Author Topic: Asset Allocation w/ Vanguard Index Funds and ETFs  (Read 3103 times)

missmoneymachine

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Asset Allocation w/ Vanguard Index Funds and ETFs
« on: March 10, 2016, 03:24:03 PM »
I was wondering if I could get some advice regarding an asset allocation for my Vanguard brokerage account?

I did some evaluating and realized that I had too much cash (from an inheritance) just sitting in the bank, barely earning anything in my money market deposit account.  So, I wised up and opened a taxable account through Vanguard. 

I put $10,000 in the total stock market index fund investor shares (I didn't do admiral shares because it said it would kick me back down to investor shares if it went under $10k, was this the right choice? It's currently under 10k due to market fluctuations.  Also, is it easy to move up to admiral once I have say 15k?)  I am currently not adding any more money to this account, I am working on maxing out my employer 401k before I start contributing more (I am currently at $12k/yr and hoping to move up to 18k soon).  I am also maxing out my Roth IRA (all in Vanguard target retirement fund).

I've been reading about ETFs and wondering if investing in them is the right choice for me.  I do have more money I could take out of the money market and put into my brokerage account, however I'm currently struggling with letting this money go.

If I do decide to invest it (another $10k), how should I allocate it?  Put more in the total stock index fund, or invest in the international index fund, or even tap into the U.S. bond fund?  Or should I buy total stock/bond ETFs with a mix of US and international?  What about sector ETFs?

I am 24 and hope to reach FI by 35.  I will be inheriting another $30-40k in the near future and am pondering on whether I should build up my taxable account with this money or invest in real estate.  Condos in my area can be bought for $50-60k so it looks as if I could buy up to 3 or 4 condos with that amount assuming 20% down.

Interest Compound

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Re: Asset Allocation w/ Vanguard Index Funds and ETFs
« Reply #1 on: March 10, 2016, 05:14:59 PM »
Real Estate is riskier than stocks/bonds indexing, which is the typical path for people striving for Financial Independence. It's more akin to purchasing a single stock. While the potential reward is greater than indexing, you pay for that in added risk and added time. I've read that Real Estate is more like owning a small business than passive investing, so make sure this is something you really want before moving forward.

Regarding your investments, I'd recommend a 3 fund portfolio:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=88005

And I'd also recommend maxing out your 401k right now. If you're currently maxing it out at $12k, you're only $6k off! Take $6k from your inheritance, put it in a high yield savings account and use it to supplement your expenses so you can afford to contribute an additional $6k to your 401k.

You'll find that your extra $6k contribution to the 401k, only reduced your take-home paycheck by $4,200 due to taxes, so really you only need to put $4,200 from your inheritance in a savings account, but that's up to you :)

Tyler

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Re: Asset Allocation w/ Vanguard Index Funds and ETFs
« Reply #2 on: March 10, 2016, 05:18:59 PM »
Hi Missmoneymachine.  Welcome, and good job starting an account!

The only real difference between ETFs and index-tracking mutual funds is how you buy and sell them.  So pay more attention to the expense ratios and what index the funds track.

The most important thing you can do at this point is to learn about asset allocation so that you can find the portfolio and investment style that's best for you personally.  Nobody here can make that call for you -- it's an individual decision that depends on your own personality and needs.  Two references that I recommend are the JLCollins Stock Series (that will give you a thorough primer on general stock investing) and PortfolioCharts.com (that will give you visibility into many different popular lazy portfolios as well as help you find index funds to fill out your portfolio).  I'm sure others here have other good resources to recommend as well. 

In the meantime, starting with a total stock market index fund is a great idea.  Don't worry about admiral vs. investor shares -- I believe they automatically upgrade you when you hit the minimum.  A total stock market fund will likely be part of any other larger strategy you eventually choose, so think of it as buying the first building block. 

BTW, I personally wouldn't bet so heavily on the condos, especially if you haven't done it before.  If that truly interests you, perhaps you could start with one and use the rest of your money to build up more traditional investments first. 

