If you had a chance to read my blog from last week, you were enlightened to my worst investment ever. Not exactly a story I like to talk about and, for some reason, I thought I’d just tell the whole world about it—like I mentioned, probably not the best way to attract potential clients as a financial advisor.
Today, however, we’re going to take a look at what I’ve learned over the years and find out exactly how I invest my money for the various goals my wife and I share. While I wish I could tell you I have some kind of crazy system that involves algorithms and lots of other cool sounding stuff, sadly, it’s really not that exciting.
However, I do get this question a lot (even from some of my own clients), so I thought I would take you behind the scenes so you can see exactly how this financial planner invests his family’s money. Granted, I am just one financial planner in Kansas City, Missouri so this strategy should definitely not be interpreted as a one-size-fits-all blueprint for all the wonderful men and women in my profession.
It’s just my strategy, and it’s truly no different from how I invest and recommend for my clients, which is why I think it’s kind of funny when my clients ask how I invest my money as if I maybe have some kind of top secret strategy that I only use for myself. Okay, enough of my mindless thoughts. Let’s start at the beginning.
Before I invest anything, I first have to know what I’m investing for. So, I break it down into various goals or buckets. A few of our investing buckets include emergency savings, vacation savings, new car accounts, retirement, etc.
We have quite a few buckets, which makes it easier to know exactly how much is saved for each goal as opposed to just having one big bucket. You can do it either way, but my recommendation is to use the multi-bucket strategy. It will make your life much easier, even though you’ll have multiple accounts to look over.
Now that we have our buckets/goals determined—and you can always add more and take some off depending on what happens—it’s now a matter of determining when we want to accomplish these goals. The reason we need a time frame is that you should always associate goals with an end date in mind and the timeframe will dictate the type of investments for the associated goal.
Here is how I invest my money according to different time frames.
Within 3-5 years – Online Savings Account (I recommend Goldman Sachs with a current yield of 1.20%).
Within 5-10 years – Moderate balance of investments. This would include something like a balance of 50% equities and 50% bonds. I’ll go into more detail later.
Anything 10+ years – With any goals that are in this timeframe, it’s really up to your comfort level how you want to invest this money. For me, I’m comfortable taking risks, so I typically will have an allocation of 80-100% equities and 0-20% in bonds depending on my comfort level for the goal.
Now that you know some of my buckets and what the allocation is for the various time frames, it’s now a matter of taking a look at what investments I fill my buckets with.
Before I get into the ETF’s and mutual funds I use, just know these are by no means the end all be all. There are plenty of good funds out there from Vanguard, Fidelity, Schwab, and many other companies you can use to fill your buckets.
What I believe to be most important is to know the fees you’re paying (typically, the lower the better), the right mix of funds for your buckets (the fancy word financial advisors use for this is asset allocation) and the tax implications for holding various investments in a taxable vs. tax-deferred account.
Because you might not understand that last part, let me explain. You have taxable accounts—anything that’s not tax-deferred, duh—and you have tax-deferred accounts, which include 401k’s, IRA’s, Roth IRA’s, 403’b, etc. Basically, any account associated with a retirement account is typically tax-deferred.
So, investments that generate income, dividends, capital gains, or interest payments should be held in a tax-deferred account. Examples of these are bond funds, balanced funds, large-cap value funds, and just about any investment that pays an annual dividend. You want to hold these types of investments in tax-deferred accounts because you’ll be deferring the taxes on this income. I won’t go into the details, but just trust me on this one.
Okay, let’s get back on course. I was getting into the various investments I put in my buckets. Because I’m a big believer in DFA funds (SA funds through Loring Ward), this is by far the majority of what fills my buckets. DFA funds have an incredible track record, and I’ve completely bought into their philosophy.
Other funds I like and own for various goals are GLRBX, GVAL, DLTNX, DGS, AKREX, RWL, DWM, MPGFX, CCPAX, and MAPOX. Yes, I literally just went through all of my buckets to list which funds are held in each. Again though, the majority is held in DFA and SA funds.
While I’m sure this isn’t super exciting to read right now (for that, I apologize), understand that the mix of your investments within your buckets is much more important than the actual investments themselves. I can’t drive this home hard enough. Focus on the mix over the actual funds!
Okay, enough of boring you with all those fun symbols I listed above. Obviously, you are free to cherry pick as you want, but again, the mix of the investments is the important part and that all depends on the timeframe of the goal.
So, the next thing I do with my buckets on an annual basis is rebalance them. A lot of my accounts—and probably yours, too—have automatic rebalance features, but if not, you’ll have to do it yourself.
All rebalancing means is making sure you always have the right mix because, over time, things will become unbalanced. Plus, it basically forces you to buy low and sell high, which, of course, is one of the fundamentals of investing.
Say you start with a balance of 50% stocks and 50% bonds. Over the next 12 months, those balances will change because one will do better than the other—and, yes, it does get a little more complicated when you have 5-10 funds in a bucket. Fast forward 12 months, and at the end of the year, your mix is now 60% stocks and 40% bonds because the stocks outperformed.
So, what we would do is sell 10% of the stocks (sell high) and purchase 10% more bonds (buy low) to get us back to our 50% stocks and 50% bonds. I know rebalancing doesn’t sound that exciting, however, it has been proven that it can improve your rate of return when compared to not rebalancing and, not to mention, ensure you’re always taking the same amount of risk.
What I just went over prior is how I invest over 90% of my investments. However, I always like to have a little fun money for investing individual stocks—5-10% of your total investments should be the max that you’re investing in individual stocks (again, this is my opinion).
I typically hold these stocks anywhere from 1-5 years depending on what’s happening with them. Current stocks I hold right now include BABA, PM, MO (my wife used to work for Altria), and CMG (definitely not killing it).
I’ve held plenty of individual stocks over the years, and I’m pretty patient with what I invest in. I’m typically looking for companies in which they or their industry, in general, is getting beat up, and I can get them for what I feel is a good value.
If you don’t have the time nor the discipline to have some type of philosophy when it comes to investing in individual stocks (and, no, a recommendation from a talking head doesn’t count) then I suggest not taking the plunge. The research of investing in a single stock falls on you, and if you don’t have the time, then don’t bother.
So, there you have it. You now basically know my thought process when it comes to how I invest my own money personally as well as the actual funds I utilize. While I have no idea if this did much for you, at least you now know how one financial advisor invests his own money, for better or for worse.
NextGen Wealth, LLC is a registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor, tax professional, or attorney before implementing any strategy or recommendation discussed herein.
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