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From 1973 to 2013, a portfolio like this returned

Anytime someone picks a seemingly pointless and random date range like that they are biasing the results. Bonds had record possibly never to be repeated again returns in 1970s and stopping at 2013 ignores the tail end of this incredibly bull run we are in right now. Pretty sure if someone looked at 1990 to 2020 or 1920 to 2020 this overly complex portfolio wouldn't compare as well.

2013 cuts off before US shot forward past international. Conversely, international might shoot ahead next time. I think international exposure is good, but also remember that everyone can tell a story with a graph

The numbers look so good because bond rates were much higher in the past than they are now. 10-year Treasuries (for example) were over 10% in the 80s, while now they’re down below 2%. In the 70's those bonds were giving 15+ percent which will almost certainly never happen again. If you run the same test again but assume bonds max out at a much more realistic rate the performance will be much more in line with the risk (likely less than half the performance of US equalities).

Even if this was an optimal asset mix, most people are probably too lazy to manage something like that even if they could figure out how to set it up. There gets to be a point when the marginal gain for a different asset mix isn't worth the extra hassle and cost of rebalancing.

For the specific portfolio recommended in the 80k article, how often did they rebalance and what would your trigger point be for rebalancing? If you're selling to rebalance in a taxable account, then the capital gains tax is going to eat away at your investment gains.

Run ideas through Portfolio Visualizer and see how it makes you feel. The idea isn't to chase past performance but more to gut-check how you'd feel in the middle of a drawdown and then contrast it to where you end up.

(Note that these comments weren't my original thoughts, but are from a conversation about investments in which I brought up the asset allocation recommended in Benjamin Todd's article)

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Managing Your Money 101

by Dave Cortright 🔸

May 124 min read 18

48

CommunityEffective givingPersonal financeSelf-care and wellbeing

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Managing Your Money 101

Passive income is the ultimate goal

—therefore—

Start investing now; be smart and consistent

Invest in Low-Cost Index Funds

Max out your employer retirement match

Max out pre-tax retirement investing

Turn on automatic reinvestment

Set up an automatic recurring investment

Dollar Cost Average your withdrawals

Set a beneficiary on all of your investment accounts

25× what you spend each year invested = retirement

Paying off debt is usually the best way to invest

Never carry credit card debt

Other recommendations

Further info

18 comments

I started working in tech at 24, coasted for the last 4 years of my full-time career, and achieved financial independence (FI) at 46. Here are the basics everyone should know to optimize their finances. The money you save by making wise choices will bolster your financial security and increase the amount you can contribute to effective causes (both money and time).

[I am American. I’ll try to be as general as possible, but some advice might not apply to other countries. All disclaimers apply.]

I’m writing this because anyone can achieve early FI if they are smart and consistent with their finances. And that freedom will allow more people to work on things the world needs without compensation constraints.

Passive income is the ultimate goal

—therefore—

Start investing now; be smart and consistent

Like the adage about “the best time to plant a tree”,

Start now, set up auto-investment of a portion (10–20%) of every proper paycheck you earn in financial instruments with no/minimal maintenance fees^[1] that appreciate, pay dividends/interest, or both.

Because of compounding returns, investing sooner will significantly shorten your road to retirement.

Invest in Low-Cost Index Funds

Warren Buffett recommends this, and he’s one of the most successful investors of our time. The bulk of your investment should be in broad market indices (e.g., S&P or Dow Jones). You can include international index funds for diversity, but these days, any large-cap stock has international exposure built in.

The expense ratio of your funds should always be < 1%, ideally < 0.1%. Vanguard, Schwab, iShares, and Fidelity typically have low expense ratios.

These funds all have an expense ratio of 0.03% or less:

VOO (Vanguard S&P 500)
VTI (Vanguard Total Market)
SCHB (Schwab Broad Market)
IVV (iShares S&P 500)
ITOT (iShares Total Market)
FSKAX (Fidelity Total Market)
[½ of my portfolio is in FSKAX]

Fidelity has several zero-expense funds. But you must have a Fidelity account to buy and hold them.

FZROX (US Total Market)
FZILX (International)
FNILX (US Large Cap)
FZIPX (US Mid Cap)
FZSIX (US Small Cap)

[¼ of my portfolio—my entire 401k—is in FZROX and FZILX.]

