Simple investing for your 20s and 30s and 40s and 50s and 60s and 70s and 80s and 90s

· 6 min read

Sun Tzu

Win first, then fight.

☀ The Art of War

A solid portfolio is built on three pillars:

  1. A US total market index fund
  2. An international total market index fund
  3. A bond total market index fund

This is commonly called a “three-fund portfolio.”

You can exclusively buy equities until you’re about twenty years away from retirement because you can outlive a few market crashes by the time you retire. Hence, a solid portfolio for your 20s and 30s is actually built on only two pillars:

  1. A US total market index fund
  2. An international total market index fund
  3. A bond total market index fund

From your mid-50s onwards, I recommend a portfolio allocation of 70% stocks and 30% bonds. Of the total amount of stocks you own, 60% should be in the US total market index fund and the remaining 40% in the total international index fund.

Allocation exampleat age 22at age 55
US index fund60%42%
International index fund40%28%
Bond index fund0%30%

Contribute money to your portfolio as often and as much as you can, as early as possible. If your personal situation permits, max out your 401(k) as early as possible during the year. Try to set a goal like “I will invest $x$ dollars each paycheck/week/month.” Of course, remember to live your life and spend your hard-earned money on the things and people that matter to you. Not every decision in life needs to be driven by intense financial decision-making, but you must still acknowledge the financial consequences of your choices.

If you have a burning desire to invest in something with a high risk-reward ratio, allocate no more than 5% of your entire portfolio to try and dip your speculative toes in whatever it is: individual stocks or cryptocurrencies or NFTs or whatever.

Sun Tzu

A mighty warrior maximizes tax-advantaged account contributions.

☼ The Art of War, Chapter 5, 'Defeating actively managed portfolios'

An investor has two types of accounts: tax-advantaged accounts and taxable accounts. A tax-advantaged account lets you invest untaxed income or withdraw untaxed gains. Here are some examples:

invest untaxed incomewithdraw untaxed gains
Traditional IRARoth IRA
Traditional 401(k)Roth 401(k)
401(b)529 plan
Health savings accountHealth savings account
…and more…and more

That’s right, the health savings account (should you qualify for one) has tax advantages on the way in and on the way out, as well as during the ride itself i.e. dividends. It’s often called a “triple tax-advantaged account.” Some US states do not recognize some of these tax-advantages, so check to see how your state treats HSA contributions and capital gains.

Put professionally, prioritize maxing out your tax-advantaged accounts. Put accusingly, you might be sacrificing a lot of future gains by solely investing in a fancy but nonetheless taxable account like Robinhood. Put bluntly, do not contribute a penny to your taxable account if you can instead contribute to a tax-advantaged account!

Bonds are not very tax-efficient because they produce a lot of taxable dividends. Try to hold your bonds in your 401(k) first, and then in your taxable account if need be. Your Roth IRA and HSA are well-optimized for maximizing growth, so I would make those my most aggressively allocated accounts with 100% equities.

Deciding whether to prioritize placing your international stocks in a tax-advantaged account or a taxable account is a personal decision that involves a bunch of tax considerations. I personally hold all my international index funds in a tax-deferred 401(k) because that is what works for my own tax situation. But I emphasize that the tax implications of holding your international index fund in a particular type of account is a very minor optimization that doesn’t really affect you until you start holding a few hundred thousand dollars in your portfolio.

So what exact things do you invest in? The answer depends on the type of account. If you are in a tax-advantaged account, use mutual funds. If you are in a taxable account, use ETFs. Be careful holding the exact same investments in your tax-advantaged and taxable accounts in case you ever do something called tax-loss harvesting.

Let’s assume you are using Fidelity because they have awesome customer service and great fund options:

Fidelity exampleTax-advantaged accountTaxable account
US index fundFZROXVTI
International index fundFZILXVXUS
Bond index fundFXNAXBND

⚠ Warning

Do not hold FZROX or FZILX in a taxable account. If you some day leave Fidelity for another broker, then your shares of FZROX and FZILX will need to be sold and you’ll pay taxes on your gains.

…and for the sake of being a bit more thorough let’s assume you’re using Vanguard (consider switching to Fidelity):

Vanguard exampleTax-advantaged accountTaxable account
US index fundVTSAXVTI
International index fundVTIAXVXUS
Bond index fundVTBLXBND

If you can’t directly pick these options because you can’t switch to these brokerages or your employer’s 401(k) plan is restrictive, then try to pick something similar like a basic S&P 500 index fund.

For what its worth, this is a snapshot of my current portfolio allocation:

Portfolio à la Eric ChengTaxable brokerage accountTraditional 401(k)Roth IRAHealth savings account
FZROX--60%60%
FZILX-100%40%40%
VTI100%---
VXUS----

Don’t be fooled by the percentages – these percentages will change as my 401(k) and brokerage accounts grow at different rates. Sixty-percent of this portfolio is US total market index funds, with the remaining 40% in international total market index funds – just like I described earlier. I just opt to hold my international index funds in my 401(k).

Not mentioned is the $300 I set aside to satisfy my self-destructive options trading addiction.

There’s some more nuance involving taxes and whatnot, but this is a pretty short document because it only contains the exam answers. And as you can see, it is a simple plan.

The long part is understanding why this simple plan is a winning strategy.1 2 3

To be continued.


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