It All Started With A Single Article
As I sat, wondering what to do with all the money we saved over the years, a number of thoughts came to mind. They ranged from buying a food truck, renting apartments, starting an online business, investing in the stock market, buying a bigger place, shopping for new car, or shop until I drop.
Even though I had very basic knowledge in all of the above categories, I knew I had to keep the complexity level to a minimum. At the same time, aside from investing, shopping, buying a place and a car everything else had dependencies and required dealing with people in one way or another. The more people you deal with the more complex things tend to become. Higher complexity equals lower profits!
I’m not saying don’t get involved in any of the above categories, I’m simply stating that I was not prepared to give my best and pocket only a portion of the profits.
Not pleased with the potential outcome of the other possibilities, and not interested in buying a new house, clothes or car; the decision to invest in the stock market was the only logical option left on the table. It was simple enough and required small effort on our end that brought substantial returns over time.
In 2015, on my commute to work, I came across an article reading Forbes, which read, “How This Couple Retired in Their 30’s To Travel The World.” A book called, Your Money or Your Life by Vicki Robin was featured in the article. As soon as I was done reading, I turned to my Kindle application to download the book. That is where our education about money and investing started.
I was so impressed with Vicki’s book because I knew it was going to make such a huge impact on our financial life, I contacted her and asked if I can have her book translated in Macedonian. You can read the rest of the story and my interview with Vicki Robin here.
Investing In The Stock Market
After reading The Simple Path to Wealth by JL Collins we were ready to embark on the stock market journey of our lifetime. Thanks to Mr. Collins and his famous Stock Series, I was convinced that everything we needed to know about wealth building was covered in the stock series. To date, it is the best resource out there on the internet for anyone looking to get a taste of stock market investing.
John C. Bogle the founder of The Vanguard Group, is another personal hero of ours. Vanguard is the only investment tool that we use. Vanguard investors are actual owners of Vanguard and their expense ratios are well below the industry average; hovering around 1%.
Investing In The Stock Market with Roth IRA
We have Roth IRA and Brokerage accounts with Vanguard. In fact, even our kids who are 4 and 6 years old, have their own Roth IRA account. Somewhere along the process of designing our investment strategy, we stumbled upon Vilfredo Pareto principle or the 80/20 principle. In a nutshell, 80% of the results come from 20% action. Not only did we use Pareto’s rule as our investment strategy, we applied it to our daily life.
Think about it, 80% of the time you wear 20% of your clothes, 80% of software vulnerabilities come from 20% of software bugs, 80% of pea pods in Pareto’s garden came from 20% of the pea plants.
With that in mind, our Roth IRA Vanguard accounts are setup using the 80/20 principle; where 80% of our portfolio is invested in Vanguard Total Stock Market (VTI-70%) and Vanguard Total International Stock Index Fund (VXUS-10%) ETFs and 20% of our portfolio is invested in Vanguard Total Bond Market (BND) ETF. Our Brokerage account, on the other hand, is a little bit more aggressive housing 100% VTI ETF.
This strategy allows us to pretty much own every publicly traded company in the world. The VTI cover only US companies and the VXUS gives us the international exposure. The US stock market accounts for 54% of the total world stock market, where as the remaining 46% of the world stock market is covered under the VXUS.
Some may argue that VTI has international exposure simply because most US companies have subsidiaries around the world, therefore you don’t need to own international stock. I agree with the above statement, but we wanted to own a piece of truly foreign companies, when we started investing back in 2015. On the other hand, owning VXUS makes our portfolio slightly more expensive because of the higher expense ratio compared to VTI.
The plan for the next couple of months is to consolidate our current investment and reduce overall maintenance cost. In order to do this, we are selling all VXUS ETF, moving VTI and BND to Vanguard Total Stock Market Index Fund VTSAX and Vanguard Total Bond Market Index Fund VBTLX admiral shares.
In terms of how we feel about investing in the stock market, read what JL Collins has to say. I do trust his experience and judgment considering the fact it took Mr. Collins years to figure things out making numerous mistakes along the way. At the same time, a quick search on the internet can show you that the average bull market lasted 8.5 years and produced a cumulative return of 460%. Whereas, the bear market lasted 1.5 years and reported cumulative loss of -40%. If you consider the performance of S&P 500 from 1926 to 2018, it doesn’t take much convincing to see the benefits of long term investing.
Investing In The Stock Market With HSA
Few years ago we signed up for high-deductible health insurance plan through my employer and learned about the “amazing” Health Savings Account or HSA.
FI folks regard HSA as best of 401(k) and Roth IRA. Funds contributed to the account are not subject to federal income tax at the time of deposit and if used for qualified medical purpose. If you leave your funds in your HSA, those fund can grow tax free with interest like in Roth IRA. And regardless of your employment status you keep your tax free HSA balance forever.
Every year, the IRS increases the maximum contribution limits to HSA, see table below. This year, we can contribute up to $7,000 and reduce our FICA tax by more than 7%. Better yet, HSA contributions can be invested in long term index funds.
Learning about the power of HSA as wealth building tool, we took full advantage by maximizing and investing our entire contribution in two funds. The Vanguard 500 Index Fund Admiral Shares (VFIAX-80%) and Vanguard Long-Term Bond Index (VBLTX-20%).
Investing In The Stock Market With Roth 401(k)
We are constantly looking for ways to invest leveraging Vanguard and investing in my retirement savings account is no exception.
Right now I’m contributing 6% to my retirement account with slight modification to the 80/20 principle. To keep things interesting, I have altered my investment strategy and opted out for higher risk with 90/10 allocation. I decided to contribute to Roth 401(k) and pay taxes now, as I expect my salary to increase over time. I rather pay taxes on lower income now and enjoy tax free withdrawals in retirement.
Final Thoughts
To keep investing simple, efficient, and organized, which how investing should be, we use Personal Capital. It’s a free wealth management tool for tracking all of our assets and liabilities. Everything discussed in this post is linked to our Personal Capital account and is structured around the 80/20 principle.
See our current assets allocation below:
What is your investment strategy, please share your thoughts in the comments section below.
