THE ACCUMULATION STAGE
The wealth accumulation stage comes while you are working, saving, and adding money to your investments. It typically occurs when you’re younger, though you may have accumulation and preservation stages at various points throughout your life.
In this phase, you’ve got money coming in and a long time horizon. You want to be aggressive, putting close to 100% of your money in stocks, and also quite passive. For the vast majority of investors, fiddling around with your portfolio all the time is only going to cost you money.
You’ve surely heard the expression, “Don’t keep all your eggs in one basket.” You may also have heard the variation, “Keep all your eggs in one basket and watch that basket very closely.”
Forget all that. Put all your eggs in one basket and forget about it.
This is the ideal asset allocation for young people, and it’s the one JL advised his own daughter to pursue in her early adult years. The overwhelming odds are that you’re not going to beat the market with clever individual stock picks or niche mutual funds. You certainly are not going to be able to “time the market” to sell high and buy low. Just put your eggs in the basket.
But which basket? For JL, it’s an easy answer: The Vanguard Total Stock Market Index Fund (VTSAX), which will buy you a piece of around 3,600 publicly traded American companies.
Each of those businesses is filled with people working to make them more profitable — and make you money. VTSAX also has very low fees involved, so you’re not losing a chunk of your money each year paying someone to manage your money. Your money is working for you. And the best part is, studies indicate this kind of index outperforms around 83% of those money managers, the self-styled financial whizkids.
If you’re young and looking to build F-You Money, there’s not much more to it than that: you get money, you buy VTSAX. If you’ve played fantasy football, you might be familiar with the term “set it and forget it.” Same here.
THE PRESERVATION STAGE
If you’re at or near retirement, you’ve (hopefully) built your F-You Money already. Now you want to hang onto it. It’s time to expand beyond the one basket, VTSAX, and add in…another index fund.
This time, it’s VBTLX: Vanguard Total Bond Market Index Fund. Bonds provide some income and tend to smooth out the rough ride of stocks. In case the market does dip as you’re entering or enjoying retirement — when you have less time to wait for it to bounce back, and you’re not earning income through work — you’ll likely want a bit less exposure to stocks. So, shift some of that money to a bond fund.
Now that you’ve got a couple of funds in your portfolio, you’ll want to set aside a couple of hours once a year to re-balance your allocation according to where you’re at and where you’d like to go. Now that JL is (semi-)retired, he and his wife’s allocation looks like so:
~75% Stocks: VTSAX (Vanguard Total Stock Market Index Fund)
~20% Bonds: VBTLX (Vanguard Total Bond Market Index Fund)
~5% Cash: VMRXX (Vanguard Cash Reserves Federal Money Market Fund)
You can fine-tune these allocations to your liking. Want a smoother ride, which comes with potentially lower long-term returns? Increase your percentage in VBTLX. If you’re comfortable with volatility and want to keep accumulating more, add more VTSAX.
THE GRAY AREA
100% stocks in the accumulation phase is certainly aggressive, and there are some studies that suggest holding a 10%-to-25% position in bonds (with 75%-to-90% stocks) will actually very slightly outperform the total stock approach.
But you should ignore traditionalist principles like “subtract your age from 100” — or even 120 — to determine the percentage of your portfolio that should be in stocks. That’s far too conservative when even modest inflation is going to eat up the value of your bonds over time, and those bonds can’t offer the growth value of stocks to offset that. Stocks are your inflation defense — you need your wealth to rise faster than prices — as well as your growth vehicle.
There will be crashes and corrections. But if you are just starting out at age 20, you are looking at perhaps 80 years of investing. Even at 60 years old, in good health, you could easily be looking at another thirty years. For the most part, you’re going to want to go heavy — heavy — on the stocks. Accumulate!
