Having a kid around has changed my perspective on many things, among them wanting to get more consistent in how our family approaches financial decisions. This is an area where I’ve spent a fair amount of time educating myself over the past decade, and I thought it might be useful for folks to see how my thinking has developed over my career, particularly given I started out knowing absolutely nothing on the topic.
For the first six years of my career, I accumulated money in a bank account. I didn’t have a 401k. I didn’t participate in the Employee Stock Purchase Plan when I was at Yahoo. I just kept money in a low interest bank account. I’d like to pretend this was because I was shaken by starting my technology career during the 2008 financial crisis, but the truth is that I simply didn’t know anything about handling money. I didn’t spend much, and kept the rest in my bank account.
Over time, I felt increasingly uncomfortable with my growing bank account, and after six years I decided to figure out something different. I started maxing out my 401k, read up on the advent of robo-advisors, spent some time researching the options, and read A Random Walk Down Wall Street. Based on what I learned, I decided to open a robo-advisor account, and moved my accumulated cash there over the course of a year or so.
Some folks are critical of robo-advisors for their fees (typically 0.25% annually of Assets Under Management), but they’re about a quarter the price you’d pay a financial advisor (who generally start at about a 1% AUM fee). The proposed alternative is to directly invest the money yourself, which I think misses the point: I felt uncomfortable investing, so the competing alternative for me was not investing at all, which is much more expensive than a 0.25% AUM fee. Also important is that robo-advisors rely on low expense ratio funds that significantly improve performance over time and provide the safety of a broadly diversified portfolio; I could have easily invested my own money in an inefficient way that easily outweighed the management fee.
For the next seven-plus years I had a recurring monthly transfer from my bank account into my robo-advisor account. The only thing I changed was occasionally tweaking the size of the transfer, although I did start working with a tax accountant to handle the complications of startup equity. This worked well for me, and in the background I slowly educated myself, in particular starting with the r/financialindependence faq and Bogleheads faq, as well as lurking in the associated forums to soak up information.
I’ve remained generally happy with my robo-advisor, but have slowly developed my point of view on the details of how I want to be investing. It’s also shifted from being my perspective to instead our perspective as my wife and I combined our finances and financial decision making. Changes kept accumulating: our first child, our first home, increased charitable giving, opportunities to angel invest, and so on. Altogether, our situation became far more complex than an automated monthly deposit could handle.
For folks following the Bogleheads methodology, the answer to this problem is writing an investment policy statement (IPS). Your IPS describes your investment strategy and is intended in particular to force you to make consistent long-term decisions rather than short-term reactions to the current market. It’s a personal document with the goal of describing your approach rather than articulating any generalized truths about investment.
Over the past few months we’ve been working on this, coming to our current plan of:
- Pursue moderately aggressive growth – we want to optimize growth through low cost and diversified funds
- We manage passively – we don’t want to spend much time managing our portfolio. We’re comfortable holding assets through the market crash and recovery cycle. We don’t believe short-term financial decisions are effective. We don’t invest in speculative offerings
- Be able to retire by fifty – we’re both planning to work for another 15-25 years, but we aim to be able to retire by fifty, particularly given this year’s reminder that stopping work isn’t always a voluntary choice
- Keep a six month emergency fund – we keep this in a savings account, with an emphasis on accessibility; we don’t worry about our emergency fund’s interest rate
- 80% stocks, 20% bonds – we have a lot of working years ahead of us, and want to maximize gains. We plan to hold this ratio for the foreseeable future as a fairly aggressive portfolio, revisiting every ten years
- For stocks, target 70% domestic, 30% international; for bonds, domestic bonds – we don’t have a target across large, mid and small cap, preferring funds that manage that mix for us. We similarly don’t have goals around REITs, etc. This yields a three fund portfolio for us (domestic stock index, international stock index, domestic bond index), selected from recommendations in Bogleheads wiki
- Don’t overthink fund placement - we follow the general guidance of tax-efficient fund placement, but don’t spend too much time worrying because there’s a reasonable level of uncertainty on which particulars will be best
- Omitted here, the full version of our investment policy also includes (1) how we size our participation in charitable giving, campaign giving, and angel investing, (2) our approach to owning versus renting a home, (3) how we want to hold and pay housing mortgages, (4) and a few other bits and pieces
This is just our plan, and it’s by no means the right plan. What works for us right now isn’t what many folks would select for themselves, and that’s great. I’m also certain what we’re doing in a decade may be a bit different than what we’re doing today. Starting from a place of total confusion about financial planning, I’ve come to appreciate that it’s much more valuable for me to make safe, reasonable decisions this month than to pursue some sort of perfection next year (no one agrees on what a perfect financial plan means anyway).
If I could go back and start over, the biggest thing I would change is simply getting started earlier. I wouldn’t worry for a second about the somewhat less efficient initial choices I made, e.g. using a robo-advisor, as they were always an appropriate balance between my comfort level and financial efficiency. If you’re in a similar place to where I was in my early career, my biggest advice would be to start now, and to start cautiously.
More concretely, r/financialindependence faq, Bogleheads faq, and A Random Walk Down Wall Street have been particularly valuable for me.