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Investing Blog Roundup: “Catching Up to FI” Podcast, Discussing Social Security

I was recently a guest on the Catching Up to FI podcast — a show for late starters on the journey to financial independence. We discussed a variety of Social Security planning topics, such as the impact of differing ages and earning histories between spouses, spousal and survivor benefits, delaying benefits as opposed to a “take the money and invest it” strategy, and more.

You can find the episode here:
https://podcasts.apple.com/us/podcast/catching-up-to-fi/id1664430924?i=1000640796504

Or on YouTube:

Other Recommended Reading

Thanks for reading!

What’s In Our Portfolio (2024 Update)

In December 2011, we switched our portfolio from a DIY allocation to the Vanguard LifeStrategy Growth Fund. And that fund was the entirety of our portfolio for about 12 years. Because people would often ask, I gave periodic updates, explaining that we still liked the fund. For example:

We recently made a change, which I’ll discuss in a moment, but it had nothing to do with a change in how much we liked that fund. I still think the LifeStrategy Funds (and similar products) are fantastic (tax-inefficiency aside). They’re easy to understand, reasonably low-cost, and very low-maintenance.

It was something in our life that changed, rather than our evaluation of the LifeStrategy fund. Specifically, we bought a house last fall. And with interest rates being what they are, it made sense to use a portion of the bond holdings to minimize the mortgage balance. (As Allan Roth often notes, it does not generally make sense to hold bonds that pay a certain interest rate while simultaneously having a mortgage balance with a significantly higher interest rate.)

But, with an “all in one” fund like a LifeStrategy fund, there’s no way to directly spend just the bond part of the fund. Instead, you have to sell the whole thing and then re-buy the stock part of the holdings. And that’s essentially what we did.

So for the stock part of our portfolio, we’re now just using Vanguard Total World Stock ETF. And for the bonds (because we do still have some bonds), we just bought individual long-term TIPS in one of our traditional IRAs — essentially a 5-year ladder of TIPS maturing from 2049-2053 (which would be our ages 65-69).

So again, we’re keeping things super simple. There’s still no need to rebalance. (The TIPS aren’t there to rebalance with the stocks. They’re there to just collect ~2% above inflation for 2-3 decades and then eventually be spent.) We’ll continue to buy more shares of Vanguard Total World Stock ETF. And we’ll slowly add to our TIPS ladder as well, buying both nearer-term and longer-term rungs.

Given how not-that-exciting this portfolio switcheroo is, it feels a bit silly to write about it. But given how public I’ve been about our use of the LifeStrategy fund, I felt that I should give an update and explain the recent change.

I suppose it’s still a single-fund portfolio. But now it’s a different single fund. Plus some TIPS.

Investing Blog Roundup: 2023 Bogleheads Conference Videos

Happy Holidays and Happy New Year!

As of last week, the videos from the 2023 Bogleheads Conference are available.

The videos and slides from Friday’s “Bogleheads University” event (both the 101 and 501 tracks) can be found here:
https://boglecenter.net/bogleheads-university/

And the videos and slides from the Saturday and Sunday sessions can be found here:
https://boglecenter.net/2023conference/

As far as my own involvement, my primary contribution was a session titled What the Less-Involved Spouse Needs to Know About the Financial Plan. The goal of the session was to help bring the less-involved spouse up to speed on the household finances, in case they have to take over at some point — as well as to empower that spouse to play a more involved ongoing role.

As a reminder, the Bogle Center is a 501(c)(3) non-profit. Donations to the Center pay for these efforts as well as our other educational endeavors, such as the Bogleheads on Investing and Bogleheads Live podcasts.

Other Recommended Reading

Thanks for reading!

What’s the Point of Bonds in a Portfolio? (And Why Individual TIPS, Held to Maturity, Are Unique)

Broadly speaking, bonds can be used to perform either of two distinct roles in a portfolio.

The first role: they are the “thing in the portfolio that’s safer than stocks but which still generally provides more return than cash.”

And for that role, as long as you stay away from bonds that are so risky that they actually aren’t safer than stocks (i.e., bonds with super long durations or extremely poor credit ratings), just about any bonds can do the trick. You can use individual bonds or a bond fund. And as long as it’s low-cost, any of several different types of bond fund would be fine:

  • Short-term Treasury fund,
  • Intermediate-term Treasury fund,
  • Total bond market fund,
  • Short-term TIPS fund, or
  • Intermediate-term TIPS fund.

Any of those will work. The intermediate-term funds are riskier than the short-term funds, and a “total bond” fund is riskier than a Treasury fund, but that, in itself, is neither good nor bad. We can adjust the overall risk level to whatever we want it to be by adjusting the overall stock/bond allocation as needed.

