I’ve been spending some time looking at retirement sites written by people who dream about retiring. There are many ways to get there some more effective than others. Investment vehicles and techniques have changed over time. The Motley Fools are a media organization started by a couple brothers and not that much different from financial blogs today
Back in the 90’s the funds they touted were not index funds. Portfolios were sets of managed funds often that addressed specific sectors like tech based or hot fund managers who were thought to be the golden children of investing. By the time you paid the fees and the loads and transaction costs it was damn hard to make any money. But you could make money publishing “articles” touting fund runners magic powers. It was a common theme in those days and was often driven by advertising. The Fools are all about the media and media sales. They are also into systems like versions of Dogs of the Dow all of this is about “beating the market”.
As a professional stock picker you can beat the market but you have to be a lot closer to the information than some source like the Fools can provide. If you’re not a professional speculator, it’s very unlikely you can beat the market because your competition is deadly. smart and exquisitely informed. The point being buying Fools books and systems is unlikely to make you rich, it just makes them rich.
The boggleehad approach has some advantages. It forces you to right size your life in a way that discourages debt and living in or close to the edge of debt. As a high wage earner living toward the mean gives you the ability to reliably invest excess money every month. The investment vehicle of the bogglehead approach are index funds. The system is designed to pay off over a long time as long as the market over decades continues to go up. Companies in America are well managed and we have good rule of law, a stable currency and some control over inflation so the likelihood of going up more than going down is good, so the likelihood of index funds paying off is good. Your investing return is not dependent on you, it is dependent on the people in the C suites of the corporations making the correct decisions. You are basically along for the ride.
Your return will be AT BEST the market return and If you don’t do it right AT WORST you won’t do very well or may loose money. So what do you need to do? First create a plan based on index funds, the simplest being a US total bond fund and a US total stock fund. The 2 fund approach puts your portfolio on the line of the most efficient portfolios, returning the most return for the least risk. Adding more funds unless done correctly tends to have lower returns for greater risk both undesirable.
The next thing to do is put all the money you want to invest in those funds and add to those every month or even week as you acquire more cash to invest. Do not mess around trying to market time. You don’t make a thing until the money is invested so sneaking up on it merely means you’re making less because you’re not invested. You need to choose an asset allocation, how much of every dollar to put in the bond fund and how much to put in stocks. The more stocks you own the more risk you own, and the more risk you own the worse you do in a downturn. I’ve read papers that say 70/30 or 75/25 over time are most efficient. Higher than that you own too much risk, lower you give up some return. During accumulation I ran my portfolio at 75/25. In retirement I own less risk so I’m about 57/43 including cash.
The next thing is re-balancing. Stocks tend to outperform bonds so the ratio will become unbalanced so once in a while if stocks get heavy sell some and buy some bonds with the proceeds on the way up. It’s a means of selling high and stashing some of that value in bonds. This manages your risk because 75/25 has lower risk than say 80/20 or 85/15. When the crash comes you re-balance the other way you pull some money out of bonds and buy stocks cheap so you are constantly cycling sell high and buy low, mechanically controlled by the asset allocation, which takes human guess work out of the equation. The human brain is not wired to make smart decisions in a crisis unless trained.
The last thing is NEVER SELL. When the crash comes NEVER SELL, just re-balance. When you buy stocks and bonds you are buying property. The more property you own the richer you are, so the whole point is to keep buying property. The value of your property is variable and set by a market. If the market crashes you own the same amount of property it’s just temporarily worth less. Relative to other property owners if you have a lot of property whether the market is low or high the one who owns the most property is always the wealthiest. If you sell low you are giving your property away, stupid move. If the market is down your purchasing power will go farther so buy more property for the same dollars and get even richer. Buy low Sell High is the mantra.
Over decades the price of your property will appreciate and the property you bought first will appreciate the most so buy soon and often. If you are 30 and you die at 90 your property has 60 years to grow, and with a bogglehead approach it’s those 60 years that pay the rent since the best you can expect is market return. With this approach YOU CAN”T BEAT THE MARKET so don’t even try. You’ll only goof it up, with hair brained schemes so sit back tend to the knitting of property purchase and enjoy the ride. I’m a fan of investing in 3 types of accounts Brokerage. Roth and IRA like accounts all the numbered accounts) and maybe HSA if its available but don’t overdo the HSA. (I think a big HSA is a likely target for means testing)
The reason to own 3 accounts is when you go to spend down in retirement the government has some tax surprises in store for you and owning 3 account types improves your ability to tax plan in retirement because the 3 types are treated differently when it comes to taxes. I’m not a fan of retirement formulas like 4×25 or 3 x 33. There is no reason not to sit down and plan a yearly retirement budget with some granularity. You are surrounded by old people, patients and relatives so use their experiences to inform you about likelihoods. You need to plan for expenses but also disaster and end of life and if you’re married 2 disasters and 2 ends of life. Disaster would include things like a CA diagnosis Alzheimer 24/7 memory care for 15 years, stroke, high inflation, bad sequence of return on investments and the increased tax burden of the surviving spouse when one spouse dies. None of that is considered by the typical bogglehead, but rest assure that train is coming down your track and when you’re 80 it’s too late to do anything about it. It’s only 50 lines on a spreadsheet to plan 50 years. I have my retirement planned and 25 years will cost 2.7M inflation adjusted in basic living expense. I have quite a bit more than that available for living expense and a spare million tucked away in a Roth which doesn’t get touched as a disaster fund that grows unmolested. Million bucks growing at 7% buys a lot of inflation protection, bad SOR or end of life care (given the inflation rate of healthcare and the likelihood of the government turning medicine into the one size fits all of the VA). I don’t need any side gigs or excessive leverage because my plan covers all the bases. Since I have a plan beyond something like 4 x 25 I have something specific to track and can readily make adjustments based on the economy.
My point is the part that is often missed is the follow through, the spend down part. It just gets assigned a number pretty much out of thin air. You can fart around trying to beat the market, I bought BTC at $275, it paid off pretty good, it’s property so I never sold it, but that’s pure speculation not investing. It’s not the kind of thing you need to retire on. The Motley Fools are in fact jokers when it comes to building a sustainable money machine.