Investing In Things Your Brain Screams DON'T INVEST IN...

[FarmerPete]

I need to create a written investment strategy.  I've kind of gone back and forth between investing in a single total stock market fund and trying to break things down into smaller sector funds.  Whenever I use an online advisor (FutureAdvisor or Voya's retirement guidance) they bark at me because I have zero bonds, missing REITs, or I'm not diversified in whatever ratio they think I should be today.  I'm a 33yr old who has no intention of retiring for at least the next 10 years, so what do I need bonds for?  Bonds may have done well this year beyond belief, but can that continue another year?  I don't think so.  I don't want to buy at the top.  Same with REITs.  I just don't feel like they add that much to my portfolio.  Why take a risk in something when I'm already buying diversified ETFs?  Here are the things I'm currently investing in:

401(k)
SSgA S&P 500 Index   38%
SSgA Global All Cap ex US   33%
SSgA S&P MidCap Index   29%

457 Plan
SSgA S&P 500 Index   35%
SSgA Global All Cap ex US   30%
SSgA S&P MidCap Index   35%

IRA
Cash   10%
Fidelity Sp 500 Idx;Adv   35%
Fidelity Sp Tot Mk;Inv    17%
Fidelity Sp Itl Idx;Inv    18%
Fidelity Sp Ext Mk;Inv    20%

ROTH IRA
Cash   8%
Fidelity Sp Tot Mk;Inv    25%
Fidelity Sp Itl Idx;Inv    29%
Fidelity Sp Ext Mk;Inv    38%

Your investment style       
Cash   7%
Bonds   0%
Large-cap stocks   38%
Mid/small-cap stocks   31%
International stocks   24%
Individual equities   0%
Total   100%


Everything is pretty darn low expense ratios.  The IRAs are at Fidelity, so I'm sticking with their low fee mutual funds.  The 401k/457 is with my current employer at Voya and they have very low expense funds there.  Obviously the cash needs to get invested soon.  I guess at what point do you invest in things even when it goes against every thing you think you know about investing?

[trailrated]

Not sure if that last part of your post addresses this but what is with the cash in the IRA's?

[FarmerPete]

Not sure if that last part of your post addresses this but what is with the cash in the IRA's?

Most of it was from when I made my 2014 contribution a week ago.  I've just been trying to decide if I should add a new fund or add it to current funds.

[GGNoob]

I need to create a written investment strategy.  I've kind of gone back and forth between investing in a single total stock market fund and trying to break things down into smaller sector funds.  Whenever I use an online advisor (FutureAdvisor or Voya's retirement guidance) they bark at me because I have zero bonds, missing REITs, or I'm not diversified in whatever ratio they think I should be today.  I'm a 33yr old who has no intention of retiring for at least the next 10 years, so what do I need bonds for?  Bonds may have done well this year beyond belief, but can that continue another year?  I don't think so.  I don't want to buy at the top.  Same with REITs.  I just don't feel like they add that much to my portfolio.  Why take a risk in something when I'm already buying diversified ETFs?  Here are the things I'm currently investing in:

You don't need a complicated portfolio to be a good investor. Advisors seem to add a ton of funds to make it look like they are doing something worth the cost they are charging you. You really just need 3 funds:

Total US Stock Market (which can be multiple funds if you use S&P 500 + extended or small/mid-cap funds)
Total International Stock Market
Total US Bond Market

But then some people say why bother with bonds? I'm one of those and it sounds like you are too. So you really just need 2 total stock funds...US and International. Just remember that with no bonds, your portfolio will drop farther during bad years. DO NOT SELL low...use that as an opportunity to buy more. If you have total stock funds, then you already hold REITs, small-cap value, and emerging markets at their market allocation. Any additional allocation to those is just tilting and hoping they outperform in the future.

So here's what I suggest...

Pick your allocation of US and international stocks. Usually an allocation of 20 to 50% of stocks in international is the way to go. Personally, I'm 40% international (was 30% but recently added more exposure to REITs and Emerging Markets...shifted my allocation to something I could stick with for the long term).

