Now That The Home Is Purchased, How Shall I Invest?

As many of you know, I previously had a small investment portfolio that I emptied out in order to make a house down payment and also for some furnishing costs (painting, some inexpensive kid-friendly furniture, etc.). This puts me back at square one, which means that I get to decide all over again what my investment portfolio will look like. Remember, this portfolio is intended to be an investment for a country home purchase in about fifteen years – my wife and I are dreaming of paying cash for this purchase.

The portfolio This is what we’re looking at for investments.

20% domestic large cap stocks via the Vanguard 500 index fund
20% domestic small cap stocks via the Vanguard Small Cap Index fund
20% international stocks via the Vanguard Total International Stock Index Fund
20% diversified target retirement fund via the Vanguard Target Retirement 2050 fund
15% individual stock holdings via Scottrade – my wife and I have been doing extensive research into individual stock holdings and we’re both interested in directly investing in a small handful of companies that look like strong businesses on paper and that we personally use as customers.
5% bonds via the Vanguard Total Bond Market Index Fund

Why no ETFs? If I invest directly with Vanguard, I don’t have to worry about fees associated with trading ETFs.

How will I build it? I have an investment savings account set up. Each week, I put a certain amount into that account.

When the account hits $3,000 (the minimum buy-in for the Vanguard 500), I’ll buy the appropriate amount of shares on that day, emptying the account. I’ll then repeat this for all portions of the portfolio – when the account reaches $3,000 again, I’ll buy that portion. This will devour the first $18,000 in savings in that account and will take a year or two (at least).

Once all of the portions are purchased, I’ll save in that account and, once a month, put money into the portion of the portfolio that is the furthest below the target percentage. This is effectively a monthly rebalancing of the investment, so I don’t have to sweat rebalancing unless I make a change in my investing philosophy.

What about the individual stock portion? With my first buy-in, the $3,000 is going entirely to one company that my wife and I believe in very much (I’ll talk about this company when the time comes – it’s months down the road, though). With future buy-ins, my wife and I will do one single buy with that amount which we’ll discuss in detail when it comes around. I have a feeling we’ll buy several companies over time, but there’s one we both feel very strongly about. These are going to be almost entirely buy-and-hold investments.

What about paying ahead on your home mortgage? Aside from this investment money, we are debt snowballing our remaining debts (most of our student loans, then the home, then one final absurdly low student loan). Why in that order? Our home mortgage is actually our lowest interest debt – and nothing’s above 7%. We’ve already eliminated everything that was very high – automobile payments and credit cards. We also have an automobile replacement fund.

How can you afford all of these funds? Frugality. That’s the key to everything.

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  1. John says:

    That portfolio seems pretty aggressive for 15 years out. I would likely do at most 70/30 stock/bond split, and would be more comfortable with 60/40. Consider dropping the Target Retirement 2050 and putting that money in bonds. At the least split it up into your other three Vanguard funds – what is the 2050 getting you that the first three combined aren’t? It’s a decent portfolio for retirement (for someone in their 20s)… but it seems pretty heavy on risk for a target that is 15 years away. To me anyway; I guess we all have different levels of aversion to risk.

  2. The Div Guy says:

    Trent,

    You should take a look at Zecco instead of Scottrade. You can trade for $0 versus $7 on Scottrade. I have accounts at both but all my new money is going to Zecco. I keep the Scottrade account for the S&P stock information. I have been meaning to post my asset allocation. I will have to do this for tomorrow.

  3. Kim says:

    Trent,

    Congrats on your house & your plans for the future!

    How about limiting your mutual fund investments to three: the Total Stock Market Index, the International Index, and the Bond Index? Doing this would:

    1)prevent the overlapping of holdings which would occur with the purchase of the Target Retirement 2050

    2)see you fully invested more quickly with just the three funds to open

    3)simplify matters (always a good idea from an emotional – and bookeeping! – standpoint).

  4. Kevin says:

    Kim,

    I could see sticking with the target retirement fund if hes putting it in a Roth or other IRA. He wants the other funds in taxable accounts to be used for a home purchase down the road.

