I am often asked “What is your investment philosophy?” or “What's in your portfolio.” The best description of my philosophy is that I invest in a low-cost, fixed-asset-allocation, index-fund portfolio that is rebalanced periodically. There are thousands of different portfolios that meet this definition and it is impossible to say a priori which is the best. But nearly all of them are better than those that don't meet this definition.
Any investment philosophy must address four issues: asset allocation, minimizing costs (including taxes), security selection, and market-timing. This philosophy addresses them as follows:
The 4 Main Issues of Any Investment Philosophy
1) Asset Allocation
Studies have shown that a high percentage of your investment returns are dictated solely by your asset allocation, rather than your ability to choose securities or time the market. Obviously, if you're going to have the same asset allocation (fixed) for decades, you need to put some time and effort in upfront to decide what your asset allocation is going to be.
2) Minimizing Costs
The market is a huge distraction from investing. Every time you buy or sell a security, Wall Street gets a cut and Uncle Sam may get a cut. Every dollar you spend on investing costs or taxes is a dollar subtracted from your portfolio. Minimizing these costs is a key part of investing, especially in times of low returns.
3) Security Selection
Numerous studies show that investment gurus, professional mutual fund managers, and pension fund managers cannot pick stocks that beat the market. If they can't do it with all the time and resources in the world, what makes you think you can? You'd better have an answer to that question (and hope it's right) before you engage in the stock-picking game.
My investment philosophy is to just buy them all. That's right. I own nearly all the stocks in the world. This is surprisingly easy to do. For almost no cost at all, I can buy a single index fund or ETF that basically owns the entire universe of investable stocks. I am comforted by the fact that I own the next Microsoft and the next Apple, even if I don't know what they are yet. Critics respond that I also own all the worst companies in the world, which is true. But it turns out that just owning all of them has been a very successful investment strategy over the last couple hundred years.
It turns out that if you engage in the practice of stock-picking that you are much more likely to choose stocks that underperform the market, especially after your expenses.
4) Market-Timing
I don't know what is going to happen in the future, and I'm okay with that. Once you acknowledge that you don't know either, you will feel liberated from the guilt of not switching from tech stocks to bonds in 2000 to REITs in 2002 and to gold in 2006.
If you haven't yet realized that you can't predict the future, I suggest you buy a $0.50 notebook the next time you're at the supermarket. Every time you have a prediction about the markets, write it down. Be specific. It won't take but a few weeks, months, or years for you to demonstrate to yourself that you have no friggin' clue what is going to happen next. Don't feel bad, just realize that you need an investment plan that doesn't require you to predict the future to be successful.
A fixed asset allocation means more time boogie boarding behind your boat instead of messing with your investments.
That plan is to use a fixed asset allocation. Instead of jumping from hot asset class to hot asset class, buying high and selling low in the process, you simply buy many different asset classes in fixed percentages and then maintain those percentages. This takes the emotion out of investing.
As you rebalance you are forced to sell high and buy low. Some of your asset classes will be doing well at any given time. Of course, some of them won't. In fact, if there is a time when you don't have at least one loser in your portfolio, you need to really think hard about whether you're truly diversified or not.
There are other benefits to using a fixed asset allocation portfolio. Your costs are kept ultra-low. By buying and holding a simple index fund portfolio you virtually eliminate costly taxable distributions, expensive management fees, and expensive advice fees. You eliminate several risks of investing including manager risk, market-timing risk, and security selection risk. Plus, you're forced to sell high and buy low, instead of the opposite, wealth-destroying activity.
Perhaps most importantly, you get your life back. You could spend literally hundreds of hours a year researching, managing, and worrying about a portfolio. Or you could spend a couple of hours once a year to rebalance your portfolio, forget about it, and get on with your life. Lower costs, lower risks, and more time to spend on the things you truly enjoy. What about that don't you like?
Do you agree or disagree with my investment philosophy of using a fixed asset allocation? Comment below!
I think the Market Timing paragraph really rings true. Entirely too many people spend too much time trying to get the perfect timing down. I’m well aware that nobody can successfully time the market…including myself. I’ve never tried and never will.
Nice article illustrating basic but extremely important points to long term investing. Stick to these basic principles and you will do better than 99% of investors (especially physician investors).
