Last Monday’s article caused a bit of a hullabaloo. Many readers were surprised to hear that my wife and I had elected to swap our old portfolio in exchange for Vanguard’s LifeStrategy Growth Fund. Today I wanted to take one more crack at explaining the reasoning and answer some related questions.
Why We Did It
If you look at the logo at the top of this site, you’ll notice that the site’s tagline is, “Simple, Low-Maintenance Investing.”
In short, the purpose of the change was to make our portfolio simpler and lower-maintenance — both of which I value for their own sake and for their assistance in preventing mistakes.
But I Am Not You
Some readers were (understandably) confused as to how to apply the article to their own portfolio. The truth is, I hadn’t really meant for anyone to do that.
The point of the article was simply to share a change that my wife and I had made and to explain our reasoning — because I know many readers find that sort of information interesting. There was no intention to suggest that you should be using an “all-in-one” fund for your own portfolio.
In other words, while I value a portfolio that is simple and low-maintenance, that doesn’t necessarily mean that you should. Perhaps you don’t mind rebalancing between several funds. And perhaps you are never tempted (as I am) to make changes that are likely influenced by recency bias.
Smart People Make Mistakes (Sometimes)
Some readers were surprised to hear me say that I worry that I’ll make a big investment mistake someday. To be clear, I’m not worried that I’ll suddenly pull everything out of our index funds and invest it in a single stock or anything along those lines. I’m far more worried about the smallish, performance-chasing, “tinkering” type of mistakes (which can add up over time).
Still, I’ve seen very smart, financially-educated people do some obviously-stupid things when it comes to their own money. This perplexes me. I do not have a satisfactory explanation for it. And I’m therefore reluctant to assume that I am — and always will be — totally immune to it. So anything I can do to automate success seems advantageous to me, especially when the cost is so little.
…which brings us to my next point:
Asset Allocation Is Not a Precise Tool
Some readers wanted to know why I was happy to change to an allocation other than the one I’d hand-selected before.
For reference, our old allocation was:
- 40% Vanguard Total Stock Market Index Fund,
- 40% Vanguard Total International Stock Index Fund,
- 10% Vanguard REIT Index Fund, and
- 10% Vanguard Intermediate-Term Treasury Fund.
But I would have been happy with any of several different bond funds for the bond allocation (e.g., Vanguard’s TIPS fund, their Short-Term Treasury fund, their Short-Term Federal fund, their Short-Term Bond Index fund, their Total Bond Market fund, or their Intermediate-Term Bond Index fund).
Similarly, I would have been happy without a specific allocation to overweight REITs. Or with an allocation to overweight small-cap/value stocks. Or with Vanguard’s Total World Stock Stock ETF for the entire stock portion of the portfolio.
You get the idea.
In other words, the LifeStrategy Growth Fund’s allocation is not the allocation I would have used if I’d been put in charge of building the LifeStrategy funds. I am, however, satisfied with it — as I would be satisfied with any of a hundred other allocations. (Note: This view that numerous different allocations would be acceptable is a part of what leads to my temptation to tinker.)
Asset allocation is not a particularly precise instrument, and I’m skeptical of attempts to treat it as such. (The only way to give it precision is to use specific assumptions about asset class returns — that they will look like historical returns, for instance. Of course, most assumptions we make will be wrong in one direction or the other.)
I Cannot Predict the Future
Other readers were puzzled about how I plan to use this fund — which doesn’t change its allocation at all — as a part of a long-term plan that shifts to become more conservative with age.
The first part of the answer is that I don’t expect to change our allocation any time soon. While I think rules of thumb like “have your age in bonds” can be useful as a starting point for planning, I certainly don’t think there’s any need to stick to them so rigidly that you move precisely 1% of your portfolio from stocks to bonds every year.
The second part of the answer is that, while I plan for our allocation to become more conservative as we move toward retirement, I don’t know the specifics. I can’t know them.
I can’t know, because:
- I don’t know what investment products will be available over the next few decades (e.g., will the Treasury continue to issue TIPS? Will insurance companies continue to offer inflation-adjusted lifetime annuities?), and
- I don’t know how our circumstances will change over the next few decades (e.g., what portion of our portfolio will be in taxable accounts as compared to retirement accounts?).
Without knowing those things, there’s no way I can say precisely what allocation I’ll want to use many years from now. I’m happy to say, “this is good enough for now, and I’ll reevaluate the decision as things change.”