Atypical Life 2016 Investments

2016 was a good year for the investments of Atypical Life. We were able to set ourselves up for future success through investing all of our savings throughout the year. 2016 was a breakout year for us because our priorities changed from savings for debt payoff to savings for investing. 2016 also saw huge growth in the stock market worldwide allowing us to get 20% growth in one year. We lucked out that the year with 20% growth finally had money in the market.

With all of the advice out there for where to put your money and when to put it where, it is hard to filter through it and decide on a plan of action for yourself. After deliberating on it, I was able to come up with a plan for the year, even though it changed throughout the year.

Initial Plan

  1. Max out Roth 401k
  2. Max out Roth IRAs via backdoor contributions
  3. Invest all other savings in brokerage account

With a clear plan in mind, we were able to save and invest for the year with a purpose. Each month, I was going to get my paycheck and put it towards these different areas.

Roth 401k

The plan for the Roth 401k was to spread the contributions out throughout the year and reach the 2016 max contribution in December of $18,000. The Roth 401k seemed like the best choice at the time because we could save after-tax money and never have to pay tax on it again in retirement. I had lots of feedback from financial advisors that the Roth IRA and 401k is the best way to go because of the tax advantages in retirement. It surely makes it easier when withdrawing money because you know exactly how much you have, but we shall see in a future post which way is truly better.

Needless to say, I switched from the Roth to Traditional (pre-tax) 401k for the tax savings now. By the end of the year, I had saved the maximum $18,000 between the 2 and had only lost out on the tax savings of $2,380 contributed to the Roth 401k which amounted to $595.

Company 401k Match

My company has recently become generous to the 401k match and gives us 9%, so long as we contribute 6%. This is a very high percentage of salary when compared with other company match programs, and is a big boost to the 4% we used to receive. 2016 was the first year for our new matching contributions and it was well received by all employees. It is free money, and we made the most of it amassing $6,825 in matching contributions throughout the year. Anytime we can get free money, we are all over it.

Roth IRAs

The trendy suggestion of the day is the Roth IRAs, so that is what we have been focusing on getting our money into. In the end, the difference may not be that big between the 2, but Roth IRAs are much easier while in retirement.

Moving abroad and accepting the expat package, our W-2 salary sky rocketed because of all the costs the company incurs that make it there. Because our salary might be above the limit for contributions to the Roth IRA ($181,000 for married filing jointly), we decided to exercise the backdoor Roth.

The backdoor Roth consisted of contributions after-tax to our Traditional IRAs and then after a few days/weeks, rolling the money over to our Roth IRAs. This was very easy inside of Vanguard because it was just treated as exchanging money between mutual funds. In this way, we were able to protect our Roth contributions from the possibility of our “salary” being too high. The only downside of this was losing out on pre-tax contributions to the Traditional IRA, but our salary was definitely too high to qualify.

Brokerage

We managed to get our brokerage account funded starting in December 2015, but we started to amass funds here during 2016 with a final account value at EOY 2016 of $98,000. We owned various mutual funds from Vanguard throughout the year, but eventually landed on the Vanguard Total US Stock Market Index Fund Admiral Shares (VTSAX) by the end. Because of our trading and strategy changes throughout the year, we incurred taxable short-term capital gains. This was an unfortunate part of the learning curve of investing for the Atypical Life family, but we will likely never incur these short-term gains again.

Changes to the Plan

After the year got rolling and I started doing more research, I came upon different strategies to save more money. When you are pursuing financial freedom, the recommendations for the masses may not apply.

During my research, I came across explanations of why to contribute to the after-tax 401k. The after-tax 401k is a Roth IRA in disguise. Because we can contribute a huge amount of money here ($53,000 total including pre-tax, Roth, and after-tax), it is a great way to get money to the Roth IRA. We want to get the most amount of money after retirement into Roth IRA for ease of withdrawal and tax advantages. After-tax 401k contributions can be withdrawn and rolled over separately from pre-tax 401k contributions. This allows you to rollover the after-tax contributions to a Roth IRA and only pay tax on the earnings while it was in the 401k.

