California Health Savings Account (as HSA earnings are subject to taxation in California, and U.S. Treasury Bond interest is tax-free).
- Utilize new contributions to rebalance the allocations.
- Rebalance monthly by adjusting the tax-deferred holdings or taxable holdings (if losses or long-term gains are available) when the differences exceed 2% (or 5% for stocks).
Tax considerations:
- Make traditional contributions when marginal tax rate is 25% or above.
- Make roth contributions when marginal tax rate is below 25%.
- Convert traditional holdings to Roth when marginal tax rate is below 25%.
Make contributions in the following priority:
- Maximum to company-sponsored 401k or Roth 401k.
- Maximum to IRA or Roth IRA.
- Maximum to HSA.
- Excess into Taxable Account.
Day-to-day considerations:
- Stay the course. Keep investing. Don't worry about the day-to-day fluctuations of the market.
- With each raise, increase retirement contributions. Maximize tax-deferred savings before increasing cost of living.
- Do not pay down debt that holds interest rates below the 30-year treasury rate. Aggressively pay down debts exceeding 5% interest rates.
- Avoid company stocks, individual stocks, annuities, derivatives, and get rich quick seminars.
House purchasing considerations:
- Do not purchase unless you plan to live in that area for 5-10 years.
- Make sure you could afford the payment on a 15-year mortgage with 20% down, but instead take the 30-year mortgage for flexibility.
- Reduce Bonds/TIPS allocation by the balance owed on low interest mortgages/loans.
Future considerations:
- Create a will once you have dependents. Update will and beneficiaries of all accounts with each new dependent.
- Hold term life insurance when you have dependents and are not financially independent.
- Utilize California 529 for college investments for dependents.
- In 50s, purchase long-term care insurance.
Retirement considerations:
- Make sure house is paid off prior to retirement.
- Retire when investments are equal to at least 25x expected annual spending in retirement.
- Make sure to factor in increased healthcare costs into expected annual spending in retirement.
- Withdraw approximately 4% of the portfolio each year for spending. Adjust for inflation each year.
Books read as inspiration:
- A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton Malkiel
- The Bogleheads Guide to Investing by Taylor Larimore