A reader writes in, asking:

“I would be very interested in reading about the various financial products that you use if you would be open to sharing that information.”

I’m happy to discuss it, but it’s not very exciting. As with our retirement savings — the entirety of which is invested in a single mutual fund — the goal isn’t to squeeze out every last dollar of performance. Rather, the goal is simplicity.

As regular readers surely know, we use Vanguard for our solo 401(k) plans, Roth IRAs, and traditional IRAs.

For our checking accounts (business and personal), we use Bank of America. The accounts earn no interest, but they also do not charge any fees for any of the things that we do. (Also, back when we were using S-corp taxation for our businesses, it was nice that BoA had an integrated payroll service — which was actually done by Intuit — that was easy to use and inexpensive.)

We use two credit cards:

• The Amazon Prime Visa that gives 5% back at Amazon; 2% at restaurants, gas stations and drugstores; and 1% on everything else; and
• The REI MasterCard that gives 5% back at REI, 2% on groceries, and 1% on everything else.

For tax preparation, I use TurboTax — not because I think it’s necessarily any better than the alternatives, but because it’s what I’m used to using at this point, and I don’t particularly want to invest the time to learn a new piece of software.

As far as other personal finance software, it’s rare for me to use anything other than Excel. Our finances are not complicated, so we don’t really need anything fancy here. (Also, given my background in accounting, I’m very comfortable using Excel — and actually enjoy using it.)

With regard to most types of insurance (life, auto, liability), my overall approach is simply to buy the cheapest policy that provides the coverage I want, as long as the company’s credit ratings are satisfactory.

As far as health insurance, we buy ours on the Affordable Care Act exchange. We’ve moved a lot (from one state to another) over the last several years, and our healthcare needs change from year to year, so our health insurance provider and plan change from one year to another as well. For instance, this year we opted for a plan with a low deductible, as it was pretty likely that I was going to need a few medical tests/procedures that I don’t need in other years.

As far as disability insurance, I have a policy through Prudential via the AICPA.

And that’s about it.

(Also, because it’s good policy for you to check regarding conflicts of interest: I am not compensated by any of the above companies in any way. I do not receive any commissions, for example, if you sign up for the credit cards mentioned above.)

A reader writes in, asking:

“At what level of money does passive investing make the most sense? Is there a ‘sweet spot’ so to speak in terms of portfolio size or income? How would the strategy have to be adapted to work at different levels?”

Firstly, there’s no sweet spot. Passive investing is a prudent choice across the full spectrum of asset and income levels — as soon as you reach an income/asset level where investing becomes relevant in the first place, that is.

Passive investing makes sense for the new beginner who is just getting started with small amounts, and it makes sense for huge pools of money such as university endowments.

The primary reason why passive investing is a reasonable choice at all levels is that it’s based on a mathematical truism — one that applies regardless of the amount of money in question. Specifically, as long as the average passively managed dollar incurs lower costs than the average actively managed dollar, it is mathematically certain that passively managed dollars will on average outperform actively managed dollars. (If you’re unfamiliar with that concept, I’d encourage you to read William Sharpe’s wonderfully succinct paper “The Arithmetic of Active Management.”)

What Does Change at Higher Income or Asset Levels?

Having said the above, it’s important to note that the implementation of a passive investment philosophy is somewhat different at different income/asset levels.

For example, tax-efficient investing strategies are very different for the person whose entire portfolio consists of a $5,000 Roth IRA than for the person with a seven-figure portfolio, most of which is invested in taxable brokerage accounts. And they’re different still for investors whose portfolio size is such that they have to be concerned with the estate tax (with its 2016 exclusion of $5.45 million, and twice that for married couples). But in each case, it’s perfectly prudent to use a passive portfolio of boring index funds.

In addition, the asset allocation decision is somewhat different at different levels of assets/income. Specifically, when your total assets are low relative to your living expenses, you have less flexibility with your asset allocation. That is, you cannot afford to have a risky allocation if you may need this money in the near future (i.e., if your retirement savings are currently doubling as an emergency fund). But again, a boring passive portfolio is still a good idea.

A reader writes in, asking:

“You haven’t written about how you feel about the LifeStrategy funds in light of current market events. Are you still using one? Are you happy with it?”

The short answer is that:

• Yes, we’re still using the Vanguard LifeStrategy Growth Fund for all of our retirement savings,
• Yes, we’re still super happy with it, and
• Neither my investment strategy nor investment tactics change as a result of market conditions, so that’s not really playing a role (in either direction) regarding my level of satisfaction.

All-in-One Funds Are Low-Stress, Low-Maintenance

One of the primary reasons I’ve enjoyed using the LifeStrategy fund is that it is a very low-hassle way to invest. When I sign into the Vanguard site to make a contribution, I don’t have to spend any time figuring out how much to buy (or sell) of each fund in order to maintain our desired overall allocation across accounts. Nor am I spending any time or energy considering adjustments to our asset allocation. All I’m doing is entering the amount of the contribution I want to make, confirming the transaction, and signing out.

