Newbie to Four Pillars of Investing

[englishteacheralex]

Way back when I started working as a teacher in 2003, my multi-millionnaire, stock-broker uncle told me that retirement investing came down to two simple things: save as much as you possibly can starting as early as you can, and for god's sake avoid stock brokers and fees. He recommended Vanguard.

Fastfoward to now: I have about 75k saved in a Roth IRA, 70k of which are in Vanguard 500 Admiral shares. The other 5k is in the Dividend Growth stock (one year I got creative).

I am now 36 and just finished The Four Pillars of Investing. It's dawning on me that I've been a little simplistic with this. My husband and I just got married and are starting to throw a LOT more money into retirement than I did when I was single with a pretty paltry salary. But the Four Pillars are kind of overwhelming.

Who buys bonds right now? Do I really need to diversify? Should I be worrying more about asset allocation? Any other recommendations on how to educate myself on this?

[Heckler]

Who buys bonds right now? Do I really need to diversify? Should I be worrying more about asset allocation?

A simple picture answers these for me.

[Radagast]

Don't make it more complicated than it needs to be. The Admiral S&P500 fund is a perfectly fine fund to have all of your money in. The Total US stock market fund might be a little better, but it comes down to semantics. I would just keep on keeping on for now. You can read a little more, collect your thoughts a few times, and see what you think a year from now. Perhaps you might start to add a little money to an international fund next year, but no hurry for now.

[BTDretire]

Way back when I started working as a teacher in 2003, my multi-millionnaire, stock-broker uncle told me that retirement investing came down to two simple things: save as much as you possibly can starting as early as you can, and for god's sake avoid stock brokers and fees. He recommended Vanguard.

  That is great advice, Uncle, deserves a kiss on the lips!
At your age diversify in stocks, which your index funds do.
When your closer to retirement and are more concerned about
not having enough years to recoup any large market losses, then
shift some of your money over to bonds and/or investments that
move counter to stocks. You won't make as much money, but you will
be less likely to have a 30%* NW loss.

*I held during 2008/09 and on through 2016 and happy I did.

[LLCoolDave]

It depends how involved you want to be. Some people get satisfaction from maintaining a slice and dice portfolio. There are more than a few millionaires over at bogleheads that do a three fund portfolio. Total US equities/Total international equities, and the Total US bond market. Since you went through the 09 financial collapse, how did you feel when your account dropped by 50%? What if you had $1,000,000 and it went to $500,000? If either makes you sick to your stomach then it would be good to add some bonds. Maybe consider an allocation of 50/25/25 regarding the above assets. Seems like "set it and forget it" would fit your investing style and you would still be very successful. Best of luck.

I read the book a couple years ago and Bernstein was spot on with his prediction that the repeal of the Glass-Steagall Act would lead to big trouble. i.e. 2008-2009

[MustacheAndaHalf]

If you go 0% bonds now, it can remain a habit until you retire.  Take a look at Vanguard's retirement nest egg calculator, and you'll see allocations of some bonds actually do better in retirement than pure stock allocations.  What you want to avoid is starting retirement taking large stock losses while also selling stocks to pay for expenses.  So as a habit, I'd suggest at least 10% bonds.  As you approach retirement, you want to be gradually reaching your target bond percentage.  With 0% bonds, you're probably not even thinking about that yet.

Take a look at Vanguard's retirement nest egg calculator, and run some simulations to see how 0% bonds vs 50% bonds vs 100% bonds plays out.

[englishteacheralex]

It depends how involved you want to be. Some people get satisfaction from maintaining a slice and dice portfolio. There are more than a few millionaires over at bogleheads that do a three fund portfolio. Total US equities/Total international equities, and the Total US bond market. Since you went through the 09 financial collapse, how did you feel when your account dropped by 50%? What if you had $1,000,000 and it went to $500,000? If either makes you sick to your stomach then it would be good to add some bonds. Maybe consider an allocation of 50/25/25 regarding the above assets. Seems like "set it and forget it" would fit your investing style and you would still be very successful. Best of luck.

I read the book a couple years ago and Bernstein was spot on with his prediction that the repeal of the Glass-Steagall Act would lead to big trouble. i.e. 2008-2009

Three fund portfolio millionaire is very comforting. Thank you.

My husband and I are researching bonds together and don't want to make any big changes until we really understand what we're doing and what the risks involved are. I'm prejudiced against bonds as I understand them right now--I don't get it, they lose value as interest rates rise; interest rates are historically low=who would buy bonds right now? But I think I'm overlooking/oversimplifying how bonds work (I don't perfectly understand them, and I REALLY don't perfectly understand the implications of bonds in a long term portfolio).

