Retirement Investment Strategy

Today, a friend asked about how we approach our retirement investment. I have a personal strategy, but it’s never written down and I can’t think of anything to point someone to. So here it is. It will be a nice thing to have in a few years when I review it.

Trust the market

To invest your retirement into stocks and bonds, you must place some levels of trust in the market. You must have a general sense that the market will perform over a long period of time. This is generally talked about in terms of decades. I do believe this is true. Global events not withstanding, it’s important to take a long term view of your money in a retirement account.

Regular investment is key

When you are investing for the long term, it’s important to minimize the danger of market timing. Dollar-cost averaging is the technique to reduce the effect of “market timing”. For most retirement investment vehicles, you do this by doing monthly or bi-monthly investment. For 401k investing, it’s typical to invest for each paycheck. For IRA, the bank you use should have some mechanism for regular/automatic investment. Both Vanguard and Fidelity do. I have retirement accounts with both of them (IRAs and 401(k) Rollover IRAs)

Buy and hold

Both Warren Buffet and Jack Bogle advocate a buy and hold strategy for retirement investors. You might consider a rebalancing strategy, but more about that later. And like Mr. Buffet said, don’t watch too closely.

Decide on an asset allocation

Now we start to get into the territory where you have real choices. There are many ways to decide on an asset allocation. This series is a good aggregator of different portfolio styles. I’ve been using an asset allocation inspired by David Swensen as defined in his book Unconventional Success: A Fundamental Approach to Personal Investment. You can see a simple layout here with an update here.

Here is my current allocation for a split of 80% stocks and 20% bonds. They are all index funds.

And,

For me, the risk of an 80% stock portfolio is still palatable. In a few years, it might make sense to reduce the percentage of stock holdings.

Why are they all index funds?

Reasons.

1. Remember to trust the market?
2. Expense ratio is the best indicator of a fund’s performance. Note: this research is performed by morningstar who publishes a star rating for the funds. They actually found that the expense ratio is better indicator than their own star rating! Index funds are typically low in expense ratios.
3. Jack Bogle, again
4. Buffet hasn’t lost yet

Check and (re)balance

How often should you check and rebalance your portfolio? There is not a best answer here. Checking quarterly or twice a year is fine. Rebalance annually is typical. It’s important that you rebalance without emotion to the market forces.

Or, you can never rebalance. There are some evidence to support that.

1. http://www.mymoneyblog.com/portfolio-rebalancing-less-than-annually.html
2. http://www.marketwatch.com/story/why-rebalancing-could-be-a-huge-mistake-2013-11-20
3. http://www.vanguard.com/pdf/icrpr.pdf - see figure 8 in the pdf for the comparison table

Happy investing!