Max out your employer retirement match

Accept all free money offered. Always contribute the maximum amount to your retirement fund to receive your employer match. This doubles your investment from the start. Never pass up free money.

Max out pre-tax retirement investing

Max out all pre-tax retirement/pension opportunities (e.g., 401k, 403b, Roth IRA, RRSP…). Even without a match, it’s still a better deal than paying tax first and then investing. Leverage every legal way to minimize your tax burden.

Turn on automatic reinvestment

Funds will generate dividends from the stocks they hold. Be sure to set your account to automatically buy new shares with the dividends. Cash sitting in a retirement account is always losing value due to inflation.

Set up an automatic recurring investment

Don't rely on manual investments; life will get busy and you'll forget.

An automatic investment from your paycheck will naturally smooth out any volatility.

Dollar Cost Average your withdrawals

You can't predict the market, so make regular withdrawals during retirement.

Set a beneficiary on all of your investment accounts

This will streamline the legal process for the people who inherit your account.

25× what you spend each year invested = retirement

The 4% rule of thumb (aka 25× rule) says that you can safely withdraw 4% of your investment every year, and it will last at least 30 years, even indefinitely.

It might be prudent to have a buffer so that you are only taking out 3% or 3½%, increasing the chance of indefinite sustainability.

Alternately, you can supplement retirement income with part-time work. This is sometimes called Coast FI or Barista FI. (Because here in America, you might need a job for health insurance. Yay us 😐)

Paying off debt is usually the best way to invest

The default prudent decision is to pay off debt. It’s a guaranteed, risk-free, tax-free return on investment. Only keep it if you have a specific better reason (e.g., the government might pay it off at some point, there are tax advantages, or it’s such a low rate, you can earn more investing it).

Never carry credit card debt

Credit card interest rates are horrible. Only buy with a credit card if you have the cash to pay for it now. Always pay off your entire credit card balance due every month. If you do have credit card debt, seriously consider debt consolidation.

Other recommendations

For cash, checking, and credit cards:

Get a cash-back credit card (Ideally 2%, at least 1%). I use the Fidelity Rewards Visa, which is 2% cash back, and they don't charge a foreign transaction fee. I also exclusively use my Amazon Prime Visa for 5% back at Amazon and Whole Foods.
Only use your credit card as a convenient replacement for cash. Don’t spend money you don’t have.
Get a high-yield cash account with checking features. I use Wealthfront, which is currently 4%.
Get an ATM card that reimburses fees. I use Fidelity, which doesn’t charge foreign transaction fees.
When traveling abroad, bank ATMs are the best way to get cash.
Don't be afraid to dispute dubious credit card charges.
Use the purchase protection benefit of your credit cards. It will reimburse you if an item you buy is broken, lost, or stolen.
Always call and ask for fees to be waived (such as for a missed payment or annual fee). I've done this a dozen times, and it usually works.
(But only if the fee is big enough to make it worth your time. I usually let go of anything under $10 )
Never loan money to friends or family. If you do, consider it a gift.

Further info

Anything by Rebecca Herbst (founder of Yield and Spread)

Kindling change: How FIRE can help you do good (Rebecca’s talk from EAGx Virtual 2024)

Personal Finance for EAs by Nicole Janeway (Dec 10, 2022)

Quit Like a Millionaire by Kristy Shen (founder of Millennial Revolution)

Playing With FIRE (Financial Independence, Retire Early)

^{^}
Some would say rental income is a source of passive income. Not me. It requires a lot of time and money to maintain. I never have to insure or repair my financial portfolio.

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RasoolMay 137

Dollar Cost Averaging reduces volatility

Investing as a lump sum supposedly beats DCA even when adjusting for risk, via the Bogleheads forum, referencing a Vanguard study

Dave Cortright 🔸May 131

In most instances, people invest with a portion of each paycheck; there is no lump sum available. If you do have a lump sum and want to invest it, go for it. I stand by it for withdrawals, though. You need to have a prudent cash reserve, and liquidating on a regular schedule is a good way to do this. Or just stop reinvesting interest and dividends.

