The purpose of this document is to explain and document my personal investing philosophy for the good times and bad. Further, I want to provide a benchmark and context for measuring my current investment choices and ensure my personal finance behavior is aligned with my stated goals.
Investing Goals:
Primary Goal – To build wealth that provides financial independence. Ultimately, my investment portfolio should produce income capable of replacing “active income” and/or provide the means to achieve an exceptional quality of life.
- Lifestyle supplementation (via achieving milestones set out in ‘Secondary Goals’)
- Early retirement / Choice in work / Ability to pursue own ventures
- Traditional retirement
Secondary Goals – To supplement normal savings for future expenses by contributing less over time, outpacing inflation, and allowing market returns to expedite savings goals.
- Vehicle replacement purchases
- Home purchases
- Future healthcare expenses
- Future college/higher education expenses
- Other large expenses
Other Goals – To allow for extravagant generosity and stewardship of entrusted resources.
My Risk Tolerance:
Overall, my investment portfolio would be considered “aggressive-growth” by traditional money-managers and investment advisors.
I am 100% invested in equities across my portfolios with a heavier concentration in technology businesses. Most of these companies are growing top-line revenues 20%-30%+ year-over-year. While growth companies can still be volatile, I prefer mid-to-large capitalization growth to help mitigate some of the risk. The vast majority of my stock portfolio is in companies with market capitalizations in excess of $10B.
To a lesser extent, I also have individual stock positions in dividend-oriented, blue-chips as well. Finally, my 401(k)s and a portion of a rollover IRA are invested in index funds (~30% of my overall portfolio in 2020).
Why I have a higher risk tolerance
At my age, I am willing to take the additional risk and volatility of a growth-oriented portfolio for greater returns over the long-term. In market declines, my contributions will offset some of the decline in value and lower my overall cost-basis.
My occupation as a Certified Public Accountant (CPA) provides an “above average income” for my age. The career stability of being a CPA means there is less overall risk in my earnings and monthly cash flow. Further, I live well below my means by saving ~1/3 of my after-tax income. Finally, I am confident I can obtain a ~15%-20% increase in my total compensation (during normal times) based on the overall market comparable for my income, position, and experience should I choose to leave my current company.
These factors allow me to assume greater risk for higher returns in my stock portfolios.
My overall strategy:
While the market is often efficient over the long-term, I believe certain instances present themselves as opportune times to buy – particularly, when fear is pervasive. It is virtually always a good time to buy for long-term investors; however, times of panic are particularly useful times to accumulate stock.
Index funds vs. Individual stocks
Index funds are a great tool to achieve instant diversification. For anyone who does not enjoy the research of individual stocks or does not understand how to interpret financial results, index and mutual funds offer a powerful way to automate their investments and achieve benchmark returns – historically, 10% per year.
In my own portfolio, a substantial portion of my long-term money is invested in diversified index funds that tracks the S&P 500. I also own a heavy concentration in the NASDAQ-100. These funds provide instant diversification and mitigate the risk of single stocks.
However, index funds also invest in companies that are “laggards.” By excluding these companies and only investing in the “best” stocks, my individual stock portfolio can likely outperform. Opportunities abound by creating an individual stock portfolio consisting of companies that are better than the average.
Through fundamental analysis and observation of broader trends and market movements, a diversified set of individual stocks can lead to outperformance. The best performers are companies who are changing the landscape of business through innovation, exceptional customer-centric services, and superior market positioning.
Winners keep winning.
My Portfolio of “Buckets”:
My current investing time horizon is classified in buckets.
For money I may need in the next 6 months, I do not risk in the market. Instead, I hold this cash as an emergency fund in a FDIC-insured, high-yield savings account. An emergency fund on the upper range of the recommended 3-6 months of expenses allows me to invest and take greater risk with my portfolio while sleeping well at night.
A large emergency fund allows me to use my excess monthly income to invest instead of playing “catch-up” when bills come due.
My Ordinary Brokerage Account:
Rather than “locking up” all of my money in tax-advantaged retirement accounts, I divert ~15% of my gross income (as of 2020) to an ordinary brokerage account. While this is not ear-marked for anything in particular, these funds could be used as a source of funds in the event of a job loss (exceeding 6 months), for a large future purchase, or as the building blocks to early retirement. In the past, I have trimmed my brokerage account to purchase a new vehicle and engagement ring.
My ordinary brokerage fund consists of a variety of index funds (S&P 500) and individual stocks (both blue-chip & growth). I consistently monitor my individual stock picks and compare their performance to the S&P 500. Currently, I have historically outperformed by 10%+ (but with more volatility and risk).