Hope that helps. 

« Last Edit: March 10, 2016, 05:45:10 PM by Tyler »

missmoneymachine

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Re: Asset Allocation w/ Vanguard Index Funds and ETFs
« Reply #3 on: March 10, 2016, 05:52:49 PM »
Real Estate is riskier than stocks/bonds indexing, which is the typical path for people striving for Financial Independence. It's more akin to purchasing a single stock. While the potential reward is greater than indexing, you pay for that in added risk and added time. I've read that Real Estate is more like owning a small business than passive investing, so make sure this is something you really want before moving forward.

I know that RE is much more work, but it's very hard to not get excited about the potential cash flow and not to mention the equity.  I think it's a great way to diversify your assets.  However, I have been thinking long and hard about changing my mind and investing the upcoming inheritance in the market instead.  I've been playing with the numbers on the CashFlow excel sheet to see the impact of that money in my taxable account in the long run.  While it's a nice bump, I believe RE could be greater.  It's really a toss up for me.

Regarding your investments, I'd recommend a 3 fund portfolio:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=88005

I've read a lot about the 4 fund portfolio, but this seems sound as well.

And I'd also recommend maxing out your 401k right now. If you're currently maxing it out at $12k, you're only $6k off! Take $6k from your inheritance, put it in a high yield savings account and use it to supplement your expenses so you can afford to contribute an additional $6k to your 401k.

You'll find that your extra $6k contribution to the 401k, only reduced your take-home paycheck by $4,200 due to taxes, so really you only need to put $4,200 from your inheritance in a savings account, but that's up to you :)

I could max it out right now, but I was setting even more money aside in case I wanted to give the RE investing a go.  I wanted to make sure I had plenty of cash to start out with.  But I seem to keep forgetting how much that saves in taxes!

missmoneymachine

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Re: Asset Allocation w/ Vanguard Index Funds and ETFs
« Reply #4 on: March 10, 2016, 06:06:54 PM »
Hi Missmoneymachine.  Welcome, and good job starting an account!

Thank you!

The most important thing you can do at this point is to learn about asset allocation so that you can find the portfolio and investment style that's best for you personally.  Nobody here can make that call for you -- it's an individual decision that depends on your own personality and needs.  Two references that I recommend are the JLCollins Stock Series (that will give you a thorough primer on general stock investing) and PortfolioCharts.com (that will give you visibility into many different popular lazy portfolios as well as help you find index funds to fill out your portfolio).  I'm sure others here have other good resources to recommend as well. 

I read the Stock Series, but I believe he advocates just the total stock market index until actual retirement (which he presumes is the normal age of 60ish).  I wasn't sure what the best allocation would be for those of us who want to be FI at a much earlier age.  Should I just stick with the total stock market (US and international) and skip the bonds until I get closer to FI?  And what is the target AA once in FI?  I have been reading around the forums and the site and haven't really seen anything concrete as to what would be an ideal AA during FI.  I understand everyone has different risk tolerances and therefore different AA, but what is the normal "reduction" in stocks once you hit FI?  You do don't want too much in stocks in case the market takes a hit, yet you still want the money to keep growing over the years.

I have slowly been piecing together all of my reading on investing, everyday I learn something new and it helps a ton to get direct information!

Tyler

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Re: Asset Allocation w/ Vanguard Index Funds and ETFs
« Reply #5 on: March 10, 2016, 07:31:32 PM »
I read the Stock Series, but I believe he advocates just the total stock market index until actual retirement (which he presumes is the normal age of 60ish).  I wasn't sure what the best allocation would be for those of us who want to be FI at a much earlier age.  Should I just stick with the total stock market (US and international) and skip the bonds until I get closer to FI?  And what is the target AA once in FI?  I have been reading around the forums and the site and haven't really seen anything concrete as to what would be an ideal AA during FI.  I understand everyone has different risk tolerances and therefore different AA, but what is the normal "reduction" in stocks once you hit FI?  You do don't want too much in stocks in case the market takes a hit, yet you still want the money to keep growing over the years.

