54. How I Invest (Part 2)

I didn't mean to take so long to write the "part 2" of this topic, but so much has happened between the time I wrote my last post and today.  I logged in thinking to write about the changes that are happening, and just noticed that I ended at "part 1" so decided to quickly wrap up this post before I move on.

 

We have about 10 accounts open, which include three Roth IRA's, one 401(k), two ESA's, and the regular brokerage accounts.  I keep track of monthly returns on those investments and also my monthly contributions to the accounts.  I have written down my yearly contribution goal (on a Google Drive spreadsheet) and that number is what keeps me from unnecessary spendings and motivates me to work harder and stay focused.  

 

I explained briefly last time about the "baskets" which could either be a tax-saving one (e.g. IRA, ESA) or a non-tax-saving one.  The proportion in which you put into each of the baskets, as well as into individual investments within the baskets depends on each person or family's circumstances.  The proportion I currently maintain reflects our age (including our children's), our income, our projected income in the future, our health, our expected future expenses, our level of risk tolerance, etc.  To describe briefly, my wife and I are not that young anymore, but our income is expected to grow, we're both healthy, and I am not worried about losing a source of income.  I'm saying this because what I do might not be the right mix for other people.  

 

First of all, I keep about 5% of the total investment in a savings account (Ally Bank) that currently yields 1.8% APY.  And the reason I keep them there instead of investing is because of the possibility of emergencies.  The market constantly goes up and down, and if I need extra cash when the market is down, I don't want to tap into my brokerage accounts, because that could make me lose money.  Having liquid cash in a savings account allows you to have control over the timing of withdrawals from other investment accounts.  

 

I started with Fidelity (IRA & Regular brokerage), and now I use Vanguard.  When I opened Vanguard, I didn't withdraw any money from Fidelity.  I just keep them there and watch it grow.  In Fidelity, I invested in the mutual funds and these are the funds that I have shares in FNCMX / FPADX / FSMEX / FSPSX / FXAIX / FSKAX / FSMDX.  So far this year, APYs on the two investments (IRA & Regular brokerage) are 29.52%* and 32.28%* respectively.  (* the numbers are overblown a little due to the unusual decline in December of 2018 which made the beginning balance really low to start the year)

 

After opening Vanguard accounts, I chose ETFs instead of mutual funds mainly because of the absence of minimum investment requirements.  There are many great articles such as this from Fidelity which compares ETFs and mutual funds.  The funds I own within Vanguard accounts are as follows: VTI, VOO, VNQ, DBC, VOT, IEF, and TLT.  I'm still in the beginning stage of my investment so I don't care too much about the exact allocation percentage of the funds, but once the amount gets to a certain point, I will reallocate using some sort of system I will go by.  The systematic allocation that I'm planning to use in the future is based heavily on Ray Dalio's "All-weather Portfolio" and there's a good article that helps to choose the actual fund.  ("Ray Dalio's All weather portfolio" by Tony Tran)

 

If you're young (20s or early 30s), I recommend putting about 50% of the entire investment amount in total market index funds (e.g. VTI, FSKAX), and the rest in various funds such as bond index, REITs, etc.  And I would pay attention to the fees that are charged.  That's why I have Fidelity's funds within Fidelity accounts, and Vanguard funds within Vanguard accounts to avoid unnecessary fees from picking non-native funds.  

 

The most important thing, above all strategies to maximize returns and minimize risks, is that you need to be disciplined to set aside a set portion of your income toward the investment ("paying yourself first").  Unless you do that, the money you put in once or maybe occasionally won't amount to much.  The consistent, disciplined contributions will allow you to build wealth and bring you a variety of options in your life that you couldn't have imagined if the wealth hadn't been built. 

 

==== revision 11/3/19 ====

I found a great YouTube clip by Our Rich Journey explaining about the Vanguard Index Fund, VTSAX.  The VTI I mentioned above is the ETF equivalent of the VTSAX.  I highly recommend this video if you're not quite sure what the index fund is.

 

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