Been doing it for 12 years, 6 while on military pay and now on craptastic academic pay. Have significantly more saved/earned than my peers. Some luck, most due to common sense, ignoring ‘experts’ that buy dinner and living below my means. My only wish is that my parents had done the same.
Surprised you call academic pay craptastic after experiencing MILITARY pay! The only nice thing about military pay was that a third of it was tax-free, more if you were in the sandbox.
I don’t know where you heard that 1/3rd of military pay is tax free, but that’s not true.
Where I heard it? You know I was a commissioned officer for 11 years, right? And 1/3 of my pay certainly was tax-free. It’s called “allowances.” Look up your BAH and BAS. Chances are good they make up 1/3 of your pay, although it varies by grade. And I’m ignoring the tax-exempt pay you get when deployed.
BAH for an O-4 in my Zip Code is $1902. Basic Pay for an O-4 with 4 years toward pay is $5734. $5734+1902= 7636. $1902/7636 = 25%.
BAH for an E-4 in my zip code is $1290. Base pay for an E-4 with 2 years is $2184. That’s 37% even without BAS.
So yea, I think “1/3 of pay is tax-free” is a reasonable thing to say.
I will play the political move and half agree with both of you. My reality has been a little different, and I think I am closer to the norm for AD doctors out of residency. While in residency living in a major metropolis as on O-3 (with 1-4 years of AD base pay), I cleared a BAH of 2K per month (great gig). So then it was roughly 30%. However, once you leave residency and make specialty pay and move to the middle of nowhere that all changes drastically. Also if you go to residency in the military system, you do not pin O-4 prior to 6 years (there is no below zone look, it does not exist for O-4 for MC, thus not even sure why you bring up the O-4, 4 year TIS). So post-residency out-side of a sandbox… BAH 1.3K a month +300ish BAS= 1.6K month tax-free (this has been relatively the same over a few duty stations). And i make ~12-13K a month total as an O-4., so a significantly lower portion is “tax-free”. Now I will throw in 19K to TSP to make more tax-free, but the civilian world has similar options to the TSP. Thus if the doc is FM, he might after all the benefits (health care, etc) have done better in the military, but most specialties this is a hard no on having a higher paycheck in the military (even after you evaluate the math on the pension, especially if you invest the difference).
The eventual payback as an AD FP/OccMed (I note grimly as I work as a GS widget in the typical ‘produce as much as private practice, with all the bureaucracy and inertia and poor staffing and lack of control of the military, and patients who want it all for free’ military clinic) is that you can be a doc making as much as you would working a lower paid salaried (eg no inpt) job with a lot more control of day to day schedule, a lot less clinical work as you rise to be mostly admin, a lot more job security, and possibly better hours- main drawback deployment risk and like me still in a govt bureaucracy though with a lot more chance to improve at least your local situation. I know since that’s the life my spouse lived staying in until pensionable, and people like him are my uber bosses. And he got to learn to fly helicopters and jets on that pay, and travel the world ;> , counting towards retirement.
I apologize as we are getting off topic from an awesome post, but I have to point out that milpay is definitely situation specific. (Standard disclaimer – only join military if you want to for non-finance reasons).
As a med student-best pay
As a resident – best pay (if done in military program)
As a staff- pretty close to academic pay in high Cost of Living areas (DC, Germany, and HI for me). Because the resident years move you up on the Time-in-grade scale if done in the military.
Thanks for this great info. I like this strategy of buying all stocks via index funds. my question is I want to do this, but when I try to buy them there are too many funds to choose from. Can you write about which exact fund names or tickers that are applicable to this asset allocation fund which holds all stocks? Thanks.
If you want to buy all the US stocks in an index fund in an IRA, Roth IRA, or taxable account, I would recommend buying VTSMX (Vanguard Total Stock Market Index Fund Investor Shares) or if you have a $10K minimum, VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares). If you’d like to buy all the stocks in the world in one fund, try VTWSX (Vanguard All World Index Fund Investor Shares). All of these are also available as ETFs if you prefer to invest through a brokerage account. Similar funds are available for low expenses at Fidelity and Schwab. If you want to do so inside a 401K or other employer offered retirement account, you’ll have to see what’s available. Most have an S&P 500 index fund with reasonable expenses.
Note – Vanguard changed many minimums, mostly for their broad-based index funds. Many of the Admiral minimums were reduced to $3000.
