The Elephant Eater Investment Plan and Asset Allocation

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When taking control of our own investments and financial planning, we found reading what other people were doing with their money invaluable to help develop our own plans.  We therefore are going to share the written plan that we developed to guide our investment processes to get us to financial independence and also outline when we would make modifications to our plans.  

This post is our personal plan and strategy.  It is not meant to serve as any specific advice or recommendations.  We always encourage everyone to do your own independent research and do what makes the most sense given your individual situation.

The remainder of this post was simply a matter of copying, pasting and reformatting the Word document that contains our plan to share with the readers of the blog.  We hope you find it beneficial.

 

Investment Plan

This plan will be followed to build our assets to reach financial independence and provide for financial security in retirement.

Assets Included In Allocation

Our investment accounts will consist of our holdings in our Vanguard brokerage account that includes funds held in taxable funds, rollover and Roth IRA accounts. We will include Mrs. EE’s current Simple IRA and Mr. EE’s current 401k as part of our investment plan and asset allocation. We will also include cash held in savings and money market accounts. We will consider all of the accounts together for the purpose of planning and asset allocation.

Cash

Part of our financial plan will include having cash to serve as an emergency fund, opportunity fund and where we will hold money we will plan to spend in the near term when in retirement. We will include it in our asset allocation.  We will always keep at least 6 months of living expenses for an emergency fund.  We will never carry more than 2 years of living expenses in cash at any time to avoid excessive drag on investment return.  We will omit from the plan/allocation any cash held in checking accounts that will be used to deposit paychecks and pay monthly expenses and day to day spending.

Home

Part of our plan will be to own our home. We currently own our home outright, conservatively valued at $250k. This also will not be included in our investment plan, asset allocation or our assets factored into reaching FI.

Savings for Little EE

We will also keep an account for our daughter, with the idea that it will be a college fund.  We are going to start investing in taxable funds and will continue to consider tax advantaged funds if the tax savings outweigh the restrictions on the accounts. We will keep these funds in a separate account and not consider them part of our investment asset allocation or our assets factored into reaching FI.  Essentially this will eventually be her money, but we will have control over how it is used.

ASSET ALLOCATION

We will begin with an asset allocation of 80% stocks, 15% bonds and 5% cash distributed across these different accounts.

STOCKS

Domestic

-35% Vanguard US Total Stock Market Index Fund

-10% Vanguard Small Cap Value Index Fund

-10% Vanguard REIT Fund

International

-10% Vanguard European Stock Index Fund

-10% Vanguard Pacific Rim Stock Index Fund

-5% Vanguard Emerging Markets Index Fund

BONDS

Domestic

-10% Vanguard Total Bond Fund

-5%  Vanguard Intermediate TIPS Fund

Cash

5% Held in savings and money market accounts

CHANGES TO ALLOCATION

  • We will adjust our allocation only when we mutually agree and only when something fundamentally changes to the point that it would be beneficial to do so. Examples would be shifting to a more conservative allocation as we meet investment goals, exiting an asset class if it no longer meets our investing objectives or adding asset classes if they become available in a cost efficient way as we combine accounts over time.
  • If we choose to shift our allocation from stocks to bonds (or bonds to stocks), the relative percentages within each category will be kept the same.
  • If we exceed 2 years of expenses in cash, we will shift excess money into bonds.

 

COST/TAX CONTROL STRATEGY

  • For both cost and simplicity we will use Vanguard funds whenever possible to meet our goals. When this is not possible, we will use the closest alternative that meets our investment objectives.
  • We will attempt to choose index funds and avoid any actively managed funds unless none are available to meet our needs (in work sponsored retirement accounts).
  • We will consider funds only if the expense ratio is less than .3% annually unless there is no other option available (in work sponsored retirement accounts).
  • We will make every attempt to locate assets in the most tax efficient places. (Bonds, index funds with higher turnover and REITS in tax sheltered accounts, broad stock index funds and cash in taxable accounts.)
  • We will limit any transaction fees by rebalancing only once annually.  Rebalancing will be done on May 1 each year after filing our previous year tax returns, at which point we will make our ROTH IRA contribution for the year.
  • We will limit capital gains taxes by rebalancing within our tax advantaged accounts.  We will sell funds in our taxable accounts only for tax-gain or tax-loss harvesting when to our benefit.
  • We will contribute the maximum amount to our work sponsored tax-deferred accounts each paycheck.
  • After maxing out our tax deferred accounts and ROTH IRA, we will invest any other available money into our taxable accounts monthly via automatic transaction.

