Updated as of September 2023
Goals of the 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.
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)
Cash and Fixed Income:
The return on cash (Vanguard VMMXX) is about 5%. This is your “risk free” rate. This is lower than the rate of inflation but still significant.
This interest rate could go down depending on what the Federal Reserve decides to do next. Last time rates were higher, I bought CD’s and wished I had bought more with a longer duration when interest rates fell.
You can also consider buying iBonds. See my section on iBonds for more information. You can buy $10,000 / year per person.
The Vanguard BND ticker represents the general US bond market. This market has been hit very hard by the increase in interest rates. When interest rates went up, the value of this ETF fell by over 20% which is terrible for what may seem like a low-risk asset class to earn a bit extra interest (above the 5% or so that you can get with no risk).
Another option for debt is “junk bond” debt. These issuers pay much higher rates and often you can buy at a discount to face value (in an ETF that is implied). If you think that the market is going to rally, these ETF’s could make a big comeback, or if interest rates decline. HGY is an example of a junk bond
Stocks
The easiest way to get exposure to the stock market is to buy the VTI ETF which 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 ten stocks by weighting were 22% of the total portfolio (stocks like Apple, Amazon, United Health and Exxon).
The Vanguard VEU ETF contains to all major non-US stock markets. Their top ten stocks were only 9% of holdings. A big component of the return (positive or negative) on non-US stocks is the impact of the US Dollar. Since the US dollar has gone up vs. most currencies, recently non-US stocks have performed poorly (not necessarily in local currencies, but when translated back to the US dollar). The HEFA ETF allows you exposure to a similar stock basket as the VEU ETF but hedges against the US dollar change.
If you’d like an even heavier technology / growth exposure than you get with VTI , the Mega Cap Growth MGK ETF provides further concentration. You can also buy sector specific ones like IBB for drug related industries.
For a focus on dividend income, you can buy the Vanguard Dividend Appreciation Index (VIG) or DVY.
If you buy individual stocks or have shares as part of your company stock plan, they also count towards your stock “exposure”. Individual stocks have more variability and you don’t get diversification until you get about 10 or more stocks assuming they aren’t in similar market areas.
Gold and Crypto
IAU is the ETF that tracks the price of gold. Historically, gold has held value reasonably well during times of war and high inflation, especially against other assets.
Crypto assets are covered extensively elsewhere. Even if you are not heavily engaged in crypto you may want to consider a position in ETH or BTC for some part of your total portfolio.
Sample Portfolio Weightings
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). Low risk and high risk are sample portfolio construction percentages (they add to 100%).
| # | Area (ticker) | Risk Expectation | Low Risk | High Risk |
|---|---|---|---|---|
| 1 | Cash and Short term Debt (VMMXX) | Zero risk. Return of near 5% as interest rates have risen | 40% | 5% |
| 2 | Bonds – Investment Grade (BND) | Moves with interest rates. Significant losses since 2021. This is now a riskier bet | 5% | 0% |
| 3 | Bonds – Speculative Grade (HYG) | High yield bonds offer more yield but bigger risk of loss due to company failures | 5% | 0% |
| 4 | US stock market (VTI) | Can be high risk in the near term but historically yields over 9% over the last 30 years | 25% | 40% |
| 5 | International Stocks (VEU) | Can be high risk in the near term but historically has yielded 5% over the last 30 years | 10% | 20% |
| 6 | International Stocks Hedged vs US dollar (HEFA) | Can be high risk in the near term but historically would yield 5% over the last 30 years plus the impact of the US dollar vs. world currencies (8% rise). Since USD has gone UP over 30 years, the hedged ETF has beaten the non-hedged ETF | 0% | 5% |
| 7 | Gold (IAU) | No dividends or interest; historically viewed as a hedge against inflation and currency risk | 10% | 5% |
| 8 | Specific Industry Sectors (VGK, IBB, etc…) or Dividend Income (VIG) | Highest risk and high volatility. Less risky than individual stocks. Some sectors may be in permanent decline | 0% | 5% |
| 9 | Individual Stocks (can include ESPP or employer options or restricted stock) | Highest risk and high volatility. | 5% | 15% |
| 10 | Other – Crypto, commodities (non-gold), real estate, etc… | Based on the asset class can go from moderate to extreme risk | 0% | 5% |
Trust Funds For Kids 