However, I will switch to an index fund only approach in the event I begin lagging the market.
My Long-term FIRE (Financial Independence / Retire Early) Goals:
Ideally, I would like to increase the total amount that is invested outside of retirement accounts. While this money will be available to supplement future purchases, I have a bigger dream for this “starter FIRE” fund.
Eventually, I would like to build a portfolio of stocks (and real estate) capable of replacing my income. By building an investment portfolio that is 25x my annual expenses (i.e 4% Rule), I should be able to live solely on my investment income without ever depleting my portfolio.
At the current rate, it would probably take 15-20 years to achieve FIRE (Financial Independence / Retire Early). Even then, it would be at a minimalist lifestyle and not necessarily the life I want for my family.
Instead, I’d like to lay the building blocks for a more flexibility future. For instance, if my investment portfolio can replace even 50% of my income, I could either continue working full-time doing something I love (for less pay) or drop down to working part time.
Maybe, my spouse could have the option of staying home with the kids.
Building wealth outside of retirement plans allows for more optionality in life – and that is exactly what I need.
My Retirement Accounts and Plan:
For traditional retirement accounts (Roth IRAs & 401(k)), I do not plan to touch until I am at least 60. Therefore, I have 30+ years to ride the wave of market volatility. As such, I am willing to take greater risk in my investment choices, focusing primarily on growth-oriented funds and stocks.
While I do hold some cash in my brokerage account, I stay fully invested in my retirement accounts. This keeps me from attempting to time the market.
At historic returns (10%), the S&P 500 will be 2,323% higher than current levels by the time I turn 60. Since the market generally rises each year, the sooner I can put money to work, the more the market can compound my contributions and build wealth in my portfolio.
Overall, I contribute approximately 15% of my gross pay to these retirement accounts. I try and front-load my Roth IRAs in the first half of the year while dollar-cost-averaging in my 401(k).
Employer-Sponsored 401(k) Plan:
In my employer-sponsored Roth 401(k), I own one fund – Blue-Chip Growth.
This is the best performing fund option within my Fidelity 401(k) and focuses on large-cap growth. Historically, I have contributed 10% to my Roth 401(k). This was enough to get the maximum employer match. However, in 2020, my employer suspended the 401(k) matching program to conserve cash. Because my 401(k) no longer had matching, I reduced my contributions to 5% to increase. Then, I increased my contributions in my Roth IRA. This is because my IRA provides better investment options that have historically outperformed my 401(k) investment options.
Roth IRAs:
I have multiple IRAs – 2 Roth IRAs & 1 Traditional IRA.
One of the Roth IRAs was from a previous employer Roth 401(k) rollover. The previous employer’s matching on my contribution was deposited into the Traditional IRA (since their contributions were pre-tax). Both of these IRAs hold index and mutual funds that track the S&P 500 and NASDAQ-100.
The other Roth IRA is my largest account. I have been contributing to this Roth IRA since I first had taxable income (starting in college). I do not own any index funds in this account. Instead, I focus on buying individual stocks that I believe will outperform the overall market.
Because of my age and risk tolerance, I invest for capital appreciation. While I do have some dividend-yielding stocks in the portfolio, my individual stocks are certainly skewed towards FAANG-like stocks.
Similar to my brokerage account, I have consistently outperformed the broker indices by 10%+. I monitor my performance on a monthly basis and plan to continually reassess based on performance.
Other Accounts – Health Savings Account (HSA):
Since I have a high-deductible health plan (HDHP), I also contribute to a health savings account (HSA). The HSA is triple tax-advantaged.
Contributions are tax-deductible. The balance can be invested in stocks and funds and grow tax-deferred. When used for qualified healthcare expenses, the growth is tax-free.
I do not get too fancy here and pick individual stocks (because of the relatively low contribution limits). Instead, I invest in growth-oriented index funds (such as the NASDAQ-100).
Other Accounts – 529 College Savings Plan:
Recently, I opened a 529 Plan to begin saving for higher education. I have not decided if I want to go back to school and pursue further education (MBA or law degree). However, in the event that I do want to take classes in the future, the 529 Plan allows me to save and invest for these future expenses.
More than likely, I will use the funds as a jump-start of my future children’s higher education.
If I don’t use for my own education, 529 Plans allow easy transfer between family (and I should stay well below the gift tax limits).
Statement Conclusion
Overall, my portfolio should be a reflection of my beliefs about the future. I only want to own stock in companies that I would be proud to own 100% of the shares. As their businesses grow and shape our world, they will inevitably generate profits an increase in value.
By investing, I can both enjoy learning and following businesses while efficiently building a portfolio that can help me achieve my financial goals.