SjlverMay 126

Thanks! This sounds like good advice

I have two related thoughts that I would love to hear your opinion on:

There seems to be quite a large opportunity cost. Instead of investing, you could spend the money on effective causes now. Or take a lower-paying job now rather than wait until you've reached some investment goal. Presumably, many effective organizations would benefit from getting money/talent earlier? If you want to maximize your life's impact, would that be a good strategy?
Depending on your AI timelines, money that is locked until retirement is... maybe not lost, but carries a high risk. I'm personally more motivated to invest money in a way that I could use or reallocate it in cases where AI causes the economy to massively change. Do you think that makes sense, or are the tax benefits of pensions more important?

Dave Cortright 🔸May 14*1

I think about it as 2 mechanisms for income: my effort or my investment's effort. I'm at the point now where my investments do 100% of the work for earning my income, leaving me 100% of my time to spend how I see fit.

You can give more to effective causes sooner, at the cost of investing more effort for longer to keep the money coming in. Ultimately, how you want to give back, at what stage of life, and how much are all unique, personal choices.

Absolutely, make adjustments based on any personal values or beliefs. I consider this to be like many art forms. You need to learn and know the foundational basics before you can make good judgments on which parts to change or ignore.

Rebecca HerbstMay 124

Thanks for posting this, @Dave Cortright 🔸 —and appreciate the Yield & Spread shoutout too! It’s been five years since I reached FI, and it’s given me such a solid foundation to shape a life that feels meaningful (or at least, I hope so!). So i'm glad to see when others find value in talking about it. If you're not thinking about FI, I think it's worthwhile. Here are some of it's superpowers.

FI folks know how much they need to live a happy life, which makes it easier to create space to give back
FI offers the freedom to choose careers more intentionally, since there's less dependence on income.
FI provides the flexibility to pursue high-impact projects

Lorenzo Buonanno🔸May 124

Thank you for sharing this.

What do you think of this old article from 80,000 hours that argues against investing everything in US equities?

Especially after the recent market volatility, I'm wondering if it makes sense to recommend people invest part of their wealth in bonds and commodities

From the article above:

Many people I’ve spoken to are almost fully invested in US equities. I think the rationale for this is that equities have been the best returning asset historically, so there’s no reason to own anything else. Another rationale is that since you can’t beat the market, you should put everything into equities.
But US stocks do not equal “the market”. If you try to tally up all global financial assets, you get something like this:
18% US stocks
13% Foreign developed stocks
5% Foreign emerging stocks
20% Global corporate bonds
14% 30 year bonds
14% 10 year foreign bonds
2% TIPs
5% REITs
5% commodities
5% gold
This represents the truly agnostic portfolio. If you think you have no ability the beat the market, then this is the portfolio with the best risk-return. 100% US equities is a huge bet on just one asset.
From 1973 to 2013, a portfolio like this returned 9.9% per year. In comparison, stocks returned 10.2%. So you only gave up a tiny 0.3% to switch to this portfolio.
In return, you had far lower risk. The volatility of the 100% equity portfolio was 15.6%, whereas this diversified portfolio had a volatility of only 8%. The maximum drawdown was also only -27% compared to -51% with equities. The wide diversification also makes you less vulnerable to unforeseen tail risks.
The much lower volatility means you could have levered up 2x and ended up with the same amount of volatility and same drawdowns as equities, but returns that were twice as high, at 20% per year.
(It also had slightly higher returns than a 60/40 equity/bond portfolio (9.9% vs. 9.6%) but with volatility of 8% rather 10.5%. The returns and risk are also similar to the risk parity portfolio Ray Dalio recently recommended to Tony Robbins. And if you lever 1.4x, you get something that historically looks very similar to the true Bridgewater ‘All Weather’ portfolio).
(Source: Meb Faber’s book “Global Asset Allocation”)
Going forward can we expect a similar result? If US equities do unusually well compared to other assets, then the diversified portfolio is going to perform worse than 100% equities (as has happened in the last few years). But due to the far greater diversification, and so long as you have no strong reason to believe you can pick which assets will outperform, we should expect the global market portfolio to deliver the best ratio of risk to return. [...]