I have slowly been piecing together all of my reading on investing, everyday I learn something new and it helps a ton to get direct information!

Well, the very first thing on the stock series page is this:

Quote
If after reading (a summary) The Series sounds appealing, you will very likely enjoy it.

If by the same token your reaction is, “This doesn’t sound right for me,” it very likely isn’t.

If you're still looking for "more", then good news -- that's an indication you've already learned something about yourself. 

Portfolio Charts offers a different perspective (I know because I wrote it. ;) )  I personally believe there are other good ways to invest than simply putting all of your money in a total stock market fund that are very appealing in both accumulation and retirement.  The trick is just finding the best fit for you personally.  Poke around the site (you'll probably find the FIREtime calculator and retirement data for different portfolios interesting), and maybe you'll find something that resonates with you.  If you do, I'm also a proponent of just sticking with the plan that got you there and works for you both pre and post retirement.  If you've done your homework, they don't necessarily need to be different portfolios. 
« Last Edit: March 10, 2016, 10:52:33 PM by Tyler »

Interest Compound

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Re: Asset Allocation w/ Vanguard Index Funds and ETFs
« Reply #6 on: March 10, 2016, 07:59:53 PM »
I know that RE is much more work, but it's very hard to not get excited about the potential cash flow and not to mention the equity.

I'm going to be harsh here ok?

Emotions have no place in your portfolio. Figure out your asset allocation, if you can't decide just go with 60/40 stocks/bonds. You can change it later. Put it in the 3 fund portfolio, and move on with our day. If you want excitement, go to the movies, find an extreme sport...etc. Keep your portfolio out of it.

missmoneymachine

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Re: Asset Allocation w/ Vanguard Index Funds and ETFs
« Reply #7 on: March 10, 2016, 08:06:34 PM »
Portfolio Charts offers a different perspective (I know because I wrote it. ;) )  I personally believe there are other good ways to invest than simply putting all of your money in a total stock market fund that are very appealing in both accumulation and retirement.  The trick is just finding the best fit for you personally.  Poke around the site (you'll probably find the FIREtime calculator and retirement data for different portfolios interesting), and maybe you'll find something that resonates with you.  If you do, I'm also a proponent of just sticking with the plan that got you there and works for you both pre and post retirement.  If you've done your homework, they don't necessarily need to be different portfolios.

I didn't get around to reading the Portfolio Charts at the time of writing that.  I must say it helped A LOT and is very straight forward and NICELY done.  Thanks

missmoneymachine

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Re: Asset Allocation w/ Vanguard Index Funds and ETFs
« Reply #8 on: March 10, 2016, 08:08:36 PM »
I know that RE is much more work, but it's very hard to not get excited about the potential cash flow and not to mention the equity.

I'm going to be harsh here ok?

Emotions have no place in your portfolio. Figure out your asset allocation, if you can't decide just go with 60/40 stocks/bonds. You can change it later. Put it in the 3 fund portfolio, and move on with our day. If you want excitement, go to the movies, find an extreme sport...etc. Keep your portfolio out of it.

Definitely not harsh, I take criticism and advice with open arms :)

coolistdude

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Re: Asset Allocation w/ Vanguard Index Funds and ETFs
« Reply #9 on: March 10, 2016, 08:20:24 PM »
I know that RE is much more work, but it's very hard to not get excited about the potential cash flow and not to mention the equity.

I'm going to be harsh here ok?

Emotions have no place in your portfolio. Figure out your asset allocation, if you can't decide just go with 60/40 stocks/bonds. You can change it later. Put it in the 3 fund portfolio, and move on with our day. If you want excitement, go to the movies, find an extreme sport...etc. Keep your portfolio out of it.

Definitely not harsh, I take criticism and advice with open arms :)

+1. You will go far with that statement.

You may also want to consider your primary residence. You may be able to lower your monthly expenditures to help you reach FI.