Investing – Basic Plan

If you want to invest on your own, there are some basic ways to approach it.  Here is a simple model that you might want to consider using.

The goals of this approach are as follows

  • Build a simple, consistent approach that does not require a lot of re-balancing
  • Minimize fees and expenses

The money you want to invest can be split into any grouping depending on your risk tolerance.  For the sake of this discussion, let’s assume that you want to split evenly before the 4 categories that are listed below.  If you were putting in $100,000, you might put $25,000 into each of the 4 categories below.

  1. 2 year new issue brokerage CD’s (bought at par, or 100 cents / dollar, no gain loss)
  2. 5 year new issue brokerage CD’s (bought at par, or 100 cents / dollar, no gain loss)
  3. Vanguard ETF total US stock market (ticker VTI)
  4. Vanguard ETF total world stock market except US (ticker VEU)

I wrote a lot of articles about buying CD’s from a brokerage.  Some highlights include 1) you get better rates than you get through your bank (for instance I saw 2 year CD’s at my bank at 0.7% and was able to get 1.2% through my brokerage) 2) the CD’s are guaranteed against loss – worst case you get your principal and accrued interest back (many of my CD’s were tied to banks that failed in 2008-9, so I tested this theory) 3) when you buy the CD’s up front through your brokerage account you pay no expenses except for any per-trade charge your brokerage like eTrade or Vanguard or Schwab might add to the trade (i.e. no annual fee).

What are the CD’s accomplishing?  They are your “safe money” in the portfolio.  You effectively can’t lose money if you hold them to maturity.  If you have to see early before they expire (i.e. you need the money to buy a house) your brokerage account can put them up for sale and you will have a small gain or loss depending on how interest rates have moved since the time you bought your CD.

There are other ways to do this (buying bonds, treasuries), but they are more complicated, and don’t offer significantly better returns than this.  On the other hand, you may note that some bond funds have had big gains, but these are mainly bets on interest rates and on the riskiness of portfolio items and this is fine but you need to know what you are getting into.  The CD’s should work fine for most investors.

Also note that many bond funds have fees in the 0.5% range (although some are more, and many are far less).  At this point, the fees will eat up your entire return!  We need to plan as if the low interest environment (ZIRP) that we are in will go out indefinitely, which means low returns and watching expenses is paramount unless you want to take on more risk in terms of your investments.

As far as the ETF’s, it is easy to buy them through your brokerage account, you just figure out how much you want to buy (say $25,000) and determine the current price (about $107 / share) which is 230 or so shares.  Put in an order, which might be free or might cost you up to $25 (depending on your brokerage), and voila – you are done.

Both VTI and VEU have rock bottom expense rates – VTI is at 0.05% / year (meaning $25,000 costs you $12.50 / year) and VEU is at 0.15% / year (meaning $25,000 costs you $37.50 / year).  Note that a typical financial advisor plus fees on ETF and mutual funds might cost 1.5% / year, which would mean $25,000 would cost you $375 / year.  Of course they also give you expert advice, so that is the flip side of that transaction.

How do you manage money using this model and re-balance?  Easy.  Likely semi-annually you will receive interest on your CD’s – this is about 1.5% on average between both of them – so you’d have 1.5% times $50,000 = $750 / year in interest.  That doesn’t sound like much, but that’s pretty much the best you can do nowadays.

For your stocks – you will receive the dividend yield every year as cash in your account – VEU yields about 3.5% and VTI yields 1.75%, so on average you’d probably get about 2.6% / year in dividends or $50,000 * 2.6% = $1300 in cash.

The interest income on CD’s is taxed at the highest marginal rate for you (likely 28% or higher) but the dividends will be taxed at a lower rate of about 15%.

Rebalancing?  You shouldn’t need to.  Just leave the assets where they are.  The 2 year CD’s will come due and you can buy new 2 year CD’s, and later the 5 year CD’s will come due.  Unless you need to buy a house or something I would just leave the ETF’s there forever – they are a bet on the stock markets in the US and around the world.

As your assets earn cash they will be deposited back in your cash brokerage account.  Take that cash, plus new cash you’ve saved up, and then pick one of the 4 categories depending on your risk tolerance, and invest more.

That’s it.  This is a super low cost plan that requires little re balancing and gives you a balanced portfolio.


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