Rebecca HerbstMay 123

@Lorenzo Buonanno🔸 you might like the work of Frank Vasquez from Risk Parity Radio. Don't let the lack of design aesthetic deter you :) He's made a lot of waves in the FI community pushing for alternative approaches to the 3-fund portfolio.

Lorenzo Buonanno🔸May 122

Thanks for sharing!

I don't have the necessary expertise to evaluate the portfolios, but I would be curious to know what you usually recommend to the people you advise. Is it closer to all-stocks, 3-fund, or something else? Or is it highly dependent on the specific individual financial situation?

Rebecca HerbstMay 134

First, I want to be clear I'm not an investment advisor.

But with that out of the way, I almost always lean towards the 3-fund portfolio. It's easy, low-cost, transparent, and leads to the least amount of speculation. My personal strategy is "set it and forget it". I rarely look at fund performance, I'm just playing the long game and investing in as many types of assets as possible that require minimal-to-zero effort on my part. With that said, I do tailor my 3-fund strategy to my specific financial situation - it's minimal tailoring, but I focus on my allocations (stocks vs. bonds broadly speaking) and the types of accounts I'm investing in (e.g. 401k vs. regular investment account).

If I am to question this strategy, it's in one of the legs of the 3-fund stool. I have no major qualms with investing in the index funds that represent the stock market (maybe some moral ones but generally speaking not really). Where I pause is with Bond Funds. Stocks are meant to support growth in your portfolio (and maybe dividend payouts). Bonds? Well what are they for? To perform well when stocks are down? To provide consistent cash payments? To stabilize your portfolio? Provide inflation protection? Total Bond funds like BND try to do all of this and as a result kind of do none of this.

So TLDR: I think it's worth considering a more tailored bond strategy that is specific to your financial situation, where as you probably don't need to be doing this with stocks.

With all that said, the more you tailor the more you speculate!

Dave Cortright 🔸May 121

Agreed that there are other options out there for those who want to invest more time and energy. But it's the 10% case, and what I've outlined here was designed for the 90% case. I tried being a more active money manager, and I realized I'd rather spend my time and attention focused on other things 🙂

JosephMay 122

From 1973 to 2013, a portfolio like this returned

(Note that these comments weren't my original thoughts, but are from a conversation about investments in which I brought up the asset allocation recommended in Benjamin Todd's article)

MichaelDickensMay 134

This portfolio has nothing to do with chasing past performance. According to standard finance theory (including making a bunch of assumptions about rational investors, zero transaction costs etc.), the global market portfolio is the theoretically optimal portfolio to hold. The idea is that if markets are efficient then you can't predict which asset classes will outperform, so you should just hold some of everything.
This portfolio doesn't require any rebalancing. It's the global market portfolio (or it was as of 2015). If you have 18% in US stocks because they represent 18% of the global market portfolio, and then US stocks go up to 20%, your holdings also go up to 20% so you don't have to do anything. Although it might still take some work to manage if you're adding more money to the portfolio on a monthly basis (or whatever) because you need to deploy your new investment in the correct proportions.
Realistically you can get pretty close to the global market portfolio by buying global stocks + global bonds and not worry about the smaller positions. You can do a 2-fund portfolio with 50% VT, 50% BNDW.
1973 to 2013 isn't arbitrary. 1973 was the chosen start year because that's the earliest date at which we have good data on global equity returns.

Lorenzo Buonanno🔸May 122

From 1973 to 2013, a portfolio like this returned
Anytime someone picks a seemingly pointless and random date range like that they are biasing the results.

Just want to quickly note that that article was written in 2015, so looking at 1973-2013 doesn't seem that random.

There gets to be a point when the marginal gain for a different asset mix isn't worth the extra hassle and cost of rebalancing.

I definitely agree with this, but I'm skeptical that 100% US equities is already at the point where adding some diversification is too costly.

If you're selling to rebalance in a taxable account, then the capital gains tax is going to eat away at your investment gains.

If I understand correctly, donating stocks can be a way to partially offset this that might be useful to keep in mind for EA investors.