At the Vanguard site you will find VTSMX is closed to new investors with the following message:
“You can now buy or convert to Admiral Shares of this fund at a $3,000 minimum. Read more about changes to our Admiral Shares program”
VTSAX shows a new investment minimum of $3000.
Yes, that’s all true. Did I use the old VTSMX ticker in the post or something?
WCI: “The best description of my philosophy is that I invest in a low-cost, fixed-asset-allocation, index-fund portfolio that is rebalanced periodically.”
“fixed”-asset-allocation, “fixed” means such as 60% stocks 40% Bonds or whatever you like & the various classes you like & that you never change the mix/ratio for many years?
Thanks
That’s right.
Have you heard of the rule 100 – your Age = percentage of equities
and the new modified 110 -your age rule? Do you have any thoughts on this calculation that supposed to base one’s stock allocation on age to slowly reduce risk over time.
Yes, and I’ve also heard the 120 – your age rule.
None of them are a bad rule of thumb to start with when considering your own stock/bond ratio. But the best rule is how you feel and what you do as you invest during your first bear market.
I’ve been through four bear markets (2000, 2008, 2020, and 2022) and I always try to invest more during these times – never sell. So why not a 100% stock portfolio? Maybe with a 3-4 years living expenses in cash/bonds in case there is a bad bear market just before retirement?
The increasing bond percentage with age (glide slope for a target date fund) is dragging my portfolio down. All the new contributions in the i401k go to bonds and the stock portion stagnates, or even decreases. A target date retirement fund assumes that I will retire and never work again – probably not realistic for physicians, considering we are workaholics and there are so many side gigs, part time coverage, etc.
You can certainly argue that you could tolerate a higher stock/bond percentage than you have. I guess the question now is do you need to? I do like the 1-4 years of cash though.
I can see the appeal of a fixed AA. These days it almost seems contrarian not to have a glidepath in the stock/bond ratio. Although, now with Kitces bond tent glidepath competing against the traditional glidepath, I’m almost tempted to throw my hands up and forget about gliding all together!
I kind of feel the same way, thus why my mix of investments hasn’t really changed much from a four figure portfolio to a seven figure one over the last decade and a half.
What do you think about up and coming services like betterment.com?
Just wrote a post about them:
https://www.whitecoatinvestor.com/what-you-need-to-know-about-roboadvisors/
Good morning WCI et al.,
I’m currently a PA student and have had a recent “Copernican revolution,” if you will, concerning finances. Never had much of a desire to educate myself on the subject (and, like most, was never taught anything about it either) until an Edward Jones agent knocked on our door last week. Since then, my wife and I have had one meeting with the guy (with another scheduled for tomorrow morning) and have transferred my wife’s Roth IRA to EJ (haven’t begun any investing or anything yet; just moved the account).
Since I’m on a semester break right now, I have some spare time and I’m suddenly incredibly motivated to educate myself on money. Have a great used book store down the street so I bought up some Dave Ramsey books and his financial peace university for cheap to get started (his was the only name I recognized, so I went for it; sorry if that drives anyone a little crazy). A few books and a seminar later, I’m scouring the internet for the proverbial “circle of trust” of financial advice, of which this site seems to be included. Found Mike Piper and read his “Investing Made Simple” in a couple hours, which was super helpful along with his blog. I’m now in the middle of several books, including Investing for Dummies and Personal Finances for Dummies (both by Eric Tyson), The Bogleheads Guide to Investing, and The Intelligent Investor, to name a few.
What’s great about these resources is that they’re all basically advocating very similar things, some common sense, some easily learned: SAVE, don’t be stupid with your money, credit cards suck, kill your debt, find the lowest fees possible, you can do this yourself, index mutual funds are superheroes and mount Vanguard is where they live, brokers/agents will cost you a lot of money in the long run, especially if they’re commission-based, etc.