When we learned the advantages here, it was a no-brainer to start contributing to the after-tax 401k. By EOY 2016 we had contributed $3,800 to the after-tax 401k with plan contributions much higher for 2017. These contributions lowered the amount in our brokerage account, but is money not needed until “retirement” so it can be placed in tax advantaged locations for the time being.

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In Conclusion

2016 saw our net worth and investment accounts sky rocket. We managed 20% gains during the year, but then again everybody did. Because we finally had a good amount of money in the market (>$100,000) gains moved the value up a lot.

I was happy to have a plan for the beginning of the year and know what my path forward was. However, refining and adjusting the plan as the year goes by can lead to future gains. Our adjustments to the plan are positioning us to reach financial and personal freedom sooner.

All of our talk and worry about finances mean nothing if you don’t have the chance to enjoy your money. So get out there, do your investing, and enjoy life.

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The Best Investment Allocation

The bestĀ investment allocation is the one that gives you the most amount of freedom to live the life of your dreams. Throughout 2016 I worked through my investment portfolio spread out across Roth IRAs, 401ks, and Brokerage accounts to come to my personal consensus for the optimal investment portfolio for the needs of pursuing the atypical lifestyle of early retirement.

Initial Portfolio

When I first started investing, I had no idea what I was doing. That pretty much sounds like every other investor that starts out when they first get a paycheck. We just put money in and everybody says it will grow, grow, grow! I started with an allocation of only US Growth all in one high expense mutual fund. With my first $3,000 investment, I was not really able to tell what fluctuations really did to the balance because it did not rise and fall much at all.

For the first 4 years of investing, I pretty much had a flat-line investment growth. Where was my growth? Was I doing something wrong?

At the beginning of 2016, I decided to make a change in asset allocation to try and gain more growth. It had taken nearly 4 years to build up to where I had enough money saved in investments to actually have multiple mutual funds, all of which would be Admiral Shares at Vanguard. More in the future on Vanguard, expense fees, and mutual funds in general. Needless to say, Admiral Shares at Vanguard have a minimum investment of $10,000 each, so I needed at least $100,000 to have a 10% allocation in a certain area.

Arriving into 2016, I owned a smattering of different investments, some US Growth, some dividend, some all-in-one Lifestyle funds. With investments scattered all across the board and no real plan, I decided I needed to make a plan and start to follow it to achieve success in the confusing arena of investing.

Advice From Around the Web

I decided that the best way to go about this was to aggregate the recommendations from multiple sites together and look at them. I had no real idea of what a good allocation would look like. I had heard:

US stocks, but you need international exposure.

Don’t forget the bonds. Bonds are safe.

Bonds alone are not enough, don’t forget international exposure here.

Don’t put all your eggs in one basket, you need alternatives.

So what are all of these recommendations? Let’s first take a look at the recommendations I received from the Wall Street Journal, Wealthfront, Future Advisor, and Personal Capital.

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Wall Street Journal from Paul Merriman

The Wall Street Journal was by far the most aggressive allocation that I found, with no allocation to bonds. Bonds are the “safe” bet in the investment arena because they are not tied to company value, therefore are much less volatile. While living in the US, I figured that more weight to the US was reasonable, however, the Wall Street Journal from Paul Merriman advocated for equal weight of foreign market mutual funds and US market mutual funds. With 10% weighting for emerging market, it brings it to 40/50 US to foreign market mutual funds. The 10% remaining was to be invested in REITs, or Real Estate Investment Trusts.

“REITs gives you exposure to the real estate market which has strong growth potential.”

That sounds very clique, but after enough people have said it, we really start to believe it. Here at Atypical Life, we try to take what people say and put it into perspective to what really matters for achieving freedom.