So lets say you decided on the following:

70% US Stocks
30% International Stocks

Now do you just want to do 2 simple funds and go US Total Stock Market and International Total Stock Market? If you are happy with that, go for it! It will be simple and keep your costs extremely low. If you want more, do your research (to understand why you are adding them) and spice up your portfolio with any or all of the following:

Small-Cap or Small-Cap Value
REITs
Emerging Markets
etc.

Once you decide on your final allocation. Write something up. My plan lists my investment goals, investment order, and what to do with a windfall. Then I also list each investment account and the allocation I want to hold in each one. Lastly, I list what I want to do with my emergency fund (basically where and how to invest it) and in what order to come up with funds to pay for emergencies (after emergency fund runs dry).

Once you have a plan, you can refer to it anytime you are tempted to do something else.

[Melf]

Most of it was from when I made my 2014 contribution a week ago.  I've just been trying to decide if I should add a new fund or add it to current funds.

Unfortunately,  I must admit that I've got cash sitting in my Roth IRA in my Vanguard account right now as well.  It's just the product of selling all of my high expense ratio funds from a previous relationship with a financial advisor as well as a recent transfer of $2500 to finish off my 2014 contributions.  I know market timing is bad but I can't bring myself to make huge lump sum additions to my VTSAX while the markets are at record highs.  I have to wait for at least a small dip before buying......can't help it.  I've got my entire 2015 Roth contribution ready to transfer in after Jan. 1 and will need to get that invested as well.  Maybe I won't be as uptight about investing that $5500 since it's "new" money. 

[Fuzzy Buttons]

I agree you need to write something down, just to get a handle on what you want.  I went through the same thing this fall.  I wanted to change my allocation and I think I decided on about a dozen different ones before I finally settled on something I was happy with.  The thing that helped me decide is realizing that it really doesn't matter that much.  Really.  Saving is much more important than how that savings is invested. 

All that tilting to one sector or another (small cap, value, REIT, international) - you're talking fractions of a percent difference in expected returns for the total portfolio, with no guarantee it will be any better than just a total market fund.  And the more you split it, the more tempted you are to fiddle with it.  And fiddling with it is what causes you to take self-inflicted, unnecessary losses.  This post from the Oblivious Investor really helped me put things in perspective: More on Switching to Vanguard's Lifestrategy Growth Fund.

You are definitely scattered a bit.  For example, in this IRA:

IRA
Cash   10%
Fidelity Sp 500 Idx;Adv   35%
Fidelity Sp Tot Mk;Inv    17%
Fidelity Sp Itl Idx;Inv    18%
Fidelity Sp Ext Mk;Inv    20%

The S&P 500 fund holds large cap US companies.  The Extended Market fund holds mid and small cap US companies.  And the Total Market fund holds all US companies.  So you're holding most US stocks in 2 of those funds.  Now, sometimes people might add the Extended Market to the Total Market to tilt to small cap - but you're tilting to both small and large cap, and just cancelling each other out.  It can feel like holding just one Total Market fund is not diversified - but it really is.  Be comfortable with that as a base.

Now, the ratio between stocks and bonds is more of a difference than the various tilts within stocks, but even there it's pretty loose.  I think 60/40 and 40/60 are probably the same, as far as we can guess.  As to your question of being 100/0 - well, I was that from age 24-44.  I'm 44 now and I expect FIRE is 10 years away, and I've added bonds.  Do you need them?  Nope.  But be aware that some studies have shown actual improvement by having a small bit - 10-20%.  That is, better risk-adjusted returns.  And as I say, these are loose.  Doing 90/10 and 100/0 are probably the same.  So I'd put a bond fund in just to have a toe in it, but if you don't, I don't think you're missing anything.

The last caveat, and the reason I changed with 10 years to go, is that you never know for sure when you'll need the money.  Life can be unexpected.  I went through three layoffs in two years during the recession, and since then I've realized that my retirement might just show up suddenly when I'm not expecting it.  I'm willing to lose a couple percent long term return to make it much more likely the balance is not in a huge trough at the same time.  YMMV.

Good luck!