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ChooseFI

277 | Gauging the Weight of your Portfolio

61 min • 11 december 2020
  • Setting up your financial life includes updating your investor policy statement and examining the rationale for equal weighting inside your index funds.
  • Brad is giving his physical fitness a boost in December with a month-long burpee challenge. A full-body exercise that can be done quickly at home without any equipment, Jonathan asks what would change about your life if you took the challenge of doing 10 burpees every day for the next year?
  • Brad was inspired to take on the burpee challenge after watching Alan Donegan and his wife, Katie, in a video they posted of themselves doing burpees. They weren't holding anything back and completing each rep with a high degree of difficulty. He wondered what it would look like to give everything your all in life, like Alan and Katie were with their burpees?
  • Jonathan reflected on how he is often more focused on getting to the end result than he is in the quality of the movement, which he likens to the old saying about losing sight of the forest for the trees. We should focus on systems, processes, and workflow, over results.
  • Get up off the couch and do something that will make your life better in some small way. Cancel a subscription, get rid of convenience, meal plan, do something that makes your life 1% better. And if you start doing burpees as a result of this episode, send in an email to let Brad and Jonathan know.
  • Although we often talk about and identify the massive actions people can take to make their financial lives better, the community has been very receptive to the idea of aggregation of marginal gains.
  • This year, Jonathan has been having conversations with his wife about their investor policy statement and what changes they might make to it since they feel like they are in a place of calm and unemotional decisions can be made.
  • Brad and Laura believe in thinking long-term, lowering their expenses, continuing to invest, and having things on autopilot. Their investments are almost entirely in low-cost brand-based index funds, like total stock market and S&P 500 funds. they also do have some bonds, international stock funds, and rental real estate.
  • Jonathan and Dani have similar investing strategies. They invest for the long-term and diversify in low-cost funds to avoid fees.
  • Recently, Brad and Jonathan discussed the difference between a total stock market index fund and an S&P 500 index fund and how with a cap-weighted fund you a disproportionate amount of the largest companies. A lot of investors believe you should try to have small and mid-cap companies equally weighted in your portfolio.
  • It used to be difficult to set your portfolio this way. Recently, online investment firms have come online, such as M1 Finance, Betterment, and Wealth Front, whose interfaces have made this significantly easier to do.
  • Jonathan recently conducted an experiment with his own investments following one of Paul Merriman's portfolios that can be found on M1 Finance. Fifty percent went into a total stock market index fund, and the other 50% went into an equally weighted fund. With the impact COVID had on small businesses this year, the equally-weighted portfolio was crushed.
  • However, when pursuing FI, we are interested in performance over the long-term and Jonathan notes that the smaller companies that have been crushed this year, might actually be on sale.
  • Because Jonathan doesn't like sitting on a bunch of cash, even in an emergency fund, the idea of negative correlation is appealing to him. He wants his emergency fund to hold steady or go up when the market is down and is willing to sacrifice a little bit of return to achieve that.
  • Your options to equally weight index funds may be more limited at large institutional firms, but with M1 Finance, Jonathan was able to set up a Negative Correlation pie, a Can I Pick pie, and an Equities pie.
  • Jonathan's M1 Finance account acts like an emergency fund but is also a growth machine. It is more conservative than his 401Ks. He views these taxable investments as another form of savings.
  • Some of Paul Merriman's recommended ticker symbols are VIOO, the Small Cap 600, IJS, the Small Cap 600 value, VOV, the 1000 Value index fund, VOO, the S&P 500, and others like VEA and VWO.
  • While many of us want to keep things simple and do not want to be stock picking, when investing in something like an S&P 500 Index fund, we are essentially stock picking. Understanding that, Brad still chooses to invest mainly in total stock market index funds.
  • In episode 194, Frank Vasquez talked about after taking a hammering in 2008, he wanted something in his portfolio that would go up when others were fleeing the market. He discussed corporate bonds, precious metals, and US treasuries were some of the types of investments people flee to.
  • Jonathan and Dani decided to invest in precious metals, which will hopefully be more effective than a savings account
  • While Brad doesn't believe in investing gold, Jonathan notes that if there is ever a loss in confidence in government, people will flee fiat currencies.
  • It's good to understand that these different tools are out there and react to market conditions differently.
  • A year-end review is an excellent time to decide what to invest in rationally and from a point of understanding your own psychology.
  • The first week's community win winner is Chris, who recently became debt-free, max out his 401K and HSA, as well as he and his wife's IRAs. They also began investing in a taxable account and contributing to their son's 529 accounts.
  • The second winner is Khang, who negotiated faster internet for less money using online chat. It never hurts to ask, but if you never ask, it's always a no.
Resources Mentioned In Today's Conversation If You Want To Support ChooseFI:    
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