If you use an all-in-one fund, you will want to make a point of staying informed about changes made to the fund (for example, Vanguard recently increased the international allocations in their all-in-one funds), because it’s possible that the fund company could change the underlying allocation in such a way that it’s no longer appropriate for your needs. But, at least with Vanguard, such changes don’t happen especially often, so the amount of work (and thought) involved is minimal.

All-in-One Funds Help Reduce the Likelihood of Mistakes

A second reason I like using an all-in-one fund is that it reduces the likelihood that I’ll tinker with our portfolio in a way that will ultimately be detrimental to performance.

Morningstar research has consistently shown that investors tend to underperform the funds that they use, because they switch between funds at the wrong times. (This is generally the result of buying immediately after a period of good performance and selling after a period of poor performance.) Interestingly, in research from earlier this year*, Morningstar found that investors in target-date funds have actually had better performance than the funds themselves over the 10-year period ending 12/31/2014.

But They’re Not for Everyone

Despite the benefits mentioned above, all-in-one funds have their limitations. Last time I gave an update on using the LifeStrategy fund, I wrote the following, which I still think is true.

All-in-one funds are not a perfect fit for everybody. There are plenty of reasons why any given investor might be better off taking the DIY-allocation approach. For example:

• The fund-of-funds structure is tax-inefficient, which is relevant if you have assets in a taxable brokerage account.
• Some people will not be able to find an all-in-one fund with an asset allocation that suits their needs (e.g., because they need to underweight U.S. stocks in their IRA in order to make up for the fact that they’re overweighting U.S. stocks in their 401(k) because their retirement plan’s only decent choice is a U.S. stock fund).
• Some people will prefer to implement a strategy that “tilts” the portfolio in some way (most commonly toward small-cap value stocks or REITs).
• Some people don’t mind the modest work involved in managing a portfolio, are completely confident they will not do any detrimental tinkering, and want to take advantage of the slightly lower costs of individual index funds or ETFs.

*A free Morningstar account is required to view the article.

On Thursday the U.S. stock market (as measured by Vanguard’s Total Stock Market ETF) went down by 2.17%. And on Friday it went down by 2.88%. The week’s market performance (down approximately 5.5% in total) has received quite a bit of news coverage, and if my email inbox and Facebook feed are any indication, many people are nervous — or even downright scared.

This Could Be No Big Deal

According to Yahoo Finance, in the last 5 years (i.e., during a roaring bull market) there have been 8 other days worse than Friday and 28 days worse than Thursday.

You might say, but this was two bad days in a row, surely this is a problem! Well, those 8 days worse than Friday? Two of them were in a row as well (9/21/11 and 9/22/11). In fact, all 8 of the days that were worse than Friday occurred within the August-November window of 2011. Perhaps, like me, you have already forgotten about that brief little period of not-so-great returns. Until looking at the data just now, I had forgotten about that period because it turned out to be no big deal. The market continued to climb for another (so far) nearly 4 years after that.

In other words, this sort of thing is normal, and it can even happen right in the middle of a period of great market returns. It doesn’t necessarily mean the bull market is over.

But Maybe We Are in for a Crash

On the other hand, maybe this is the beginning of the next bear market. We could be in for a much greater decline. In the 2007-2009 decline, for instance, the market fell by more than 50%.

If last week’s not-that-big-of-a-deal performance has you in near panic mode already, you have learned an important lesson. Specifically, you have learned that you overestimated your risk tolerance and chose a portfolio that is probably too risky for you. If a decline of less than 10% has you scared, imagine how you’d feel if the market fell another 40%.

The point of strategic asset allocation is to give up on guessing where the market is going next and instead craft a portfolio that will allow you to sleep well at night, regardless of whether we’re in for another 4 years of great returns (as we were after that little blip in late 2011) or a further decline of 40% or more.

What to Do Now?

Evaluate. How are you feeling about your portfolio and its risk level right now?

If you’re feeling perfectly comfortable, this week could be a great time to rebalance your portfolio back to its target allocation, which likely means buying more stocks. (It may also be an opportunity to tax-loss harvest.)

On the other hand, if you’ve been stressing about this modest decline, you may want to scale back your stock allocation somewhat. Yes, that means selling immediately after a decline, which isn’t ideal. But chalk it up as a lesson — one that could have been much more expensive.

And take note of the stress you’ve been feeling. Literally. Make a note of it. Record how you are feeling right now. Then sign and date that document. You want something that you can refer back to the next time things are looking rosy and you are tempted to bump up the risk level of your portfolio (to a level that you have already proven is too risky for you).

