Lightning Round Mailbag 2.0

Thanks to all of you who wrote in! I wish I had time to address in detail all the correspondence I receive. I'm going to try giving short responses to as many as I can instead of a very detailed response to just one. Here's today's round-up...

1. Reader Question

Hello, Great Website. Do you have any information on deciding on the correct asset allocation for retirement accounts. Currently following Jack Bogle recommendation of set bonds to age. I follow bogleheads.org, but just want some outside opinions. Thanks for the help.

My Reply

Age in bonds is as good an approach as any. There is no perfect strategy, though, of course, one strategy will prove superior in hindsight. Age in bonds is good. Age + 10 in bonds is good. Age - 10 in bonds is good. Constant balanced stock/bond portolio (anywhere from 30/70 to 70/30) your whole life -- or at least many decades before making it more conservative for retirement -- is good. Even 100% stocks until you're, say, 30 or even 40 (provided you have strong nerves) is good.

Any of these is as good as others. The key is to pick one, stick with it for life (or at least a few decades), and implement it with rock-bottom find expenses, widest-possible diversification, and maximizing tax-advantaged accounts. Oh, and bogleheads.org is a wonderful resource with an incredibly helpful community. Highly recommended for all.

2. Reader Comment

No question, just wanted to tell you how much I enjoy your blog. I seem to remember you are/were an engineer, so perhaps this complement may be a bit unusual but I wanted to tell you that I enjoy how well you write! I'm also an engineer (or have been in the past) with a heavy math/stats background in EE (as well as an MBA). So I virtually always agree with your analysis, but I'm so impressed about how well you say it. Simply, with clear explanations, it's just a pleasure to read. Please keep up the good work - you're bringing knowledge (and pleasure) to many people.

My Reply

Thank you! I really appreciate the feedback and the compliments, even though I don't feel that this blog is anything special. And my writing could use some improvement -- I need to cut down on filler adverbs and adjectives which sound good in my head but don't add anything to the message. But in any case, I am very happy that you and others are enjoying my blog and/or finding it useful. And, yes, my background is engineering / computer science.

3. Reader Question

My wife and I are retired, 69 years old and living off of our federal pension. I was heavily invested in Vanguard index funds (50% stocks and 50% bonds) and bailed out in 2009 when everything tanked. I am sitting on a lot of cash (7 figures) and am considering investing in the conservative VSCGX Life Cycle Vanguard fund, in both tax deferred and non-tax deferred accounts. I have a large capital gains loss from my sale in 2009 which should offset future capital gains from the taxable account. As I get older, I like the simplicity of the Life Cycle Fund and hoping that this investment strategy will deter me from not staying the course in the future. Do you recommend investing the lump sum, or dollar cost averaging? Since I don't plan on withdrawing any of the money for at least 5 years, am I being too conservative and should I be considering the moderate VSMGX fund?

My Reply

Sorry to hear you bailed out in 2009. Based on that experience I would absolutely not invest in anything more aggressive than VSCGX and I would strongly consider going with an even more conservative VASIX. What happened in 2008-9 should be expected to happen at least once every decade or two. And it will feel just as terrifying and hopeless the next time around. There is no reason to set yourself up to make the same mistake again.

If your federal pension provides most of your living expenses already then there is no reason to take much risk. I would go VASIX with full knowledge that it will lag behind the market but with the comfort that it will never have a drop worth worrying about. You have already "won the money game". Now you can simply enjoy your retirement without worrying about what the market might do.

If this cash is in taxable account, then you could consider going with one of Vanguard municipal bond funds and separate stock funds instead of the all-in-one LifeStrategy like VASIX. The reason is that LifeStrategy's bond holdings -- total bond market fund -- are fully taxable and not ideal for taxable accounts. Instead of VASIX you could do, say, 13% VTSAX (US stocks), 7% VTIAX (international stocks), 80% VWIUX or VWLUX (intermediate- and long-term municipal bonds respectively). Municipal bonds are tax-exempt and are more appropriate for taxable accounts. But even if you hold LifeStrategy in a taxable account, your retirement will still be secure. And whatever portfolio you settle on, do not exceed 40% in stocks (VSCGX level) and strongly consider having even less stocks.

4. Reader Comment

I absolutely love your blog, thanks for all the great information! I study some of your posts very closely since the math details are excellent but not overwhelming. I've read a few books from the tome typically recommended for individual investors: Bernstein's Investor's Manifesto, Malkiel's A Random Walk Down Wall Street, and Graham's The Intelligent Investor. I'm always seeking more investing knowledge despite following a passive indexing strategy. Do you have any books or courses or degree recommendations? In particular, how did you become an investing expert?

My Reply

Thank you for the compliments and I am very happy to hear you are enjoying my blog. I wouldn't say I'm an expert in investing. I am simply trying to promote the same ideas you read about in Bernstein's and Malkiel's books because they are so unappreciated by -- or simply unknown to -- the average individual investor. I do happen to be an expert, but it's in one tiny and generally overlooked corner of the markets and something I avoid mentioning on this blog. That experience has given me extra appreciation for just how profoundly worthless all the publicly discussed active management "strategies" are and more confidence to rip them apart instead of being intimidated by the supposed expertise of those who push them. The finance and wealth management industry is all about sales disguised as something more profound and intellectual. Its marketing machine is so effective that majority of the people working in the industry drink their own kool-aid. Once you fully grasp this fact, the path to successful investing becomes pretty simple: don't trust anything they say, don't give them any of your money, and assume that you have just as little knowledge of the future as they do. From there it's a small logical step to low-cost, maximum-diversification, balanced buy-and-hold model.

Of the experiences outside my work that have helped me, I would say that my general like and aptitude for math has been most important. Everything I know about finance and investing I picked up on my own from a whole lot of different sources -- I feel that was a big plus as I was never indoctrinated into any one approach by an authority figure. My math skills have always been great but my statistics skills are not what I'd like them to be. As I noted in another reply, I have computer science background which makes it easy for me to do all sorts of backtesting and other analyses. This too has been very educational as I realized how easy -- and tempting -- it is to torture data and algorithms until they yield the desired backtested results.

I like and have learned some interesting things from reading old economics and investing books. From a 1990s economic text I learned that the US is expected to have paid off its national debt by right around now. From 1970s and 1980s investing books I learned that technical analysis was just as popular back then which made me wonder where are all the people who became technical analysis millionaires in the decades since. In general it's just eye-opening how much things change and how much they stay the same in this industry. Learning history of any subject is a worthwhile pursuit and that goes double for finance and investing.