Simple Debt-Free Finance

A Simple Approach to Getting Out of Debt & Into Wealth

Boring is Beautiful!

Posted on | May 29, 2008 |

There was a time when I led a matrix-like life: part super hero, part secret super spy… back when geek was chic. I was employee #10 in an Internet startup.  Women wanted me, and men wanted to be me. Well, that was the 90’s.

Then the bubble burst and while I didn’t lose my job (I was one of the few with formal training and a degree in the software field - a rarity of the time), I did lose my superstar status.

What does any of this have to do with personal finance, and debt free living?

Just like working in a hot job field at the right time, investing in the hot market at the right time is sexy and thrilling. People flock to be near you at neighborhood picnics just to catch any drops of wisdom that may fall from your mouth as you regale the listeners with tales of the latest double digit gains in your portfolio. But just like an over heated job market, the temperature of over heated market can drop like a stone overnight and if you’re left holding a portfolio full of yesterday’s winners, you’ll quickly find yourself out in the cold. Just ask the millions who were left holding the bag when the tech bubble burst, or more recently the housing market.

In short, there is unnecessary risk in being exciting.

How Not To Be Left Holding The Bag.

Be Boring.

That’s right. Boring, practical and simple approaches to finances win out in the end. And that’s what it’s all about - reaching your financial goals. It’s not about wowing the Joneses at the neighborhood picnic.

Here’s a simplified portfolio as suggested in this month’s Money Magazine article, The Only 7 Investments You Need.

The Simple 7 Portfolio.

1. A blue-chip U.S.-stock fund.
Money Magazine recommends Fidelity Spartan 500 Index (FSMKX), iShares S&P 500 Index (IVV) or Selected American Shares (SLASX)

2. A blue-chip foreign-stock fund.
Money Magazine recommends Vanguard Total International Stock Index (VGTSX),  Vanguard FTSE All World Ex-U.S. ETF (VEU) or  Dodge & Cox Intl. Stock (DODFX) .

3. A small-company fund.
Money Magazine recommends T. Rowe Price New Horizons (PRNHX),Vanguard Small-Cap Index (NAESX) or Vanguard Small-Cap ETF (VB).

4. A value fund.
Money Magazine recommends Vanguard Value Index (VIVAX), iShares S&P 500 Value Index (IVE) or T. Rowe Price Equity Income (PRFDX)

5. A high-quality bond fund.
Money Magazine recommends Vanguard Total Bond Market Index (VBMFX), Vanguard Total Bond Market ETF (BND) or Harbor Bond (HABDX)

6. An inflation-protected bond fund.
Money Magazine recommends Vanguard Inflation-Protected Securities Fund (VIPSX),  iShares Lehman TIPS Bond (TIP) or T. Rowe Price Infl.-Protected Bond (PRIPX) .

7. A money-market fund.
Money Magazine recommends Fidelity Cash Reserves (FDRXX),Schwab Value Advantage Money (SWVXX) or Vanguard Prime Money Market (VMMXX)

Each recommendation lists 2 no-load mutual funds, and 1 ETF. Why two mutual funds? Probably because the first has performance that matches the underlying index more closely and has less of an expense ratio. The second fund deviates from the index (slightly) and is thus more risky (so the thinking goes) and carries a higher expense ratio, though most are under 1%.

There has been some criticism of the funds recommended above, specifically that they require large amounts of cash to open the account or to buy into the fund (i.e. Large Minimum Investment required). This is true if you’re investing a lump sum, but most (if not all) of the brokerage firms that manage these funds waive that requirement if you sign up for automatic, investing. This is also why they include an ETF with each of their recommendations, because if you have a lump sum investment to make, ETFs are more cost effective than mutual funds.

Another point of criticism is why 7? If Americans can’t manage to spend less than they earn and sign up for a 401k to begin with, why would you think they’d be capable of following 7 different investment types?

I think this is perhaps a bit harsh on most Americans, especially the ones interested in investing to begin with. But I can see the point, and to be honest I’m not sure why Money included a value fund, but not a growth fund? Especially when both funds invest in large cap U.S. equities, which is already covered under “1. A blue-chip U.S.-stock fund”.

So, for those critics, or the ultra simple investor, I give you:

The Super-Simple, One Minute Portfolio.

1. The Whole Enchilada.
This is where you invest in the entire U.S. Stock market in one shot. Small Cap to Large Cap, Growth to Value, Sector to sector - You own it all. Recommendations: Vanguard Total Stock Market (VTSMX), or Vanguard Total Stock Market ETF (VTI).

2.  The Whole International Enchilada.
Just like #1, but everything outside the U.S. - emerging and old Europe. Recommendations: Vanguard Total International Stock Market (VGTSX) or Vanguard FTSE All-World ex-US ETF (VEU)

3. The Bond Enchilada.
For proper diversification, bonds are a given. Recommendations: Vanguard Total Bond Market (VBMFX), iShares Lehman Aggregate Bond (AGG) . There is the Vanguard Total Bond Market ETF (BND).

Why so much Vanguard? Well, their expenses are the lowest around and they hold true to index tracking, so it’s simple and straightforward with no mystic index formula voodoo. Besides, they often have one of the highest yielding Money Market funds available as well, and that should be the foundation upon which your investment portfolio is built.


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Comments

3 Responses to “Boring is Beautiful!”

  1. A Simple Secret to Successful Investing. | Simple Debt-Free Finance
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    [...] those, you should stick to tried and true sector/capitalization diversification, or maybe go with a super-simple portfolio. Now, without further ado, on with the [...]

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    Social Bookmarks Demon is enormously powerful, 100% automatic social bookmarking software which will build UNLIMITED number of top quality backlinks, send first-class traffic in minutes, increase your affiliate sales, AdSense income and site revenue as much as never. Social Bookmarks Demon combines features of ALL social bookmarking tools available in the market for price of single tool.

  3. Does Your Paycheck Have an Expiration Date?
    June 2nd, 2009 @ 8:28 am

    [...] If the thought of picking a few investments out of the entire universe of the stock market (as opposed to a few offered in a 401(k) plan) seems daunting to you, keep it simple with a super boring, but super simple investment portfolio. [...]

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