This has all happened within a matter of days, but I feel like I may already be reaching that point where I know enough to be dangerous (in a good way, meaning maybe I can take charge of this myself). I suppose I’m appealing to the council here to ask what my next move should be…? I’m the kind of guy that likes cut and dry, to the point answers, so when I read on Mike Pipers blog (and partially on this one as well) exactly what he had lined up, I’m tempted to run out and do the same (I mean, I’m the newbie here right? What do I know…). Here’s what he replied when someone asked him what his portfolio looked like:
– 40% in Vanguard Total Stock Market
– 40% in Vanguard Total International
– 10% in Vanguard REIT
– 10% in Vanguard Treasuries
I think he likes Vanguard (and I suppose he should, considering they have an “investor-owned” setup), and it seems most people in these parts do too. So any advice on what my next move should be? Goodbye Mr. Edward Jones? Should I saddle up and move to Vanguard? I’m not even sure how to do that or what that would entail; I’m still in my consume-as-much-reading-as-possible-before-next-semester phase…
Thanks for the blog and book recommendations!
Congratulations! I began my journey 12 years ago in the used book store next to my house.
Last I heard, Mike Piper was 100% invested in Vanguard Life Strategy Moderate Growth.
Yes, you need to say goodbye to Edward Jones. It’s easy to leave. You don’t even have to talk to Edward Jones. Just talk to Vanguard and fill out a couple pages of paperwork and they’ll do all the work for you.
You may like this post: https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
Thanks so much for your reply! That post you linked to is pretty epic and very helpful; I spent a good amount of time looking through all the portfolios and comments. Lots to learn, but the bottom line seems to be that you pick something that’s solid, reliable, and understandable for you and stick with it over the long haul. I’ve recently moved out of EJ and into Vanguard with our Roth IRAs, and it feels pretty good to be in charge of things myself.
A couple side questions though:
– I’ve read that money market accounts are a good idea for stashing an emergency fund, and I’m sure Vanguard has these to offer. Do you concur with this general idea?
– When it comes to our Roth IRA’s and 403b’s, what’s a good approach for setting up those accounts? In other words, do I want my Roth IRA’s to be mirror images of one another, having identical allocations and diversifications, or would I want them to be different? (same question for the 403b’s)
I used to use a MMF, but don’t currently for reasons discussed here: https://www.whitecoatinvestor.com/why-would-anyone-invest-in-a-money-market-fund/
The best approach is to treat all accounts as one big account. So take what’s good in your 403(b), and build around it with your Roth IRA to arrive at your overall desired asset allocation. So all my 401(k)s and Roth IRAs have different asset allocations. There is enough overlap to rebalance, but I couldn’t have the same investments in all of them even if I wanted to.
Thanks for the pointers! I was actually able to find a pretty sweet Vanguard Institutional Index Fund in our 403b and I built a simple portfolio around that with a couple more Vanguard funds. I wasn’t actively trying to, but it turned out looking like a classic “boglehead” portfolio, which I’m definitely ok with. Thanks again for putting this site together. I’ll do my best to keep up with my financial education throughout PA school with good books and blogs like yours…
Certainly agree with the premise of index funds and how that saves you time and effort while benefitting from the market as a whole. But also comical that real estate is also recommended which entails much time and effort along with risk in many cases. I think it makes sense for the majority of assets to be index funds but also take a small portion on a few potential fliers or private offerings just like putting some money in real estate.
Given the relative efficiencies of the two markets, where do you suppose active management is likely to make the bigger difference?
Besides, you can invest in real estate index funds.
on the equity side small cap and reits plus total stock or total world
I would be interested in comments on momentum strategies, instead of a fixed asset allocation portfolio. There is much academic literature and practical strategies to support this approach; i.e., Larry Swedroe, Meb Faber, Gary Antonacci, Brian Livingston, etc. One of the main benefits is to limit losses in a down market, with some underperformance upside in a bull market, but to outperform on a risk adjusted basis over a complete market cycle. I have switched some of my fixed asset allocation investments to these various strategies. Time and costs (in retirement accounts) are minimal.
Try these posts:
https://www.whitecoatinvestor.com/dual-momentum-investing-a-review/
https://www.whitecoatinvestor.com/factor-investing-review-of-your-complete-guide-to-factor-based-investing/
Good luck. Once you get past a very basic moving average I think there’s a lot of handwaving going on.
Brian Livingston (Muscular Portfolios) ran a series of articles comparing a number of fixed “Lazy Portfolios”, and then adding a momentum factor. The results show improvement in each of these portfolios. The introductory article is here: https://stockcharts.com/articles/muscular-investing/2019/06/lazy-portfolio-more-muscular.html. Very interesting.
The question is whether it will work going forward in someone paying real costs and real taxes. How much of your portfolio are you betting on it?