    Also Trent, do you still have a fully funded emergency fund or will you be building that while starting the investments? Or planning on keeping a smaller one and cashing out some mutual funds in the event of a large need?

  5. Jeremy says:

    Hey Trent,

    Just make sure to stick with the allocation percentages you select now when investing later – the only exception to this rule is if you decide to invest more in asset classes that have fallen further (either absolutely or relatively) – you probably won’t, but don’t make the mistake of chasing what is ‘hot’ now.

  6. alyne says:

    Trent:

    Why are you investing in bonds at this time. I think you are a little young for that. It is a good idea to be sure you have an emergency fund in cash or money market funds.

  7. Here’s another vote for Zecco… it puts those ETFs back in the game – and they can lower expenses than nearly equivalent funds. Also, this way you don’t have to put all 3,000 into that one company that you believe in. You could divide it out amongst a few or even dollar cost average into that company.

    Why not look into Vanguard Total Market Index instead of focusing on large and small… where is your mid-cap diversification?

    Your Vanguard links ask me to log on… perhaps you can link readers to a source that gives them fund details for non-members? I think Vanguard should have this available, but if not, Morningstar might be a fine choice.

  8. ck_dex says:

    Three of the five index funds that make up Target 2050 are the funds which make up the Vanguard Total International Market Index, and the fourth fund is the Total Stock Market again. So you are paying extra fees with the Target 2050 to duplicate the U.S. and international index funds, and you only gain the Total Bond fund, which as Lazy Man pointed out, belongs in your 401K and IRAs.

    Target Retirement 2050 consists of the following funds:
    Vanguard Total Stock Market Index Fund
    Vanguard Total Bond Market Index Fund
    Vanguard European Stock Index Fund
    Vanguard Pacific Stock Index Fund
    Vanguard Emerging Markets Stock Index Fund

  9. ck_dex says:

    Forgot to add that the extra fees for the target retirement date funds basically cover the costs of rebalancing in the short-term and reallocating to bonds in the long-term as you near the retirement date.

    Trent, you seem to have the time, interest and ability to be able to do this for yourself and it’s a whole lot more flexible (like being able to jump in and buy Total U.S. Market last Friday when it was seriously down, rather than at the fund manager’s convenience). Just trying to save you a few bucks.

  10. ck_dex says:

    Sorry, just noticed that you also have the Total Bond fund as a 5% allocation. So you have a complete duplicate in the Target 2050 of what you are already investing.

  11. Ted Valentine says:

    I don’t understand owning the TR2050 and the underlying funds that make up the TR2050. That is not diversification as you say, but duplication.

  12. LTruslow says:

    I use an approach that I call 10/20/30/40. I put 10% into real estate (REIT mutual fund), 20% in an international index fund (EAFE), 30% in a bond index fund (Lehman Aggregate), and 40% in a total stock market index fund. I use T. Rowe Price; but Vanguard, Schwab, ETF’s will work just as well.

  13. Michael says:

    The previous posters are right. If you invest in the TR2050, you should do only that fund — that’s what it’s for — unless you want to add a different category in which it does not invest, such as commodities or whatever. Either do the other funds, or the TR2050, but not both. It may seem crazy to have everything in “one basket” but this type of fund is not really one basket. It makes good sense for many folks to put all their investments in one fund such as TR2050 and spend their mental cycles and energy on career and savings, rather than investing.

  14. thad says:

    Have you considered the tax efficiency of this portfolio? I’m assuming this portfolio is for a taxable account.

    I think that typically small cap is pretty tax inefficient, and bond funds are definitely. TR2050 in a taxable account is also not very tax efficient.

    Have you considered Vanguard’s Tax-Managed Small Cap fund (it has a $10k minimum, though)? You might also use a tax-exempt bond fund as well.

  15. thad says:

    Trent,
    The fact that it holds bonds, and you plan to keep this for long term (15 years), so the bond portion will grow even more over time, still leads me to believe that TR2050 is better in a tax-deferred account.

    See Taylor Larimore’s response to this post at http://www.diehards.org:
    http://www.diehards.org/forum/viewtopic.php?t=2977

    (Sorry I don’t know how to post a url)

    Thad

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