A reader writes in, asking:

“I’m a bit of a late starter, financially speaking. I am in my late 30’s but only now beginning to learn in earnest about personal finance. One challenge I have run into is that I cannot tell who is giving good information and who is just selling me something. Where would you recommend looking for unbiased financial and investing information?”

The short answer is that nobody in the financial services industry (or financial publishing industry) is an unbiased source of information.

With regard to advisors, the most obvious conflicts of interest are created by a commission pay structure. Commission-paid advisors have a strong incentive to steer you toward insurance products and mutual funds that pay a commission, rather than low-cost index funds that do not pay a commission.

But other advisors have conflicts of interest too.

• Advisors paid as a percentage of assets under management have an incentive to maximize your portfolio size, even when doing something else (e.g., spending the portfolio down to pay off your mortgage, delay Social Security, or buy a lifetime annuity) may be in your best interest;
• Advisors who charge a fixed periodic retainer (e.g., a flat $X quarterly fee) have an incentive to gather a lot of assets while doing the least work possible on each portfolio, even when it may be beneficial to the client to pay somewhat more attention to it; and
• Advisors who charge an hourly fee have an incentive to make things more complicated than they really need to be. (And all advisors have an incentive to make investing appear more complicated than it really is.)

Financial publications (and their writers) have conflicts of interest as well.

• Most financial publications make the majority of their revenue from advertising. As a result, they’re often reluctant to publish articles explaining exactly how bad certain financial products are.
• And every financial publication (including this one!) has an incentive to convince you of the importance of each topic being discussed. We need you to keep visiting our sites, buying our books, paying subscription fees, etc.

Even academic research can’t be assumed to be conflict-free. In many cases, the research is funded by a company with a product to sell. (For instance, many pieces of research regarding annuities have been funded by insurance companies.)

Of course, this doesn’t mean that none of these sources are helpful. Advisors, financial publications, and academic studies can all be very helpful. But it’s critical to be aware of the conflicts involved so that you know how the information you are encountering might be slanted.

So Where Can You Get Unbiased Information?

About the only way to get truly unbiased information is to get it from somebody who makes their living in a completely different field. For example, your neighbor who works as a software developer has little reason to convince you to make one investment decision as opposed to another. Of course, the problem is that, in most cases, such sources not only lack conflicts of interest, they also lack expertise.

As far as unbiased sources that are still knowledgable, something like the Bogleheads forum is about the closest you can get. Most people there do not work in the financial industry at all and therefore have nothing to gain from convincing you of one course of action over another. That said, even there it is important to be careful. Most people are anonymous, so it can be hard to know how much faith to put in any one person’s information or opinions. Also, some people there do actually have conflicts of interest (specifically, those of us who work in any of the types of positions mentioned above).

A reader writes in, asking:

“Lately I’ve seen expert after expert saying that a big stock market correction is coming because of Greece and a bond correction is coming because of rising interest rates. My question is whether it still makes sense to be investing money. If stocks and bonds are going to be less expensive in the near future, shouldn’t I just wait?”

Personally, I place no value in expert opinions about where the market is going.

For example, with regard to bonds, people have been predicting the bursting of a “bond bubble” for almost five years now. In August of 2010, Jeremy Siegel and Jeremy Schwartz wrote the following in an article for The Wall Street Journal:

“Ten years ago we experienced the biggest bubble in U.S. stock market history. […] A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds. Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites.”

Near the end of the article they concluded that, “those who are now crowding into bonds and bond funds are courting disaster.”

And yet, over the last five years, Vanguard’s Intermediate-Term Treasury Fund has earned an annualized return of just over 3%. That’s not exactly off the charts, but it’s hardly a “disaster.” And it’s definitely not the sort of thing I think of when I imagine a financial bubble bursting. (In other words, it’s exactly the sort of ho-hum return one would typically expect from Treasury bonds.)

By keeping your money in cash in order to avoid a “bond bubble,” you miss out on interest that you could have earned in the meantime. And the longer you end up waiting for the correction, the more interest you forgo.

And with regard to stocks, high profile experts are similarly unreliable. For example, think back to December of 1996. As of that point in time, the stock market (as measured by the S&P 500) had quadrupled in value over the last 10 years. And, on December 5, 1996, Fed Chairman Alan Greenspan (i.e., the person then regarded as both knowing more about the economy and having more power over the economy than anybody else) gave a speech in which he publicly suggested that stock prices might be “unduly escalated” due to “irrational exuberance.”

That’s as clear of a get-out-of-the-market signal as anybody can hope for. And yet, if you took your money out of the market immediately after hearing that speech, you missed the 112% (!) increase in value that occurred from December 1996 to March 2000.

In short, knowing that a market decline is coming isn’t especially useful unless you know when it is coming — and even the experts get that wrong on a regular basis.