With my retirement money...I've always been really weird about it, temperamentally, in that once I put the money in there, I have this feeling like it no longer exists, and I don't care. I actually do check it a lot--looked at it a lot in 2008/09 when I was still in my twenties--but always more of a curiosity. I remember back then not understanding why people were freaking out, and continually thinking...wait, if I really understand the stock market, isn't this a good thing? Stocks are cheap right now, right? I actually bought more that year then I ever had.

Putting the money in the stock market is always a bit of a wrenching move, because once it's there, in my mind, it's completely gone. I know I've totally given up control over it, except as I do research and understand more about different asset classes. So anyway, I don't think there's a lot of risk of me freaking out and taking all my money out in the event of a crash (or a far scarier event of a 20 year bear market, which I know now is perfectly possible and must be part of the reason that bonds are a good idea).

[dandypandys]

I am the same, once it is in the fund i no longer think of it as real money. Maybe because for years the work match was triple of what i put in.. i put 3% they put 10%. I now match them so it does feel a little more like real money.
I have gone with a 3 fund sort of .. except i also have some gold and silver- so it is more like the golden butterfly. I don't 100% understand bonds.. but see it does benefit you when you do a (yearly) reallocation.

[Laserjet3051]

hi alex:

I just finished reading Bernsteins "The Four Pillars of Investing" last week. What an incredible book! I soaked every bit of it up but didn't find it overwhelming. In fact, I sometimes went back and reread specific sections that were particularly important to follow and understand.

"Who buys bonds right now? Do I really need to diversify? Should I be worrying more about asset allocation?"

Lots of folks buy bonds right now. Without going into the pros and cons of bonds as part of ones portfolio, I have been building, and will continue to build a bond position using VBMFX. Diversification ,as I'm sure all good moustachians will/have told you is essential to manage risk, and no, you shouldn't worry about asset allocation, but you should one way or another, be diversified across a wide array of asset classes, many of which inversely correlate with one another in order to reduce volatility/risk.

[gggggg]

Everyone is going to have a different opinion on asset allocation. I do think most folks would agree with:

1. A broad market stock index. Total market or s&p 500, or similar.
2. Perhaps a total international (excluding us) stock index. Certainly optional
3. If bonds, then a total US bond market index. Barclays aggregate or similar.
4. Optional diversification. REITs, sector stock, precious metals, TIPs, intl total bond market

I like splitting mine up, some folks like 100% total stock market index. Ask 100 people, and you'll probably get as many different answers.

[Eric]

I buy bonds right now.  Why wouldn't I?  If I don't want to be 100% stocks, and I don't, then bonds are a great thing to own.  The reason to buy bonds is not because they offer the highest potential return.  The reason is because they offer diversification and often zig when stocks zag.  It smoothes out the curve.  So yes, while stock markets are rising, they're a drag on returns.  But when stock markets are falling, they help mitigate the losses.

Four Pillars of Investing is my favorite investing book.  I'd highly recommend you read it again.  I thought it was very accessible.  It honestly doesn't sound like you soaked all of it in.

[englishteacheralex]

So I had my husband read this book, and he loved it. He helped explain some of it to me that I was unsure of.

He is a federal employee and one of his benefits is a pretty good pension, which we hadn't really thought about much before. The book got him super into asset allocation and retirement planning, and now he's realizing that a lot of people consider a federal pension as a retirement asset that should be calculated into one's portfolio.

According to him, it should figure more or less as "federal bonds" because it is essentially as stable as that asset category would be. Therefore, our asset allocation is actually pretty heavy in this category, and it's wise to continue doing what we've been doing with our 401(k) and Roth IRA: aggressive/risky equity index funds. In fact, he's lobbying that we get more risky with our index funds, looking to diversify into small cap and international funds, which we've ignored previously to this.

Thoughts?

[Radagast]

Adding international index funds certainly seems like a good idea, perhaps as much as 40%-55% of your stock total. Tilting to riskier things like small company stocks has a good chance of paying off if you will still be making contributions for a long time, but is not as certain in the short term or once you start making withdrawals. If you are FIREing soon it might be an unnecessary risk. Up to you (;

I personally overweight riskier things in my retirement accounts because my time horizon is long and vague and will be entirely contributions for at least a decade. But in our taxable account which is probably going to become a house within 10 years things are much tamer.