Basic Investing Plan

This is an update to my “basic investing plan” to take into account market shifts.  As always do your own research and make your own investing decisions.  I created a prior version of this page in 2015 but am updating it as of late 2020.

This is a plan for a reasonably sophisticated investor; the goals include:

  • Diversity among investing classes
  • A few representative investment choices to allow for differing levels of risk
  • Aiming for very low costs
  • International options
  • Taking into account the impact of currency risk (rise and fall of the US dollar)

Fixed Income:

In my prior plan I recommended brokerage CD’s.  However, the current yield curve for CD’s looks like this:

  • Base rate (no CD, leave in money market) – 0.01% (Vanguard VMMXX)
  • 1 year CD – 0.05%
  • 2 year CD – 0.15%
  • 3 year CD – 0.25%
  • 5 year CD – 0.45%
  • 10 year CD – 1.05%

The return on cash and cash-like (virtually risk free) investments is now effectively nothing due to our current governmental policies (also called ZIRP for Zero Interest Rate Policy).  Many banks have higher interest rates in savings accounts (up to a certain level) and we will look at iBonds which now are a reasonable alternative, for smaller dollar amounts (up to $10,000 / year per investor).

ETF Options:

ETF’s are recommended due to their (generally) very low annual expenses and their tax efficiency (they do not generate gains unless you sell them).  The following ETF’s are good considerations for any portfolio:

Vanguard – Total US stock market (VTI)  – Provides exposure to all classes of US public stocks (over 3000 stocks).  They are “market weighted”, meaning that you are investing money based on the relative value of each stock.  This means that the top tech stocks (Apple, Microsoft, Alphabet (Google), Amazon and Facebook) comprise over 15% of the total investment (as of year end 2020).

Vanguard – All-world except US stock market (VEU) – Provides exposure to all major non-US stock markets.  This index is also market weighted, and includes stocks from Europe, Asia (including China) and other major markets.  Below are some of the major holdings as of the end of 2020, which include significant foreign technology stocks like Alibaba, Taiwan Semiconductor Group (TSM), Tencent, and Samsung (S Korea).

iShares – Large and Mid-Capitalization Non-US stocks, Hedged vs. US Dollar (HEFA) – moves in the US dollar can significantly impact the return of foreign ETF’s like VEU, above.  For instance, if the dollar rises 20% against a basket of foreign currencies over a period of time (which has happened multiple times, along with reversals), this rise could completely wipe out the underlying return of these stocks.  Essentially the VEU international ETF above is maybe half a bet on the US dollar vs. a basket of foreign currencies, and a bet on the underlying performance of these foreign stocks.  If you want to get the “pure” return of these assets, HEFA should be seriously considered for your portfolio.  This ETF has slightly higher expenses than the other ETF’s listed above, but this is due to the added hedge costs, and is still a reasonably 0.7%.

iShares – Gold Trust (IAU) – tracks the short term price of gold.  Can be viewed as a hedge against market volatility and (potentially) likely to hold its value in a time of inflation or a debased US currency.  Does not offer a return in terms of dividends or stock returns.

Vanguard Total US Bond Index (BND) – This ETF tracks the total US bond index.  Given that the return on risk free cash is zero, you may want to consider this ETF instead.  It does have higher risk.  The current yield is 1.14% but it has had a higher gain over the last few years because the value increases as interest rates fall.  Should the US government interest rates head up again, this ETF would likely fall significantly since it moves inversely with interest rates.  As of late 2020, there seems to be no indication that these rates will rise in the near or mid-term future.

If you’d like an even heavier technology / growth exposure than you get with VTI (which is weighted by market capitalization, so that the biggest stocks have the biggest impact), you can select the Vanguard Mega Cap Growth ETF (MGK) which has the largest exposure to the highest flying stocks.  The stock list looks similar to VTI for the top ten holdings but note that they comprise 56% of the funds’ capitalization.

Below is a “sample” of portfolio construction. It is just for discussion purposes, only. This would exclude cash held in an emergency fund and real estate for residential or investment purposes held directly (not as a financial instrument like an ETF).

Sample Portfolio Construction
This is a sample of a way to approach Portfolio Construction. It is for illustrative purposes only.

Also see how to set up and track your total investment portfolio here.

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