 

Share your thoughts below.  We would welcome any feedback (positive or negative), questions or other comments that may help you, us and fellow readers in further developing our plans.

 

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7 comments on The Elephant Eater Investment Plan and Asset Allocation

  1. Sounds like a great plan!! The annual rebalance on May 1 sounds good. You plan seems fairly simple to keep the categories in a pretty consolidate spreadsheet and maybe keep an eye on them each quarter. If something get out of target be more than 7% it might be time to reassess it.

    I tend to do some balancing of account by looking at weakness in the market in certain sector areas and put new contributions there to get the most bang for my buck… Buy those areas when they go lower..

    cheers!!

    1. Thanks Tim!

      I like that idea of modifying contributions through the year to buy more of what is down (relatively cheap) and less of what is up (relatively expensive). We actually do that when we have any extra money accumulate in addition to our normal automated contributions.

  2. Hey EE,

    thx for sharing this. It will help me in writing my own plan. Having a big picture plan is a must.

    I like the way you approach your home: not included in the FI numbers. I do the same. I do not count it in my networth thta should support my Freedom.

    Keeping the college fund is also a good idea. In Belgium, we have not to save that hard for college yet. But the costs of college housing and transport can be high. We do not save for this now. But I think I should keep that in mind.

    I hope you make it by 2017!

    Amber Tree

    1. Amber,

      Glad you found it helpful. We included the house b/c we figure it is an asset that should go up in value and should be considered as something different than other assets like cars, computers, etc that are depreciating over time and therefore ignored in the plan. However, it is not included in our AA b/c it does not produce any income and also because it is not liquid and so there is no way to include it with other assets as far as increasing or decreasing allocation in that area.

      Likewise, the college fund is a totally separate bucket and we thought it easier to just keep it that way.

      Thanks for the feedback.
      EE

  3. Hi

    I am relatively new to your site, and am glad I found it. I realize I am late to the discussion on this topic, and the benefit of another 6 months on my part may be the reason I ask these questions, however…

    1. I love your domestic plan as it is very similar to mine. I am more involved in this though, 40% of my funds are allocated in the vanguard total stock index, a S&P 500 index, small cap value index, and two sector indexes.
    2. I have little exposure to international oremerging market funds as they are just to risky right now for me, with little.potential for gains.
    3. I have no bonds, I simply do not feel they are appropriate in this rising interest rate economy.
    4. I have 40% of my funds in individual stocks/ETF, mostly as value plays purchased on dips, such as BMY, SKX, VTV, POT, T, etc.
    5. I have another 10% sitting in cash waiting for additional opportunities ties as they present themselves, I.e., dips in stable companies, pullbacks in indexes, etc.

    Most would question my judgement in steering clear of bonds and international markets, but the reward simply doesn’t seem to be there based on the risk.

    Thanks again, I’m really enjoying your posts.

    1. Hi Dave,

      Glad you found us as well. Appreciate the comment and really like dissenting views to further the conversation and learn more myself. I do not question your judgement, especially as related to bonds which offer horrible risk/reward ratio at this time. However, here is where I would question you. If you are avoiding some things because they are overvalued, why are you investing in TSM/S&P500 funds right now as they are also way overvalued by most measures. What is your criteria/cut-off for being too overvalued to invest in? The second question is how do you then decide when to jump into a market that you had been sitting out of? Are you trying to wait for a bottom? Are you jumping in even as things are falling as soon as they are at an acceptable level of risk?

      I ask you these questions b/c they are questions we have asked ourselves when designing our portfolio and couldn’t determine the answers to. We were very nervous when looking at these things when designing our portfolio about 4 years ago. Little has changed since then. Sitting out would have meant missing a lot of dividend and interest payments along the way, not to mention that stock values have increased considerably, even if not rationally, since then.

      The part of your plan that I like in theory is the value investing approach. However, it is a lot of work for the increased return that can be expected (but certainly not guaranteed). For me, I will look for more diversification and higher returns by investing outside of paper investments in the future when I have more time to devote to it, while staying passive and continuing with this plan while working and planning to let our paper asset portfolio for the most part as described here for the long haul.

      Thanks again for taking the time to share your thoughts
      EE

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