Hey hey, and welcome back to the final lesson of Minafi’s Minimal Investor course!
Great job sticking with it for all 10 lessons. Learning to invest takes patience and practice to build confidence. If you’re not feeling like a confident investor at this point, that’s completely understandable.
It took me years of investing with just a 401(k) and a Roth IRA before I felt comfortable. Even now there are times when I let the news influence my decisions. The difference is that it’s for smaller tweaks to my portfolio: “Should I rebalance now or wait another month?” or “I have some extra cash right now, should I invest it immediately or wait?”.
Once you have your asset allocation and automatic contributions set, most of your investing decisions will be these small tweaks to your account. This lesson is about setting up systems that let you answer those questions as they come up.
Also: Just a heads up – at the end of this lesson I’m going to link to a survey for feedback on this course. I’d seriously appreciate it if you fill it out. It helps me make this course better for everyone else.
The first two years I invested was at Vanguard in a Roth IRA and a Brokerage account. The amount of money was a lot for me, about $25,000. By the end of 2 years there, I gained a great deal of confidence and an understanding of all of the topics I’ve shared in the past 9 lessons. It’s now 12 years later and I’m still using those same techniques with only minor tweaks.
This lesson will be about creating your own rules for investing – something that often comes naturally with experience. We’re going to try to fast track this a bit. Even if you’re not there yet, it should be a good exercise
Lesson 9 Review
Lesson 9 – Rebalancing Your Portfolio
Rebalancing isn’t the most elaborate topic – it’s just buying and selling. The strategy you use to rebalance could save you a ton of money in the long run; especially if you have a good grasp of taxes.
- You Can’t Control the Market – Don’t sell and buy funds to feel like you’re in control. You aren’t in control – the market is. If you’re well-diversified, the best thing you can do is ride it out.
- Rebalancing Basics – Shifting funds from one fund to another to stay in line with your desired asset allocation.
- Contribution Rebalancing – Adding more funds to your account to stay in line with your asset allocation. This technique is best used on brokerage accounts but works everywhere.
- Conversion Rebalancing – I’m going to sell some of fund X and buy some of fund Y.
The goal of rebalancing is to keep your assets somewhat close to your target asset allocation. How often you do it is up to you. I tend to do a conversion reallocation once a year if needed, and then use the contribution rebalancing approach for everything else.
Lesson 10: Create Your Own Rules For Investing
This the last lesson is all about setting an intention going forward. It’s a good idea to write down your answers to these questions somewhere (Evernote, Google Doc, paper). The format today will be a little different – each section is a question for you answer on your own. I’ll share my own answers for each and give a bit more background to help you shape an answer that feels right for you.
It is important to write down your answers to these. They start off somewhat basic, but by the end, you’ll have a bulleted list of your rules for investing. It’s important to write them down as a commitment to yourself that you’ll behave in a certain way when an event happens down the road.
In other words: think of these as commitments rather than just a thought experiment.
Why Are You Investing?
Are you saving for retirement? Are you saving for a purchase like a house or car? Are you saving for someone else, like a college fund? Is this investment going to be used for a vacation in the short term?
If you’re investing for multiple reasons, what percentage or dollar amount are you allocating to each group? Is there a set amount you’re aiming for?
My answer to this is simple:
Invest as much as possible for retirement each month – ideally above 50% of my income.
I have a goal amount I try to shoot for, but in the end, this rule isn’t about making me feel bad if I don’t hit it. Just a reminder that investing for retirement is my primary goal.
Ever since I left my job at the end of 2018, my reason for investing has changed:
Continue investing in diversified, low-fee, tax-optimized index funds that ensure that the 4% rule enables me to fund a long-life from these investments.
The shift after retirement been less towards optimization and more about not trying to chase amazing returns. There will always be new investments that skyrocket. Bitcoin, Tesla, Kodak – whatever the “hot stock” is, it’s important to not be sucked in. My “why” for investing helps me remember that I’m OK, and I don’t need to chase those long shots.
What Will Your Asset Allocation Be?
How much of your portfolio will be in bonds? US Stocks? International Stocks? Anything else? How will this change in time? Will this allocation be the same 10 years from now? Are you well-diversified?
My asset allocation is somewhat aggressive, but I’ve grown this over time:
- Age/2 in Bonds
- 2/3 of what’s left in US Funds
- 1/3 of what’s left in International Funds
- 5% in REITs
- 5% in whatever I want
This isn’t quite so minimal as a three-fund portfolio, but it does stop me from making dumb investment decisions. I can only put about 5% of my total funds into high-risk areas, which is just right for my tolerance. Another rule I have is to never use 2 funds when 1 would do. Less is better. You can read more about my specific asset allocation in my post about How I Would (and Do) Invest $1 Million.
How, and How Often Will You Rebalance?
What does rebalancing look like for your accounts? Are you using contribution rebalancing or conversion rebalancing? How often will you manually rebalance? How often will you change your contributions to rebalance that way? How far out of sync with your asset allocation should your funds be to trigger a rebalance? What happens if you need to sell a fund and pay taxes on a capital gain to rebalance? Will you still do it?
I lean towards contribution rebalancing for my answer.
Rebalance assets every year by investing more in areas that are below the target percentage, only using conversion rebalancing when an asset group is more than 5% off.
Ever since I left my job rebalancing has gotten more difficult. Now that I’m living off of my investments, the money I take out each year for my regular expenses is, effectively, rebalancing.
Let’s say we spend $80,000 a year. For that $80k we’ll withdraw from whatever asset is the most overvalued as part of our portfolio. If stocks are 55% of your portfolio and we’re aiming for 50%, we’ll sell stocks. If bonds are somehow more, we’ll sell bonds.
What Accounts Will You Buy Funds In?
If you only have one account, this one should be easy. Otherwise, this is more about stating your plan for how you’ll invest your asset allocation. Remember GoodSaver and BadSaver? The only difference between them was which accounts they invested their funds in. That one change made a massive difference for the growth of their funds. What’s your plan to minimize taxes by choosing the correct accounts?
Always buy things in the most tax efficient account (401k, Roth IRA, etc).
How Will You Minimize Fees?
What will you do to minimize fees? Are the funds you’re picking low in fees? Are you picking actively managed funds or index funds? Are you using an advisor, or a robovisor? Are you OK with the fees you’re being charged, and how they’ll affect your overall earnings in the years to come?
Never buy actively managed funds except in the 5% of my portfolio that’s experimental.
Lesson 10 in Review
With these rules in hand, you’re all set to invest! I wish you the best of luck in your investing career and hope you find it as fun and exciting as I have.
I’m still amazed by investing even 10 years in. The idea that if you retire at 40 with $1.5 million dollars, then those funds could provide you with over $10 million in returns (while withdrawing!) before you’re 100 still completely blows my mind. The idea that it’s possible to make more money in retirement from investments than during your entire working career just sounds nuts – but it’s all about time in the market and the magic of compound interest.
Side note: In a later course in this series, Make Your Investment, we dig deeper into this topic and create an investment policy statement. That article from the Bootcamp is free if you want to check it out.
Feedback On This Course!
I truly hope you have enjoyed this course. Check out the Course Wrapup next to complete this course.