Wealthfront Recommendation for Mr. Atypical Life

WealthfrontWealthfront is an investment advisor and one-stop investment management company. I made an account there, so they could give me their recommendation for best allocation. With this, there is no commitment to give them your money. The advice is free and they hope you will join them and let them do all of the “hard work” of investing and balancing.

Wealthfront gave an even more aggressive asset allocation, in my view, than the Wall Street Journal did. They said 35% in the US market, is good and that 50% should be held in companies outside the US. The remaining 15% were to be split 5/5/5 in dividends, bonds, and natural resources. The consolation on this split is that it is only 6 funds as opposed to the 9 funds recommended by Paul Merriman.

Future Advisor Recommendation for Mr. Atypical Life

Future AdvisorFuture Advisor is the same type of service as Wealthfront and many of the other investment management services that will manage your money that you give to them. They also give free advice when you open an account and connect your investment accounts to them. They analyze your portfolio and give recommendations based on your point in life and retirement goals.

Future Advisor had a shotgun approach to investing. More is better, right? I have simplified the recommendation for the table above, but they recommended 12 different mutual funds or ETFs with a maximum of 16% balance in any one investment. This seemed like a very complicated approach to me, especially when the goal is to gain freedom, not to weigh myself down with another responsibility of maintaining complicated investment accounts. For a do-it-yourself investor like me, the more funds the more complicated and difficult to manage. If you let an investment management firm manage your investments then there is no worries about more funds.

Of all the recommendations, Future Advisor gave me the highest allocation to bonds which is surprising, with the amount of funds they suggested. They suggested TIPS, which are US Treasury bonds, foreign and US bonds. The 3 bond funds together weighted to 20% of the allocation.

Future Advisor’s investment services and advice go far beyond asset allocation. They give helpful advice in fund location, taxable vs tax-advantaged, and fee minimization.

Personal Capital Recommendation for Mr. Atypical Life

Personal Capital logoPersonal Capital is my personal favorite financial tool for account agglomeration and overall financial health monitoring. They allow you to see all of your investment accounts and bank accounts in one place and have the best interface for visualizing investment asset allocation. They also offer advice for free. If you want to give them the freedom to manage your accounts that is an option as well, though it is a paid option. The rest is free of charge and a wonderful service.

Personal Capital had a conservative approach to foreign investment with a 60/25 split for US / foreign market allocation. Since we are US citizens, albeit we don’t currently live there, I think it makes since to have a higher proportion of our money in the US economy. I believe in it and Personal Capital obviously also believes that foreign markets may be over rated.

When we analyze fees, for 2 equivalent funds, one in the US and one foreign market, the US fund is always cheaper in the US. My 2 favorite funds for this comparison are the Vanguard Total US Market Admiral Shares and the Vanguard Total International Market Admiral Shares. The US is 0.05% expense ratio while the International fund is more than double at 0.12%. It just goes to show that for a believed better return, investment companies charge a higher premium.

Although, Personal Capital advised 85% in the 2 above assets, the remaining 15% are in 3 additional. Bonds are split in 2 with foreign and US bonds along with 10.5% allocated to alternative investments. These could be REITs, gold, natural resources, etc.

Mr. Atypical’s Asset Allocation Decision 2016

Come March, I had done my research and decided on an asset allocation. Looking at the above recommendations, I did not understand the complexity of many. Why would they need 9+ funds to cover only 5 areas? I wanted to use the KISS method (keep it simple stupid). With an allocation allotted between 5 different areas, I can choose 1 fund that encompasses that area and then set and forget. Once I am invested in these funds I can just add money to them each month and then at the end of the year, I can rebalance to try and keep the asset allocation where I decided was the best target.

For me, I decided 50% US total market, 20% foreign market, 10% emerging market, 10% REIT, and 10% bonds was the best allocation. To arrive here, I looked at all of the recommendations and then averaged them together. I knew that the less funds the better for trying to balance my money, so I went with my favorite investment carrier Vanguard, and chose their Admiral funds for my allocation.

