My Shameful Investing Secret

I have an investing secret. No, not a secret way for you to “earn 10,000% return on your investments in 3 easy steps!” It’s a secret about how I invest my money. It’s an investing secret that would upset a lot of financial advisors if they knew it. Are you ready? Here it is.

I am purchasing 100% stocks with my investment contributions.

I’m not buying a single bond.

And putting money into cash holdings? Psssh.

My TSP…IRA…taxable accounts…all contributions are going to stocks.

I know. I know. Terrible idea! But before you give up on me forever, read the rest of the story.

Is it a big risk?

Heck yes it is.

Huge.

Investing 100% of my contributions in stocks means I’m putting all of my money, and my faith, in the stock market.

Is it scary? Not for me, but my risk tolerance is through the roof. John Bogle said “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”

Not only does a 20% drop in stocks not scare me, it actually excites me. Why? Because I view that as a sale! I would be pumping every dollar I could into the stock market to take advantage of the lower prices, so when the stock market comes back to life, which it historically always has, I would be in a far better place financially.

Keep in mind, all of this is done with the understanding that I am widely diversified in my investments. I only have a couple individual stocks that I picked up when I was new to investing. Since then I’ve learned to pick funds with hundreds of companies in them, so the failure of one or two won’t affect my portfolio too much.

So why am I only buying stocks?

There are a few reasons.

First: because I want to retire early, I don’t have the long investing timeline that most people have. Instead of 40-50 years of compounded earnings, I’m looking at only 20-25 years. That means my money has to (or at least hopefully does) grow faster than it does for the average investor. Stocks are higher risk, but they also have a higher potential long term return than bonds.

Second: I am working on other wealth-building and retirement measures that are lower risk. My high stock allocation is offset by these other ventures. They aren’t risk free, but then neither are bonds.

• I am working towards a military pension. This is not a risk free venture. There are plenty of things that could happen that would end with me not earning a military pension. Having been through several Reduction In Force boards, I’m quite aware of that. However, if I am lucky enough to earn a pension, it will be incredibly stable. I would say it is one of the most reliable sources of retirement income available, period. This makes me comfortable investing more aggressively than I otherwise might. It also explains why I’ve gotten more risk tolerant over time, as I’ve moved closer to retirement.
• I have also been paying off the mortgage on my rental property early. I’m not putting a ton of money towards this, but if you think of it as a fixed-income investment (like a bond), my normal mortgage principle payment plus extra payments is equal to spending about 10% of my investment contributions on bonds. This is only a slightly smaller allocation than my age would suggest using the formula you will see later in this post. My interest rate on that mortgage is just a little less than the average return of a long term bond fund, too, so (to me) it’s a very rational replacement for bonds.

What will I do if the stock market crashes?

That’s easy. I’ll keep working until I have enough money to retire. It’s the same thing I will do if the stock market doesn’t crash.

If I receive the pension I am currently working towards, it will cover 100% of my normal living expenses. So it’s entirely possible a stock market crash wouldn’t affect my retirement plans at all. But if I don’t make it to a military retirement for whatever reason, I will be relying on that investment portfolio. And I would work until that portfolio equaled the amount I would need to fund my retirement using a Safe Withdrawal Rate, whenever that would be.

However, since I’m planning to retire so young, even a huge market crash (30% or more) would just mean I need to keep working for a few more years until my portfolio recovers.

That’s the thing about planning for early retirement. If something happens and I have to work a few extra years, I’ll still be able to retire at what is considered a young age. For instance, if a major recession hits right as I reach 20 years in the military and I have to keep working for another decade, I’ll only be 51 when I stop working. That’s still very young for a retiree!

But if I plan for retirement at age 67 (current Full Retirement Age for my age group) and a market crash happens around that time, I might have to work well into my 70s. And while plenty of people do work into their 70s, it’s not something I’d recommend planning for. You don’t know what your health or life situation will be at that point.

I’m not saying everybody should plan to retire in their 40s. But if you can plan for any early retirement, say, age 60, then you should be able to recover from a major economic downturn without resigning yourself to working forever.

Should you purchase 100% stocks?

I can’t answer that question for you. I can tell you that what is right for me isn’t necessarily right for you.

Oh, you want a clearer answer than that? Fine.

Probably not.

Very few people have as high of a risk tolerance as I do. A lot of people would be very rightfully upset if their IRA suddenly lost 30% of its value. And only a small percentage of Americans qualify for a pension. Of those, a tiny amount will be able to cover 100% of their expenses with the pension alone. Most people will need income from other sources, including their investment portfolio. So there is only a teeny, tiny percentage of people who could invest 100% in stocks comfortably.

Prior to the Great Recession, the rule of thumb was that you should subtract your age from 100 to figure out your stock allocation. The rest of your portfolio would be comprised of fixed-income assets (usually bonds) and cash. So if you were 30 years old, you would have an asset allocation of, say, 70% stocks, 25% bonds, and 5% cash.

The recommendation has now changed. Between the lower expected returns following the Great Recession (still too early to tell if that is true) and the longer lifespans of Americans, the formula is now 110 or even 120 minus your age. So a 30 year old would have 80-90% stocks. The purpose of the higher stock exposure is to provide greater growth.

And then risk aversion comes into play. I’m planning a longer post on this later, but basically you need to assess how much risk you are willing to take. If your age indicated you should have 80% stocks but that risk exposure keeps you up at night, then you probably need a lower percentage of stocks. You should still put some money in stocks, but also look for other ways to increase your portfolio such as increasing your savings rate.

Have I always put 100% of my money into stocks?

Actually, no. It’s a relatively new state, to be honest. I’ve been heavily – 90%+ – in stocks since I started investing over a decade ago. But I only recently directed all of my contributions towards stocks. It’s working for me right now. In three months I might wake up and decide to move back to more of a 90/10 stock/bond split, but for now I’m happy with 100% stocks.

Prior to this, I contributed to a diversified mix of index funds, mutual funds, ETFs, and lifecycle funds. Because of that, my investment portfolio is already about 8% bonds and a tiny amount of cash. Combined with the mortgage prepayments, I’m pretty on par with recommendations, but as long as I stick with my contribution plan I will increase my stock exposure and decrease my proportion of bonds over time.

How do I sleep at night with all this risk?

I simply don’t look at my investments. Well, mostly. As I said in My Investing Philosophy, I do a total review of all accounts on January 1st every year, so I can see how well I did then. I also check out my TSP and Roth IRA annual statements to see my annual rate of return. But I don’t check the quarterly statements, and I sure as heck don’t check my investments weekly or daily like some people do. There’s nothing wrong with doing so, but it’s not for me. Too lazy, remember?

Why am I telling you this?

There are a lot of investing styles out there. Some are better than others, but the important part is to be invested. And the sooner, the better! So don’t let anybody, including me, intimidate you into thinking your style is wrong. And definitely don’t let the fear of getting it wrong stop you from investing! You definitely want to choose your asset allocation with care, but don’t get so hung up on it that you don’t invest at all. Like I indicated at the beginning, there are a lot of financial advisors that would think I’m crazy for investing the way I do. But it works for me and my goals.

Figure out an asset allocation that works for you and go for it. Use the formula above (110 or 120 minus your age) or find an asset allocation calculator online. Here’s one from Bankrate that I like. If you still don’t know what to do, look into lifecycle funds. They automatically allocate and diversify your money for you, including changing the asset allocation as you get older. I highly recommend them for anybody who wants to invest but doesn’t know where to start.

 

So that’s my investing secret. Have you figured out a good asset allocation for your investments? Why did you choose it?