A while back I read How I Invest My Money, a fairly short book that is comprised of 25 financial “experts” describing how they invest their money. It was interesting to see the different perspectives and rationales, so I thought it might be helpful (to somebody?) if I shared my1 portfolio.
I look at our portfolio in three distinct ways, each of which I think is helpful at different times and in different ways. I look at the portfolio through the lens of Asset Location (which custodians the money is invested with), Asset Allocation (which asset classes the money is invested in), and Asset Tax Status (whether the money is currently being taxed, is yet to be taxed, or has already been taxed).
Like many people, by necessity we have our investments in multiple places due to past employers, HSAs, and different types of taxable accounts.
- Taxable Investments: Vanguard
- Traditional and Roth IRAs: Vanguard
- Health Savings Accounts: Fidelity (Vanguard doesn’t offer this for some reason, also see this post)
- Traditional 401ks: Colorado PERA (our pension system which also offers a 401k and 457)
- Checking and Savings: Ally Bank
- Savings: U.S. Treasury (Series I Bonds)
Update 11-11-22: With the recent turmoil in the crypto markets, I would not recommend these (even as a “risky” part of your savings).
- College Savings 529 Plan: CollegeInvest Direct Portfolio (see also this post)
Since we have now retired, we could move our 401k money to our traditional IRAs at Vanguard, but haven’t yet for two reasons. First, PERA has shown the ability to slightly beat the indexes over time by a few basis points (with a mix of passive and active management). Second, PERA’s 401k allows “Rule of 55” withdrawals so, on the off chance that we want to pull money from a pre-tax account before age 59.5 without penalty, it needs to stay in the 401k. At some point we will definitely move this to our IRAs at Vanguard for simplicity of management and for simplicity of Required Minimum Distributions. (RMDs don’t start until age 72, although it looks likely that will be changed to 75 before we get there.)
The second way we like to view our portfolio is the typical way most people talk about their portfolios, discussing asset classes and the individual investments that they have within those classes. This is our current allocation to the different asset classes we are invested in (this breakdown does not include our college savings and the equity in our house).
- US Large Cap Equities: 48%
- US Small/Medium Cap Equities: 21%
- International Equities: 21%
- Real Estate3: 2%
- Emerging Markets Equities: 4%
- Cash/Alternatives4: 4%
We believe in investing in low-cost, diversified index funds when possible. Our intent is to have a bit more allocated to international/emerging markets, but the outperformance of the U.S. market over the last decade keeps suppressing this. The following list is longer than would be necessary if all of our investments were in one location but, since they are not, there are various funds in each asset class that are very, very similar to each other.
- Total US Stock Market Index: VTSAX, VTI, ESGV
- US Large Cap Equities: PERAdvantage U.S. Large Cap Stock Fund (pdf)
- US Small/Mid Cap Equities: PERAdvantage U.S. SMID Cap Stock Fund (pdf), VSIAX, SLYV
- International Equities: PERAdvantage International Stock Fund (pdf), VTIAX, VSGX, FTIHX
- Emerging Market Equities: VEMAX, VWO, FPADX
- Real Estate: VGSLX
- Cash/Alternatives: Ally Bank Savings Account, Series I Bonds, GUSD
You might notice that there are no bonds in our portfolio5. That probably seems very risky to most folks but, as I’ve written about recently, I think it makes sense for us. Both my wife and I have a very good defined benefit pension (“fixed” income) coming in every month, so we have no immediate need to draw from any of our investments. Since over longer periods of time equities outperform bonds, and especially because right now expected returns on bonds are more or less negative, and because we don’t face sequence of return risk because we are not drawing down these investments for living expenses, an all equity portfolio should provide the best long-term return for us. While it’s certainly possible that the equity premium disappears in the future, if it does then that likely means there are much larger disruptions going on that would’ve made it extremely difficult to pick any investments that would have ended up doing well.
Asset Tax Status
The third way we like to view our portfolio is by the tax status of our investments. This basically falls into three categories:
- Currently Taxable: Investments that we have to pay taxes on now if they earn interest or pay out dividends or capital gains.
- Not Yet Taxed: Investments in traditional, pre-tax accounts like traditional IRAs and 401ks.
- Already Taxed: Investments in accounts that won’t be taxed on withdrawals, like Roth IRAs and HSAs.
This is our current breakdown. This breakdown does include our 529 college savings and the equity in our house, both of which fall in the “already taxed” category. Without those additions, the other two categories would be much higher percentages.
- Currently Taxable: 19%
- Not Yet Taxed: 35%
- Already Taxed: 46%
We were a bit late to the Roth IRA (and Roth 401k/403b/457), as they didn’t yet exist when we started investing and we were a bit slow to realize the implications of the Roth when it was created. Same story with the HSA (it was not available to us until very late in our career and it took a while for us to understand it.) If we had known then what we know now, we probably would have a bit more in the already taxed category and a bit less in the other two. But, overall, we feel really good about this breakdown. Our pensions are fully taxable, so we will likely continue to be in a “medium” tax bracket for the duration. This breakdown gives us lots of flexibility about where to draw money if and when we need to depending on that year’s tax situation, and we are certainly looking both at some charitable giving and leaving a legacy to our daughter.
So I’m not sure how helpful this is (if at all), but one of the big issues in personal finance is that many people are reluctant to talk about their finances. So my hope is that by sharing this it will help others be more comfortable talking about their portfolios (as well as other financial decisions they have made).
1It’s really my and my wife’s portfolio. While we have individual retirement and HSA accounts (because that’s the way they have to be titled), we think of everything put together as one big portfolio.
2Some people might disagree with classifying stablecoins as “savings”. I think that’s a legitimate disagreement, but here’s a bit more on why we classify them that way for us.
3This 2% real estate allocation does not include the value of our house. While our house (which is paid off) does have a lot of equity in it, it’s not liquid, so I don’t think of it in terms of our asset allocation. After all, if I decided to reduce our exposure to real estate in our allocation, I don’t think my family would appreciate me saying, “I sold the house today to change our portfolio allocation!” We do include this in our net worth and I do think of it as exposure to real estate, which is part of the reason why we have such a small portion of our liquid assets in real estate.
4This includes our checking and savings, Series I Bonds, and the aforementioned stablecoins.
5We actually do have a small investment in bonds, since our 529 college savings plan is invested 75% in equities, 25% in bonds. But since I don’t include the 529 as part of this view of our asset allocation, bonds don’t appear in this breakdown.