I bought into the marketing and put 10% in emerging markets, even though the total international fund includes those same businesses that are included in the emerging markets fund. This double weighted them and probably brought the allocation closer to 50/50. Hindsight is 20/20, and looking back now, owning both a International Total Market and Emerging Market Fund is useless. I also bought into the REIT craze and put my money here for a while. “REITs have higher dividends.”

Mrs. Atypical and I live abroad in an apartment that is supplied for us, so we wanted a safe investment in bonds to save for our house purchase when it comes to settling down back in the US. Who knows when this will be, but 10% of our money in bonds is more than enough to ensure a good buffer for volatility in the stock market when our time horizon for saving is long.

Thoughts on my Allocation Decision

After deciding on this asset allocation, it took a little time for adjustment to the new allocation. Since I track all of my investments manually with Gnucash as well as use Personal Capital, the more investments and accounts the more complex the picture.

Is complexity a good thing?

I began moving money around between funds trying to rebalance too often. When I added money to the Vanguard accounts, I was not sure which fund to put my money into. I already put a forecast together of end of year account balance with estimated contributions, so I knew where to put my money. However, when it came time to put money in different accounts and maintain the desired asset allocation, I was sorely inept. This ineptness caused multiple taxable moves from gains throughout the year, that brought my tax liability higher than needed since I should just be holding these funds until the time I need the money.

Then stepped in Mr. Jim Collins.

I read his blog, specifically the Stock Series, and after approximately 6 months of investing in my new asset allocation, I took a step back and looked at the learnings and explanations from the Stock Series.

Mr. Collins recommends the KISS method.

Keep It Simple Stupid. ~anonymous

His Stock Series is 30+ posts now, but condensed down to 4 bullet points, here are my takeaways from the Stock Series:

  1. According to Mr. Collins Vanguard is the best place for your funds. Check. Even my 401k got migrated there this year thanks to my company.
  2. People are emotional, and inherently stupid with money. Totally Agree.
  3. KISS. Invest in VTSAX. That is all you need to know. Will do.
  4. If you question this recommendation because everybody says “investing is complex”, refer to rule #3.

The BestĀ Investment Allocation

VTSAX is the Vanguard Total US Stock Market Index Fund Admiral Shares and has an expense ratio of 0.05%. So for every $10,000 you have invested in this fund, the cost is $5 per year. It encompasses all of the asset sectors that are generally recommended to be invested in. This is the easiest way to get everything you need, minimize your risk, and minimize your time commitment all in one super low cost mutual fund.

Vanguard

But companies on the US Stock Market aren’t international?

Just look in the news to see Apple, Google, Exxon, and many others internationally. Just because a company is based in the US doesn’t mean you do not have international exposure. We have the US market covered, the international market covered, the emerging market covered, REITs covered, and alternatives covered. The only lack from VTSAX is in bonds. If you feel you need bonds in your portfolio for piece of mind, then do it.

The Trinity Study and many others show growth rate is barely effected with a bond allocation from 0-20% of total portfolio. I settled on an allocation of 90% VTSAX (or equivalent in 401k) and 10% bonds in the form of VBTLX, which is the Vanguard Total Bond Market Index Fund Admiral Shares. The 10% in bonds is to save for my home purchase in the future. Throughout the year, I will only contribute to VTSAX and then once per year I will rebalance to keep the bond percentage around 10%.

If you have made it this far congratulations. The optimal investment allocation is:

80-100% Total US Stock Market
0-20% Total US Bond Market

 

optimal investment allocation

Keep it simple. You will thank me later. We have more important things to worry about, like our freedom. Let’s lead the atypical life and invest with the optimal investment allocation.

For much more detail and my inspiration for this allocation and recommendation:

Jim Collins’ Stock Series

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