My Financial Plan (part 2) – A look at Total Return Investing

Following on from my last post about new Financial Plan / Charter, here’s the final installment describing some changes in my Retirement Portfolio which follows a “Bogleheads” strategy, a strategy named after the father of index funds, Jack Bogle.

I maintain two separate investment portfolios; my Income Fund (and I really need to find it a better name than Income Fund) is focused on dividend stocks and funds because its purpose is to generate current income to reach Financial Independence (FI). Which means that I won’t need to work again ever. Ideally I will reach FI before I retire but I have some work ahead of me in the next 20 years based on my last estimate.

My other portfolio, which I generally refer to as my Retirement Portfolio, uses low-cost Index funds held in tax-free (Roth IRA) and tax-deferred (Traditional IRA and 401k accounts). I had my Retirement portfolio long before I started my Income Fund although I didn’t really think about it until 2009 or so. Now I contribute the minimum amount of money to my 401k to get a matching contribution from my employer and that’s pretty much it. It’s my safety net in retirement and will also provide some space to lower taxes in my retirement.

The Boglehead Approach

The main premise behind the Boglehead approach is that no one can consistently beat the market. It’s better to own the market in the form of a low-cost index fund and just hold on for the ride. This strategy can never beat the market by definition, but neither can it lose. In an analogy to a game of tennis, you won’t win the game by playing a great shot but you will eventually win because you’ll never play a bad shot.

I once compared the total return of my Income Fund to the S&P Index using the exact purchase amounts and dates for all my stock purchases and dividend reinvestments. You can probably guess which fund generated $600 more total return…

Now since the point of my Income Fund is to generate income, I considered that I achieved my particular goal because my Income Fund generated more income than the index ($700 vs $565). But money is money, and in a retirement account where I have no need to access income for the next 25 years or so, a passive index-based total return approach works best for me.

Retirement account Investment Philosophy

So here’s the investment philosophy for my Retirement Account with some additional notes on the sections.

I will follow the Bogleheads investment philosophy for my Retirement investments which is summarized in the following points

  1. Develop a workable plan – live below your means
    Satisfied via my personal finance charter. I think everyone can agree with this point. It’s important to know your living expenses and be able to estimate retirement costs.
  1. Invest early and often
    I will make automatic 401k contributions to achieve maximum employee matching. I was late to the retirement account party as I didn’t start contributions until a few years after I arrived in the US. But I’m now making regular payments and maximizing my contributions to obtain employer matches.
  1. Determine a suitable amount of risk
    I will target a 70% stocks / 30% bonds asset allocation. I’m not following the “Your Age In Bonds” heuristic and I’m more aggressive in my allocation on account of my Income Fund. Risk in this context is referring the volatility in your returns. A risker portfolio has a chance of (say) a 50% change in value (either up or down), whereas a less riskier portfolio may be limited to 10% up or down. There are many great resources online about risk; a couple I came across are from Vanguard and of course the Bogleheads.
  1. Diversify
    I will invest in US Stocks, US Bonds and International Stocks, with a small tilt towards the REIT sector. Generally speaking a small < 10% allocation of your portfolio towards a specific sector or just as “play money” is tolerated. In my case I decided to put a 5% allocation towards REIT stocks and I reduced it from the 10% I was holding previous. The 5% of REIT went into US Stocks so I’m still at the same overall 70%/30% allocation; I’m just a little bit closer to the market now.
  1. Never try to time the market
    401k contributions are automatic based on paycheck. Fund distributions are set to re-invest automatically. Not much to say here really. One advantage of index investing is that you don’t need to worry about P/E, book values, limit orders. It’s not called passive investing for nothing.
  1. Use index funds where possibleI’m lucky in that my 401k has a good selection of index funds which I’m using.
  1. Keep costs low
    Low-cost index funds will be used with expense ratios of < 0.4%. All the funds I hold are low cost and less than 0.3%.
  1. Minimize taxes
    My retirement portfolio will use Tax-Free (Roth IRA) and Tax-Deferred (401k, Traditional IRA) following these general guidelines. When allocating investments between a Roth and IRA account, the most important criteria for asset placement are the funds which are available in the accounts and their fees. In my case it’s the same selection of low cost funds so it’s a wash. I decided on keeping VTSAX in my Roth as it should grow the most in the next 25 years and I have the other categories in my Traditional IRA for now.
  1. Invest with simplicity
    The overall asset allocation is a Three-Fund Portfolio with a tilt towards the REIT sector.