That said, I'm really not knowledgeable in this, and it seems plausible that the best way to diversify doesn't include bonds

Dave Cortright 🔸May 121

For me (and most people, I suspect), usability is a top value. I used to read the Motley Fool and followed some of their advice. I even bought into their premium service for a year. And I found that I didn't want to spend my time tracking investments, trying to time things, buy low, sell high…

I like the buy-and-hold strategy. I think it's good foundational advice, and you can start to tinker and diversify as you personally see fit.

JosephMay 123

I am also an American who has occasionally given informal investment advice to non-Americans. I agree with the broad strokes of what is written above, and I want to add a note regarding how hard it can be for people who aren't Americans or who don't have access to the types of investment tools:

If you don't have some sort of employer matching, if you don't have some sort of tax sheltered/preferential account available to you, and if you don't have a way to access American stocks, it can be really hard to invest. Many countries don't have something like Vanguard, or don't have stock markets that have a long-term upward trend. Sometimes the best option is to try and open an international account to invest in VTSAX or VTI or VOO (or something similar), but that usually involves additional fees. So this is basically just to say that I have sympathy for how hard it is to do these things when you don't have access to several of the most impactful methods/tools.

Lorenzo Buonanno🔸May 124

I'm surprised to read this. Interactive Brokers (as an example) is available in many countries, has low fees, and there are many similar country-specific services. Can't people just buy VWCE/VWRP/IWDA?

All my friends in Europe and UAE don't seem to find it hard to invest

JosephMay 132

Can't people just buy VWCE/VWRP/IWDA?

Sometimes people can just buy those funds. I'm guessing that people in relatively wealthy/developed economies have the best options (and people living in their home country tend to have better options than people working internationally, since many finance/investment/banking things are restricted by citizenship). Most major European countries probably have services like Interactive Brokers or Vanguard or similar options (although I haven't looked into the details of it). And I assume that things generally are improving over time: things available now weren't available in 2015, and things which were available in 2015 weren't available in 2010. Commission-free trading is now very common among the large brokerage firms, which is a huge improvement for the individual investor.

Folks in Europe, UAE, and similarly wealthy/developed areas probably have the best options available to them. The investment options available to a Spaniard or a Emirati are probably better than those available to, say, a Peruvian or a Mozambican or a Vietnamese. A few years back a friend from [undisclosed non-OECD country] was looking to invest her savings, and the least bad option we could find was to pay extra fees to invest through a brokerage in her home country that allowed her to buy American index funds; the native/local funds just weren't very good. So she was able to invest, but it took extra steps and cost her more money to do so.

So I don't want to make it sound like nobody outside of the USA can invest. I just want to emphasize that it is harder for people who don't have the good fortune to be born in or to live in develop countries; they often don't have access (or have to pay more fees for access) to some of the following things, and it is a lot harder to build wealth if you don't have access to these things:

low fee investment brokerages
brokerages with commission free trades
able to invest without risk of currency fluctuations
index funds/mutual funds that track a good stock market
being able to invest in global markets without paying extra fees
tax sheltered/tax advantaged investments (Such at the IRA in the USA, a RRSP in Canada, or a Super in Australia)
employer sponsored/supported investments/savings (a 401(k) match is fairly common among 'good'/elite/white-collar jobs in the USA)

If you will indulge me in some rambling, one thing that sticks in my memory is learning that a countries economy can grow a lot while it's stock market does quite badly. I wish I had the image to share, but remember an image from a finance class I took showing China's GDP growth over many years alongside it's stock market growth; if a Chinese person had invested a broad index of Chinese stocks, it would have had very modest growth. It disabused me of the notion that I should try to invest in a country if it's economy is growing. And of course, Chinese people have the added challenge that the currency can't be traded freely. And brokerages that technically have operations in China might not be open to retail investors; I recall seeing a few years back that Vanguard opened operations in Shanghai, but it was only private investment advice for high-net-worth individuals, and regular citizens couldn't open their own account. When I lived and worked in China as a foreigner with a visa, I wasn't allowed to invest because all the investment firms required investors to have a China National ID Number. (my apologies for focusing on China so much, it is the area I know best)

Dave Cortright 🔸May 121

Thanks for sharing your perspective! For any reasonably large economy, I'd think an analog market index fund would be the best alternative. But I admit I didn't look at it in detail. I know that the Millennial Revolution couple are Canadian, and they had some posts on how they invest in America. Those might be of interest.