I have been asking this question since I started investing and am still looking for the answer. We all know that in order to save up for a healthy retirement you’ve got to choose the right funds to stuff inside our investment portfolio. Choose poorly and your money will slip away from underneath your feet. Choose wisely and you’ll enjoy a full retirement with plenty of safety.
Solin’s Investment Portfolio Recommendation:
Normally we could use the classic Rule of 110 where you take your age, subtract it from 110, and you’ve got your percentages for stocks and bonds. Although this is helpful, most investors will need more specific guidance.
Today’s recommendation comes from a book I recently read called The Smartest Retirement Book You’ll Ever Read
by Daniel R. Solin. In Part 2, Solin makes stock picking extremely simple for us – he tells us not to do it! Instead, Solin decisively thinks we should go with low cost Vanguard index funds. He feels this is a better route due to their superior returns, low cost, better diversification, tax advantages, and the nature of their low cash holdings.
In Chapter 5, Solin gives us a very simple investment portfolio consisting of the following:
1. Total Stock Market Index Fund (VTSMX)
2. Total International Stock Index Fund (VGTSX)
3. Total Bond Market Index Fund (VBMFX)
Here are Solin’s asset allocation models arranged by risk:
Return History from Solin’s Asset Allocation Models:
If you’re interested in seeing how each of these portfolios performed over the years, Solin provides data for each in Appendix B:
Readers – What do you think of this simple investment portfolio advice? What other asset allocation models do you usually follow?
Related Posts:
1) What are Mutual Funds and How Do I Invest in Them?
3) What Does “Stocks Return 8 Percent Each Year” Actually Mean?
Photo Credit: freedigitalphotos.net, “The Smartest Retirement Book You’ll Ever Read”
Those are some pretty lucrative returns. It would simplify things a lot to just go the index fund route. Most people would rather pursue the possibility of even higher returns though.
Exactly the point. They would rather “pursue higher returns”, but the author argues that they won’t find it. That’s the beauty of this simple plan!
Does he mention the Vanguard Retirement Date Funds? A ton of companies offer them too – but for people who’ve asked me what they should do when they “don’t know”, “don’t want to research” or, ahem, “don’t care” I tell them just use a TD fund and maybe someday they can move out of it.
He does mention target date funds, but he favors this portfolio instead. Target date funds are okay. The Vanguard TD funds are one of the cheapest ones I’ve ever seen. But they’re not all the same across all companies. The ones in my 401k plan are ridiculously expensive, so I avoid them.
Studies have proven low cost index funds can’t be beat for the average investor compared to actively managed mutual funds. Plus it keeps things simple. I did a guest post topic on keeping investing simple over at BudgetsAreSexy. Vanguard is pretty popular. I’m personally not against actively managed mutual funds and depending on the fund it could be good mutual fund to invest in. But as you pointed out…it’s best to keep it simple for now.
I’m sure there are some actively managed funds that can do okay in the short term or marginally better than an index fund for an extended amount of time, but not in the long run. It all depends on if you are willing to take on more risk. With an index fund, you pretty much know what you’re going to get. And if its anything like history has returned, 8% isn’t that bad! Plus it is much simpler. Vanguard is pretty good for keeping things cheap!
For now I just stick with the asset allocation in my vanguard target retirement 2050 fund as far as retirement goes. It works for me 🙂
Keeping it simple and using Vanguard! But come on – you’re going to retire long before 2050, right? 🙂
I’m always disappointed with this advice. Not that it isn’t good stuff….it is. Advice like this always discounts the one problem I always ran into as a financial planner: some day you’re going to have to take the money out. What do I do when this model is down? If time weren’t an issue, then I might even find a more aggressive mix.
I appreciate your honesty Joe. But couldn’t you say that about pretty much any portfolio? What do you do if your active fund is down? What if your more aggressive mix is down? Plus, I think the 20/80 Low Risk portfolio would look pretty attractive if I were entering my retirement years.
Not really. I have no business being in an active portfolio with a high standard deviation if I’m only five years away from my goal (for example). Rather than a percentage in stocks/bonds, wouldn’t I figure out what I spend per year and base my percentages of investment dollars vs. current income streams on that instead of a set allocation?
I love discussing this stuff. Asset allocation is something we’d sit for hours over beers with after work (a bunch of money nerds….).
If you’re smart enough to diversify and start bringing in more income streams, then you’ve advanced past the 1-2% difference that these various portfolios can deliver.
You’ll have to let me know the next time you’re near 14 Mile Rd. Then we could do this for real!
My wife and I have our retirement money in T Rowe Price and Vanguard target date funds.
Another one for Vanguard Target Date funds! Which year are you guys targeting?
Ha, when I asked investment consultant how much on average are the returns. He said “in the long run… it is usually around 10%”
It shows so from the book. I guess I can trust the guy 😉
That’s right Alik! I actually feel like going forward things are going to be a little more like 6 to 8%, but that’s just me. Depending on who you ask, 8 to 10% is usually what people will tell you. So far so good on your consultant if he’s not trying to over-promise figures to you!
That’s exactly how I started my retirement plan. I had no clue and saw this advice. I have added a few things since then, but a grea way to start if you are not very well versed in investing.
Exactly! This is a very easy way to start out. In fact, I may go the other way – going from too complicated and not so great active funds to a more simplistic approach such as this.
Great idea. I also recommend Vanguard inflation-protected securities fund(essentially bond fund). It’s a low risk fund with above average return.
https://personal.vanguard.com/us/funds/snapshot?FundId=0119&FundIntExt=INT
Low expense ratio, 8 to 10% return … I’m sold! I can’t wait until I qualify for Admiral Shares!
So far my husband and I have been averaging about 11-13%, we both have 401’s and Roth Ira’s and have allocated our investments using similar funds in all accounts.
Not too shabby! I’m curious if you guys just started out after the great recession in ’08 which has been a pretty decent time for returns. If you’ve been pulling that kind of return for more than the last 4 years, then I encourage you to write your next blog post about your winning secret combination of investments! 🙂
It’s May 2016 & I just found Solin……his advice is timeless!
Hi Sam, and welcome to the site. You got that right about Solin’s advice. I still go back to this post every now and again, and re-read my notes from his book. There were a ton of good nuggets in that one.