The second role that bonds can play is that they can be used to offset specific costs at a specific date in the future. (“Asset-liability matching” is the technical term for this concept.) For instance, if I expect my first year of retirement to be 10 years from now, and I want to have $60,000 of spending power available in that year, I could buy bonds that mature in that year, to provide me with a very safe way of satisfying that spending.

But here’s the key point: for this purpose (asset-liability matching), it is only individual TIPS, held to maturity, that can do the job.

It has to be TIPS* (rather than “nominal” bonds, which are not adjusted for inflation), because we want a certain amount of purchasing power at some point in the future, rather than a certain dollar amount.

And it must be individual TIPS, rather than a TIPS fund.** And that’s because the only way to have a certain amount of known spending power at some specific date in the future is to hold the TIPS to maturity. With a typical bond fund, the fund is constantly buying new bonds. (It must. Otherwise it would eventually hold nothing but cash as the bonds matured.) And as a result, whenever you sell shares of a bond fund, you’re effectively selling bonds prior to maturity. And so, at the time you buy the fund, you don’t know what it will be worth when you eventually sell it. (For example, if I knew that I wanted to have $10,000 of spending power 10 years from now, a TIPS fund doesn’t achieve that goal for me, because I don’t know what the fund will be worth 10 years from now.)

*I Bonds also work, though they have two major limitations in that they cannot be purchased inside retirement accounts and you’re limited to $10,000 per purchaser per year.

**One exception: BlackRock does offer ETFs that hold TIPS to maturity. For example, iShares iBonds Oct 2028 Term TIPS ETF (IBIE) owns nothing other than TIPS maturing in 2028. And the ETF will hold those TIPS until they mature, and then the fund will liquidate, distributing cash to shareholders. So it works very similarly to just buying 2028 TIPS on your own and holding to maturity.

Investing Blog Roundup: When to “Wing It” With Financial Decisions

Aside from the technical discussions here on the blog (e.g., how various tax or Social Security rules work), there are a handful of messages that I try to deliver pretty regularly. One of those is that there’s a lot more to financial planning than just investing. Fortunately, most financial planning decisions don’t require any sort of complicated, in-depth analysis.

In a recent article, Harry Sit gave some guidance on which financial decisions really merit a careful decision process — and when it’s fine to “wing it.”

Other Recommended Reading

Thanks for reading!

Risk and Return Are Interchangeable

Today I want to talk about one of the investing lessons that took me the longest to learn and really internalize. And, when talking with clients and corresponding with blog readers, it’s clear that this topic is one of the biggest gaps in many people’s investment knowledge.

Anybody who has been studying investing for any period of time is aware of the relationship between risk and return: safer investments tend to offer lower returns. Cash typically earns lower returns than bonds. Bonds typically earn lower returns than stocks. Safer bonds typically earn lower returns than riskier bonds. And so on.

Similarly, it’s not hard to grasp the idea that we would always like our portfolios to provide the greatest amount of return possible for a given level of risk. Why not, right?

But the full ramifications of that idea — that we want the greatest amount of return for a given level of risk — are deeper than most novice investors really understand.

It means that an increase in return is not, in itself, a good thing. And it means that a reduction in risk is not, in itself, a good thing. In each case, we have to ask: “in exchange for what?”

That is, outside of the extremes (i.e., portfolios that are already 100% stock or 100% cash), we already have an easy way to adjust the risk/return level of the portfolio: adjust the allocation between stocks/bonds/cash. Doing so is free and extremely easy. So if somebody points out some way to increase the return of your portfolio, the first thing you must ask is whether the strategy being proposed is any better than simply adjusting the stock allocation upward. And if somebody points out some way to reduce the risk of your portfolio, you must ask whether the strategy being proposed is any better than simply adjusting the stock allocation downward.

That’s the hurdle that must be met: “is this better than simply adjusting my stock/bond/cash allocation?” And you must always keep this in mind, otherwise you’ll be sold a bunch of nonsense over the years.

But here’s the part that took me an especially long time to internalize: a reduction in risk without a corresponding reduction in return is effectively the same thing as an increase in return. If you can find a way to keep the return the same and reduce your risk, then you could slightly nudge the stock/bond allocation of the portfolio upward in order to bring your risk back to what it was before, while now having a higher level of return.

Similarly, if you can find a way to increase return without increasing risk, that’s effectively the same thing as a reduction in risk — because you could nudge the stock/bond allocation of the portfolio slightly safer, in order to bring the expected return back to what it was before, but now with lower risk.

Risk and return are interchangeable.

And that’s the holy grail that the investment industry is always seeking: an unusually high level of return for any given level of risk, whether that’s better-than-cash returns for a cash-like level of risk, better-than-bonds returns for a bond-like level of risk, or better-than-stocks returns for a stock-like level of risk. Any of the above means you have achieved some magic.

Of course, reliably achieving such magic is nearly impossible. And when somebody tells you that such magic can be achieved, it’s prudent to be very skeptical.

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