Tom’s Thoughts: How I Invest My Money
As an advisor, I spend time giving people recommendations about their investments and in many other areas of their personal finances. In the interest of transparency, I want to provide a view in the other direction and talk about how my wife and I manage our own finances. This is quite a long piece, and may not appeal to everyone – if you want to skip down to the rest of the articles, be my guest. Nothing here is meant as a recommendation for how anyone else should do things; every situation is different, and what works (or has failed) for me may not be a fit for someone else.
The premise here is completely unoriginal; many advisors and financial professionals who have written similar pieces of late. I’d encourage you to read as many as you can, since each provides a different perspective. In particular you can read posts by Ryan Frailich (another advisor based in New Orleans), Peter Lazaroff, and finally Josh Brown, who turned his post into a book of the same name by collecting a wide array of other professionals’ stories.
Privilege and Luck
Before discussing our current situation, I am compelled to admit that privilege and luck as an upper-middle class white male in the United States have played an outsized role in where our finances are today. Growing up I was extremely fortunate that I never had to worry about money. I learned about saving and investing relatively young, and am privileged to have had a Roth IRA since before I went to college. The fantastic public schools I attended were due to my parents’ ability to choose a strong school district, which subsequently got me into a good college and put me in a position to graduate without student debt, and so on.
All of that background is essential to understanding my financial outlook, which is dominated by a very long-term view coupled with a high level of risk tolerance. Our situation, as I sketch out below, if a very fortunate one. But I didn’t create that through what I’m doing today – hence none of this is a prescription for anyone else to follow.
About 5% of our net worth is in cash; this provides operating funds in our checking account and an emergency fund in our savings account. I tend to view the cash in these accounts in terms of water levels. The checking account always has enough cash to cycle through a normal month without any worry that the water level will bottom out, leaving everything high and dry. When we have a major purchase, we move cash into the checking account from savings (not from the emergency fund) to pay for the purchase and move on.
The emergency fund is just that – for emergencies, like a loss of income or sudden medical expense. An emergency fund is not a cash reserve for great investment opportunities, nor is it a vacation fund. I generally aim to have 3 months’ worth of expenses in the emergency fund, but we will probably increase this a bit over the next year as my wife moves to the end of her training pipeline.
All of our expenses are automated, and the vast majority go on a credit card that provides 2% cash back. We try to keep things as simple as possible when it comes to bills and to credit card rewards. I also have an HSA with a small balance that used to be invested, but that moved to all cash when we entered a period of potentially higher medical expenses.
We currently rent, and have done so for the past 8+ years. And I’m completely fine with that; in that time, we’ve lived in 4 different apartments/homes (in six months that will increase to 5), and never had any measure of certainty about geography due to our careers. So long as there’s a decent likelihood that we will move within 3 years, I’m usually against buying a house because of the transaction costs on each end, the potential for very high maintenance costs, and the extremely concentrated bet on the value of the property.
To parse words (a favorite activity of mine), I believe there’s a large difference between a) an investment property and b) a home. We own an investment property that I bought during my time in the military, which accounts for roughly 20% of our net worth. As an investment property, I evaluate it based on the numbers alone, and we’ll keep it so long as the Excel spreadsheet say it makes sense.
A home, on the other hand, involves emotional attachment and provides a place for our family to live and grow. If we find someplace to settle in the next few years, we will likely buy a home. The purchase price and ongoing mortgage payment have to make sense in the larger scheme of our finances, but the primary criteria will be finding the right place for us to live.
I started my business just over three years ago, and the place it occupies in our finances shares some characteristics with a home. While it does provide my income, it also provides me with flexibility (as the worker) and control (as the business owner) – enormously valuable qualitative factors, as 2020 demonstrated time and again.
Our investment accounts consist of two taxable brokerage accounts and two Roth IRAs – one for each of us. These accounts are evenly spread between Fidelity and Schwab since they are large investment firms that provide cheap and plentiful investment options. Finding a brokerage firm that doesn’t charge commissions and offers very low-cost index funds is an absolute necessity in my opinion.
We also have a 529 college savings account for our 2-year-old daughter, but it is not well-funded. This will (hopefully) increase as our incomes do over the next 5 years, but it is a few steps down the priority list. Going forward, I will create a business retirement account in the next year or so (as my business grows), and if my wife finds a job where there is an employer match for 401(k) or 403(b) contributions, that will be a priority to set up as well. Both of those changes will once again automate our retirement savings, which will be a significant improvement.
We focus on funding our Roth IRAs first each year because I’m confident – although not at all certain – that tax rates will be the same, or higher, three or more decades from now when we tap our retirement accounts. And given our current low tax bracket, it makes all the sense in the world to utilize Roth accounts as much as we can. As a result of focusing on Roth contributions (and opting for Roth 401(k) contributions when I worked in the corporate world, plus the long time my Roth IRA has been open, our Roth IRAs are a little over 50% of our net worth.
So, how do I actually invest the money we have saved? My focus is on choosing the asset classes (large US stocks, emerging market stocks, US Treasury bonds, real estate, etc.) to invest in, writing down the target asset allocation, and then sticking to those targets. I utilize cheap index funds for almost every investment in order to invest in a diversified mix of assets and take what the market will give me over the long term. We own zero individual stocks; I am not and have never been a stock-picker.
While the mix of investments is diversified, it is also very aggressive. Across the Roth IRAs and brokerage accounts, we own zero bonds or bond funds. An all-stock portfolio can be very volatile, and not something that works for everyone. Since time horizons drive how I look at investments, the lack of any short-term need for the money we have invested means I could take a very long-term view amid the carnage in early 2020. Of course, over time our goals will evolve and if the time horizon for our non-retirement money changes, then the way it is invested will also change accordingly.
Finally, I also have a steam valve account, which is a small pot of money (less than 5% of investments) that sits outside the rule-based investments for our larger portfolio. Having a small account to play with makes it more likely that I’ll leave the rest of our investments alone so they can do their long-term-growth thing. Not everyone needs or wants this sort of arrangement, and how often someone trades is completely individual. Personally, day trading holds no appeal; I made a grand total of two moves in 2020, and don’t have any plans to make another move anytime soon.
I cannot recommend anyone take what I’ve written here and blindly follow it as some sort of recipe for success. Everyone manages their finances differently, and that’s how it should be. The key is to find a system that works for you – then automate everything you can, and write down rules for the portions that you can’t automate.