I don’t want to say that your investing plan and Savings rate are the most important parts of your financial plan because they are all very important. But your investing plan and Savings rate is super important and vital to your financial success. Ok, so they probably are the most important. However, a great investing plan can’t make up for bad plans or no plans for Housing, Spending, Asset protection, Student Loans, etc. Needless to say, you need a comprehensive financial plan.
I mentioned Savings Rate. I define it as percentage of gross income that goes towards
retirement Financial Independence. So if you save for a house, a car, a vacation, college ,etc., that does not count in your Savings Rate. You must save for these things on top of retirement savings. Those things are counted in your WAR (Wealth Accumulation Rate as defined by The Physician Philosopher). A good rule of thumb that The White Coat Investor and others recommend is a 20% Savings Rate for dentists, doctors, and other high income professionals. That’s if you want to retire/become financially independent at a normal age (60-65). If you want to reach financial independence earlier than that, your savings rate must be higher.
Ok, now that we have established we have to save a whole bunch of money to reach our financial goals, where do we put that saved money. There are a lot of bad places to put it (Savings account, Gold, Cryptocurrency, Casinos, under your mattress, etc.), and there are a lot of good places. I will recommend a few good places but that does not mean they are the only good places to put it. You must read books, blogs, internet forums, and maybe consult a financial professional before deciding where to put it.
The three best places to invest this money is in Stocks, Bonds, and Real Estate. I don’t know a whole lot about Real Estate so I won’t discuss that much. But I do know that if you do it right, it is a great place to invest. For someone like me, I want between 10-20% of my investments in Real Estate. But others have much much more and are very successful. A great place to learn about Real Estate investing is at the Semi-Retired MD blog.
The rest should go into stocks and bonds. More specifically, they should probably go into indexed mutual funds with low expense ratios. The first decision to make is how much you want to put in stocks and how much in bonds. The higher percentage of stocks means the more aggressive you want to be, with higher percentage of bonds being a more conservative portfolio. You need to know your risk tolerance and also how far away you are from retirement. Generally, the farther you are away from retirement, the higher percentage of stocks you want. Stocks will earn you more money than bonds. They have a higher risk of losing money, but with a long time horizon, stocks will likely rebound and rebound well. As you near retirement, adding more bonds and less stocks is probably a good idea.
Once you decide on your percentage of stocks and bonds you would like, then you need to decide on specific stock and bond mutual funds. I can’t go int them all here. I will leave that to the geniuses. Reading the books from my Recommended Resources tab is a good place to start. However, I can make some general recommendations. Having a good chunk of your stock allocation in an indexed total stock market fund is a good idea. Having an international stock market fund is also probably a good idea. Some people like to have small funds that tilt their portfolio to certain factors like “Growth” or “Value” or “Small Cap”, or “Large Cap”.
There are also a lot of different options for bonds. Again, I am no expert and would advise you to consult others. However, a total bond market fund is a good fund. A total international bond market fund is fine but not necessary. A TIPS fund is a good bond fund, as well as Municipal bonds. There are a lot of books and resources out there for bonds and I advise you to read them.
Portfolio Ideas for your Investing Plan
There are a lot of good ways to slice up your portfolio. General rules are only add a fund if it will comprise at least 5% of the total portfolio. That way you don’t have a thousand different little funds. At least three funds is a good idea and having up to 10 is fine and adds some diversification. If you aren’t into this stuff then a Target Retirement fund or something like a Life Strategies Fund from Vanguard is a great idea. These are just indexed funds that have multiple indexed funds in them.
Here are some examples of reasonable portfolios (Leaving out the Real Estate portion of a portfolio)
- 80 % Stocks and 20% Bonds
- 60% total stock market indexed fund and 20% Total international stock market indexed fund. 10% Total bond market indexed fund and 10% TIPS fund
- 80% Total Stock Market indexed fund. 20% Total bond market fund
- 50% Total Stock Market, 10% Small value stock fund, 20% Total international. 10% Total bond fund, 5% International bond fund, 10% TIPS fund
- Vanguards Life Strategies Growth fund that is 80/20.
I could go on forever. There are a lot of good ways to slice up your investments. Just make sure they are low cost indexed funds. Having a huge chunk in the Total Stock market fund is a good idea. You can mix and match these and change the percentages based on your overall Stock:Bond ratio as well. You just have to find your risk tolerance and time horizon. The key is to have a written investing plan and a proper savings rate. If you have those two things, financial success is attainable.
-Debt Free DDS
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*Nothing on my website is professional or legal advice. I am only sharing information that I have learned and it may or may not be accurate. I am not liable for any problems you may have by following this advice. Please do further research and get professional and/or legal advice about any of these topics. This post likely contains affiliate links. This site could be paid for clicks or purchases made through these links.