Investment Lesson #2
Yesterday in Lesson #0, I explained the Why - why I invest in the style of the Krypto Fund. And on Friday in Lesson #1 I listed the seven assets classes I use (really nine as one class has three parts).
Today we get specific. The How and the What. We stick to the K. I. S. S. method. [Taxes will complicate it a bit, but not excessively.]
All the investments are made in The Vanguard Group's index mutual funds and their exchange traded funds (ETFs). Those have the lowest fees. Our objective, remember, is to get average performance with almost no fees. That guarantees us excellent returns long term as we ride (for free!) the great bull elephant of world economic growth.
The minimum brokerage account at Vanguard is $3,000. In it, you can invest in Vanguard ETFs for free - no commissions. The annual fee is a mere $20. Those Vanguard ETFs have the lowest fees of all ETFs, and they are indexes - no human intervention to cause risk & losses. You can also invest in the Vanguard index mutual funds there for no fees; their management fees are the lowest and their service is excellent. You can electronically connect the accounts to your savings or checking account, enabling you to add or withdraw money quickly and easily. It's a fine deal for the common man and woman.
Cash: use Prime Portfolio
Treasury Inflation Protected securities - use the Inflation Protected Securities Fund.
Fixed Income - use the Total Bond Market Index Fund or the Long Term Treasury Fund.
US Stocks - use the Total Stock Market Index Fund - the ETF has the ticker, VTI.
Foreign Stocks - (a) 1/3 goes to the Pacific Stock Index Fund; (b) 1/3 goes to the European Stock Index Fund; (c) 1/3 goes to the Emerging Markets Stock Index Fund. The respective ETF tickers are VPL, VGK and VWO.
Real Estate - use the REIT Index Fund (REIT = Real Estate Investment Trust). The ETF ticker is VNQ.
Gold & Silver - Use the Vanguard Precious Metals Funds and/or the non-Vanguard ETFs, GLD and SLV that hold physical gold & silver at low cost. That Vanguard fund is not an index fund, but it invests in gold & silver mining stocks. I personally use a mixture of all three of these investment vehicles to invest in gold & silver.
That's it. Simple. Seven asset classes, nine if you count the three parts of the Foreign stock group.
What have we accomplished with these seven classes?
Notice that four classes are rather sensitive to inflation: Cash, TIPs, Real estate and gold/silver. In times of inflation, those classes have provided much protection at different times. For example in the 1970s prolonged high inflation environment, cash (i. e. money market funds) provided high yields, real estate boomed as did gold & silver. Now we have TIPs, too. Krypto Fund have much inflation protection.
For income we have the fixed income, the dividends on the US stocks and the REITs, and the income from the TIPs.
For growth, we have the US stocks, foreign stocks and the real estate. The
For Doomsday, we have the gold & silver and the cash.
These are the components of a well-diversified portfolio of investments - the Seven Pillars of investment.
How much do you put into each class? The depends on YOU - your risk characteristics: your How, What and When. How old are you? What is your future earnings outlook? When will you need the money?
Here are the canonical percentages to invest in each class. These are the baseline amounts, which you tweak (that's MIT-techie-speak for 'adjust') based on your own how, what and when:
15% Fixed Income
30% US Stocks
25% Foreign stocks (1/3 in each part)
Make adjustments based on our age and future earnings and need to draw on the funds. But don't adjust them too much, except in extreme circumstances.
Why does cash get 0%? Because we will mostly use cash as a buffer - the place to put money when nothing is cheap and most other classes are expensive. And we use cash as a buffer to put some money that we will need to draw out over time as we need to use the money. Cash also connects your long term investments to your bank checking or savings account; it's the link bewteen your Krypto Fund and your daily operating life. You need that link.
That's it. Simple.
Taxes will complicate the matter, but those for another post.
Word of the Day
"Expatiate" - verb, intransitive [$10]
Expatiate means (usu followed by 'on', 'upon') speak or write at length or in detail.
Sentence: As Bunkerman expatiates on long term investing in this series of posts, you should try to absorb and read re-read each one each day to learn. If you have questions, grasshopper ;) you can post them in the comments (or call me if you know my phone number or email me if you know one of my emails.)