    • US Stocks             50%
    • International Stocks  15%
    • US Bonds              30%
    • US REIT               5%

    Last year I was holding two international funds: VTMGX (Developed Markets) and VEMAX (Emerging Markets) instead of VTIAX (Total international). This year I’m moving to the single VTIAX fund since it includes Canada which is missing from the VTMGX+VEMAX. This also simplifies the portfolio as I don’t have to worry about balancing the two funds.

  1. Stay the course
    Changes to my retirement portfolio and strategy require a written amendment and justification. I’m trying to make it someone painful to make more changes although I’ll probably spare you, dear reader, the pain of reading about it!

Funds and accounts

The general view is to consider all your retirement accounts as one big account, and then make an allocation of your portfolio in each account in a way that reduces fees and taxes. The usual account terms are Taxable, Tax-Free and Tax-Deferred; however I’m not holding any portion of my Retirement account in Taxable accounts.

A common phrase when discussing allocation is “space” which really means how much space you have to hold investments in your tax-advantaged accounts. IRA and 401k accounts have yearly limits; in 2016 the most you can put in a Roth is $5,500. So if you started your retirement investing now by opening a Roth IRA, you’d have $5,500 of “space” in the first year and perhaps $11,000 in the second year.

Note: There are various IRA restrictions and exclusions about the contributions so please research what applies to your personal situation.

Anyway, the good news is that the earlier you start the more space you’ll have; the bad news is that if you skip a year and don’t contribute to an IRA, you’ll lose that space for good. There are some catch-up limit increases as retirement nears but those are too-little and too-late really.

Because of where my income falls, I’m only able to make post-tax contributions to a Traditional IRA account and I don’t see a whole lot of point to that. So to avoid running out of space in my IRA accounts as my portfolio grows, I’ve decided to replicate my asset allocation between my 401k and my IRA accounts. I’m still evaluating this placement but for now my accounts are targeted per the table below.

Name Account Allocation ER (%) Type
Vanguard Total Stock Market Index (VTSAX) Roth IRAT-IRA 50 0.05 US Stocks
Vanguard Total International Index (VTIAX) T-IRA 15 0.18 Int. Stocks
Vanguard Total Bond Market Index (VBTLX) T-IRA 30 0.07 US Bonds
Vanguard REIT Index (VGSLX) T-IRA 5 0.12 REIT
SSGA Large Cap S&P 500 Index 401k 30 0.01 US Stocks
SSGA Small/Mid Cap Index 401k 20 0.04 US Stocks
SSGA International Index 401k 10 0.081 Int. Stocks
SSGA Emerging Markets 401k 5 0.127 Int. Stocks
SSGA REIT Index 401k 5 0.08 REOT
Pimco Core Plus Bond 401k 30 0.37 US Bonds

You’ll notice that the percentages add up to 200%; that’s just because I’m showing the allocation for both the 401k and the IRA accounts; in reality when I calculate my actual allocation I sum the categories across all accounts.

What the table above shows is that I consider the Large Cap and Small/Mid Cap funds in my 401k to be equivalent to Total Stock Market in my IRA, and likewise with the International and Emerging Market funds.


I overlooked stating a policy on rebalancing in my Charter so I’ll have to go back and add that. Rebalancing is where you exchange high-performing assets with lower-performing ones to get back to your planned allocation. I won’t be rebalancing more frequently than once a year so I have some time to work out the exact tolerances that I want to follow there.


So that’s pretty much it for a whirlwind tour of passive investing and my Retirement portfolio direction going forward. Both my investment portfolios are similar sizes so it’s interesting watching them both grow over time.


Quote of the Day

Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.

2 thoughts on “My Financial Plan (part 2) – A look at Total Return Investing”

  1. Ciao DL,
    I used to follow the Bogleheads forums and it did indeed have a lot of interesting resources for investing and strategies on passive funds. I was drawn into the forums by my “lazy portfolio” researches, unfortunately here in Italy we do not have access to most of the funds that are used (Vanguard being the first of them), so in the end I decided to let it go and settle for a more active position. I like the two portfolios approach, I am curious to see how the two strategies work out for you!


    1. Hi Stal,

      I’m curious too so we’ll see what happens! You’re correct that the strategy doesn’t work as well if you can’t get access to low cost funds. I think my two portfolios represent my personality – I’m naturally lazy but I like the idea of holding individual stocks too!

      Wishing you a successful 2016!

      PS. I updated the UK Champions list for January and the download links should be live now if you’re interested; there were a lot of changes this month so the blog post will follow on later this week.

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