So you are interested in investing to grow wealth but you don’t want to spend a lot of time doing it. You just want something that is simple. Something dirt simple. Well, here it is, the dirt simple investment portfolio, which consists of three funds:
1. The Vanguard Total Stock Index Fund
2. The Vanguard Total Bond Fund
3. The Vanguard Total International Stock Index Fund
This portfolio has all you need to properly diversify and allocate money between income and growth.
The percentage you would put in each fund would vary depending on your age. As you get older and will need the money sooner, you would shift from growth (stocks) to income (bonds). The percentage you would put into the bond fund would be your age minus 10%. You would then put the rest into stocks, split between the domestic and the international stock fund.
For example, let’s say you started with $12,000 and you were 30 years old. You would then put 20% into the bond fund and 40% into each of the stock funds. Your portfolio would therefore look like this:
$4000 Vanguard Total Stock Index Fund
$2000 Vanguard Total Bond Fund
$4000 The Vanguard Total International Stock Index Fund
(Note that the minimum investment in the bond fund is actually $3,000, so you’d need to scrape together another $1,000, but you get the idea.)
You could then keep this same portfolio, adjusting the percentages as you got older, to continue to invest your age – 10 % in bonds. At age 40 you would have 30% in bonds and 35% in each of the stock funds. At age 60 you would be 50% in bonds and have 25% in each of the stock funds, and so on.
You would need to rebalance the funds about once a year. In rebalancing, you shift money from the funds that have done well to those that have not done as well in order to restore your target percentages. For example, let’s say that you are age 30 and the stock funds had a great year, such that your $10,000 portfolio became:
$6000 Vanguard Total Stock Index Fund
$2000 Vanguard Total Bond Fund
$7000 The Vanguard Total International Stock Index Fund
Your total portfolio value would now be $15,000. You would want to put $3,000 in the bond fund and $6,000 in each of the stock funds to restore your target percentages of 20% bonds and 80% stocks. You would therefore pull $1000 out of the Total International Stock Fund and invest it in the Total Bond Fund. Vanguard, and several other fund companies, have online tools to allow you to do this very easily without even doing the math. You just indicate the percentages you’d like to have and press a button to rebalance the portfolio.
There is an issue with doing this, however, if you are investing in a taxable account. If you have had gains in the account this might result in capital gain taxes being owed. This is particularly an issue if it has been less than a year since you invested the money because that would be a short-term gain and be taxed at a higher rate. Depending on your income, long-term gains may not be taxed at all (check with a CPA). Another way to rebalance the portfolio if you are contributing new funds to the portfolio – which you should be doing on a regular basis – is to invest new money in the fund that you want to grow. In this case, you would direct new money to the bond fund until you reached the target percentage of 20% bonds, then start to allocate new money based on the 20%, 40%, 40% percentages again.
Investing doesn’t need to be difficult. While you can perhaps eek out a little bigger gain by developing a more sophisticated portfolio, you will do very well with the dirt simple portfolio.
Contact me at [email protected] or leave a comment.
The SmallIvy Book of Investing, Book 1: Investing to Grow Wealthy
Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
