How I started the ball rolling

From time to time various individuals who I have met or word with will ask me a series of questions concerning how my wife and I got to where we are financially.  Many of these individuals confess that the task appears to be too daunting, complex and insurmountable, and as a consequence they give up before they try.

First my advice is free and unsolicited and as such it should be viewed with a critical eye.  What is in it for me is one of the first questions you should ask?  I do own the funds that are detailed in this post.  I have no other vested interest in the organization that sell and manage these funds other than I own them.  I receive no direct material gain if you choose to purchase these funds.  Instead of re telling the story, I can just point to this post.

I am describing the path that I took it is not the only path.  My path may or may not work for you, either way I hope the best for you and yours.

After making up our minds that we were going to save for our future, making up our mind was easy; the saving would be a bit more difficult.  How did I get started building our investments?

Many years ago when we started our investment program many of the tasks appeared to be difficult if not impossible, we to were lost and confused.  The first step was to start small, so we did some research and picked a portfolio to mimic.  The requirements for this first portfolio were that we had to understand it, which means that it had to be simple, that entry cost had to be low, for we did not have much in the way of disposable cash.

By taking this path realize that you are taking a somewhat passive path, which to my way of thinking is good, you should have other more pressing issue in your life to attend to, your spouse, your children, your self, your job.  That you are willing to accept the gain or loss the market via its indexes is providing, you are not trying to beat the market you are trying to be the market.  The instruments will to some extent under perform the market, due to their fee and expense structure, so therefore fees and expenses do matter.

In our case we initially selected what would eventually be called the “Couch-Potato” Portfolio published by Scott Burns, a blend of two Vanguard mutual funds Vanguard 500 Index (VFINX), and Vanguard Total Bond Fund (VBMFX) split 50/50.  Please note, that at the time we started Electronic Traded Funds (ETF’s) did not exists.  Discussion of ETF versus Mutual Funds is a subject for another day.  This is a presentation of the path that we took using the investment vehicles that were available at the time.

After a few years we decided that the next step was to build a portfolio that is 50 percent “Couch-Potato Portfolio.” and 50 percent “Margaritaville” Portfolio.   The “ Margaritaville” portfolio is a blend of three Vanguard mutual funds, Vanguard Total Stock Index (VTSMX), Vanguard Total International Stock Index (VGTSX) and Vanguard Inflation Protected Securities (VIPSX).  Within the “Margaritaville” portion of the portfolio, 34 percent is allocated to VTSMX, and 33 percent to VGTSX, and VIPSX.

Once the portfolio was now approximately 50 percent “Couch Potato” and “Margaritaville” another modification was made, and this one would be much more complicated.  This was the integration of this portfolio into the “Aronson Family Taxable” into our portfolio.  We wanted our portfolio to be 50 percent our hybrid Portfolio (50 percent “Couch Potato” and “Margaritavile” and 50 percent Aronson Family Taxable.

The Aronson Family Taxable portfolio is composed of 11 different Vanguard mutual funds.  The good news was that 3 of the funds in the Aronson were already in our hybrid portfolio, namely Vanguard 500 Index, Vanguard Total Stock Market, and Vanguard Inflation Protected Securities.  Therefore they could serve double duty count for the hybrid portion of the portfolio and count for the Aronson Family Taxable portion of the portfolio.  We need now to add positions in Vanguard Extended Market (VEXMX), Vanguard Small Cap Growth (VISGX), Vanguard Small Cap Value (VISVX), Vanguard Emerging Market Stock (VEIEX), Vanguard Pacific Stock (VPACX), Vanguard European Stock (VEURX), Vanguard High-Yield Corporate (VWEHX), and Vanguard Long-Term Treasury Investor (VUSTX).  At this point all I can say is thank God for spreadsheets.

Once parity was achieved with this new hybrid portfolio (“Couch Potato”, Margaritaville”, and Aronson Family Taxable, I thought that I was done, until I read about and did research on the Yale U Unconventional Portfolio.  This model portfolio of 6 Vanguard mutual funds performance was pretty remarkable even when compared to the Aronson Family Taxable portfolio.  The Yale U Unconventional Portfolio contained 6 Vanguard mutual funds, of which we already held position in 4.  This time we had to add Vanguard Developed Markets (VDMAX) and Vanguard REIT (VGSLX) to the mix.

Initial portfolio weighting between the respective portfolios was 17.54 percent for the “Couch” and “Margritiaville” portfolios, and 35.09 percent for the Aronson Family Taxable and Yale U Unconventional portfolios.  This results in a portfolio that is 69.65 percent Stock, and 30.35 percent Bonds.  25.94 percent of the stocks are Foreign.

I wanted a little more of the portfolio in stocks and I wanted the put more emphasis on domestic stocks.  After a little spreadsheet magic I settle on a portfolio weighting of 9.1 percent for the “Couch” and “Margaritiaville” portfolios, 36.04 percent for the Aronson Taxable, and 54.05 percent for the Yale U Unconventional.  This blended portfolio assets were now 73.06 percent in Stocks and 26.40 percent in Bonds.  22.40 percent are Foreign.  This final portfolio and its allocation is just my preference, it is my sleep point.

Somewhere along the way Vanguard had decided create different class of shares for their various funds, investors, admirals, and institutional, your basis determined which class of share you owned and purchased.  Eventually we had amassed enough value in each of the funds that they were converted from investor shares to admiral shares.  These conversions were handled as a stock-split.  It was not a taxable event to convert from investor share to admiral share.  The only difference between the shares was that the management fee are lower, depending on the fund the management fee was reduced b at least by .5 to .6.  The result is more of the earnings are returned to you, and that is a win for you.

All of this was not done overnight, it has taken 25 years to get all of the foundations built.  Now we just keep adding courses of bricks to the walls.

As our Hybrid portfolio investment goals are as follows.

VBMFX         4.50 %
VFINX            9.91 %
VTSMX          21.08 %
VGTSX           2.97 %
VIPSX             16.49 %
VEXMX         3.60 %
VISGX            1.80 %
VISVX            1.80 %
VEIEX            6.31 %
VPACX          5.41 %
VEURX          1.80 %
VWEHX         3.60 %
VUSTX           1.80 %
VDMAX        8.11 %
VGSLX           10.81 %

According to the Quicken Calculation since 1978 we have seen an IRR of 8.44 percent, which I consider to be well within acceptable limits, our money is doubling every 8.5 years.  Do I have any regrets, just three, and they deal with not having more cash on hand to take advantage of the events in 1987, 2003, and 2008, but I do not lose sleep on them.

Well there it is the path that I started on and continue on today.  Feel free to use it if you want, or do not use it is your choice.  I wrote this for my son and daughter, and a few of my friends in hopes of explaining my crazy and sometimes difficult ways that they have observed from time to time.

The ultimate end goal is to have enough investments that produce enough income to provide us a nice comfortable income in our retirement.