A few months ago, my wife and I were hanging out with our friend, let’s call her Martha, and the topic of finance came up as it usually does by my wife making fun of me. But Martha wanted to talk about it a bit, especially how to invest her savings. Like a lot of folks, she “just doesn’t know about that stuff”, but recognizes that it’s important.
After some discussion, I laid out the usual suggestions I make in these sort of situations:
You have three choices:
- Hire a dude to be your financial advisor. This is expensive, but you don’t have to learn or do anything.
- Hire a robot to be your financial advisor. This is not as expensive as the dude. You will still probably need to learn some things, but you won’t have to do anything.
- Or do it yourself. This is the cheapest option, but you will need to learn and do some things yourself.
Now Martha is pretty smart, and she’s also pretty frugal, so she was most interested in options 2 and 3, but in either case I was telling her that she should invest a little time into learning about “financial stuff” which she finds daunting. So she wanted to know how much time exactly?
Now, some folks might quibble with me here. This is where my bias against robo advisors or any type of advisor for that matter probably shows, but I firmly believe that if a robot is going to make your investing decisions, you really owe it to yourself to at least learn the basics. It’s your freaking money after all. You should have a minimal understanding of what the robot is up to. (I think this is true if you hire a dude too, but I digress).
Anyway, the logic progresses that if you’re going spend the time to learn the basics, why not just do it yourself?
This surprised Martha. She didn’t really think that you could “do it yourself” with only a minimal amount of knowledge or time invested.
Then I said something like, “Oh sure…you could manage your own finances and put all your extra wealth into like 4 index ETFs and rebalance annually. It would be a perfectly reasonable investment approach that would probably be as good or better than the dude or the robot, and it would require less than a couple hours of initial “education”, and like 30 minutes a year to do the rebalancing.”
“Really?” Martha asked. “Will you share that list of 4 ETFs with me?”
I haven’t made good on that promise, until now. So this post is kind of for Martha.
But it’s also for the Wizard Family.
I’m turning the Traditional IRA (account #2 on the portfolio page) into our “Lazy Portfolio Experiment”.
This portfolio represents what literally anyone could do with nearly zero thought or effort regardless of their level of financial sophistication. The only difference is that I will be rebalancing quarterly instead of annually. That would probably be too often for most retail brokerages because the fees will eat you alive, but this account is with Interactive Brokers, so the fees are a lot less and you kind of have to be more active to get your money’s worth. I think it’s a reasonable compromise. It’s still cheaper than the robot.
I’m doing this for two reasons:
- I think it will be a fun experiment to see how this completely hands-off, passive approach works compared to the other accounts that I’m actively managing and
- I’m a buy and hold agnostic. I believe that stocks can be under- or overvalued, so to some extent I’m going to spend a lot of my resources chasing that alpha. But I’m far from convinced that I’ll be especially good at that, so there is also a pretty good amount of our wet wealth that is put into passive investing vehicles and this is part of that.
So what’s the portfolio?
Full disclosure…it’s not like I came up with this myself. In the spirit of being completely lazy, I google searched “4 ETF portfolio” and found this at the Bogleheads wiki site.
It’s not rocket science. What should I invest in? Stocks, bonds and real estate.
Now granted this skews a little heavy towards US based assets. The only international exposure is in stocks. But given the fact that the rule of law and private ownership are pillars of our society, it’s not a bad idea to stick to America when investing in debt and real estate. You can get into some weird shit out there in countries where the government might just take your land or force a company into bankruptcy or whatever. I think there should be some global exposure, but it’s best limited to equities where the rules are a little more sophisticated (and modeled after ours).
Plus it’s where both Martha and I live. Go ‘Murica!
Now the allocation percentages are a matter of personal preference and situation. That’s where the time spent on self-education comes in. One might want a higher or lower allocation of one asset class over another. This asset allocation is what I came up with based on my preferences and personal situation. That bogleheads site is a good starting point. Reading that, and clicking around to flesh out some basic concepts shouldn’t take too long.
It’s probably important right now that I reiterate my disclaimer.
No one should make investment decisions based on what a whackadoodle writes on the internet.
So let’s be absolutely clear that NONE OF THIS IS INVESTMENT ADVICE!
But it is my opinion that this would be a perfectly reasonable way for one to invest one’s money without putting a lot of thought and effort into the process. In 20 years, this portfolio will probably be a lot better off than if the money were just in a savings account or the sock drawer or something.
In fact I think it’s so reasonable, this is how I’m investing $43K of my family’s money.
$43,238.59 to be exact (account value at market close yesterday).
We’ll see what happens.