My Investment Benefits and Strategies

Investment Benefits and Strategies

In the first part of Creating an Investment Philosophy I talked about my investment vehicles including retirement and brokerage accounts.  The investments themselves are today’s topic as I discuss my investment benefits and strategies I use.  Hot stock tips not included.  Sexy individual stocks, maybe just a little.  Boring core index investing, absolutely i’ll take seconds please!

Index Funds

What is an index fund?

When I think index funds I think John Bogle and Vanguard.  So I went straight to the source for a definition.  

An index mutual fund or ETF (exchange-traded fund) tracks the performance of a specific market benchmark—or “index,” like the popular S&P 500 Index—as closely as possible. That’s why you may hear people refer to indexing as a “passive” investment strategy.

Instead of hand-selecting which stocks or bonds the fund will hold, the fund’s manager buys all (or a representative sample) of the stocks or bonds in the index it tracks.

Thanks Vanguard I knew you would provide a great definition.  I look at index funds like this: instead of buying individual stocks and trying to beat the market an index fund says I’m entirely happy with average stock market returns.  This is a Big Gulp sized portion of my investment philosophy.

Investment Strategies and Benefits Big Gulp

I’m pretty sure Big Gulps are illegal in 7 states, but not when it comes to index funds

Main benefits of index funds

  • Lower fees
  • Lower risk
  • Less taxes

Current Strategy

When I first started out investing I really believed the answer to creating wealth was picking the right stocks.  Today my philosophy has changed to believe that I can pick stocks but it’s extremely unlikely that I will do better than the stock market itself.  That’s why index funds are such an important piece of my investment philosophy.

If you peak into each investment vehicle in my retirement accounts and taxable brokerage accounts you will find index funds as the overwhelming leader.  

I invest in index funds because the core of my investment philosophy is that long term growth is best accomplished with low fees, paying less in taxes, and not putting all of your eggs in one basket.  An index fund accomplishes all three.

S&P 500 Index Fund Example

Index funds are part of my overarching investment philosophy.  When you drill down into index funds you will find a strategy and asset allocation which results in reduced risk.  For example one of my index funds follows the S&P 500.

The S&P 500 index fund through Vanguard offers a few things are perfect for my investment philosophy.  Let’s use Vanguard 500 Index Fund Admiral Shares (VFIAX) as example.

Investment Benefits and Strategies Vanguard S&P 500 Index

  • Low fees (0.04% which is $4 per year for every $10,000)
  • Diversification (511 different stocks within the index fund)
  • Long term growth (10 year return of 13.66%)

I pretty much ride or die with low fee index funds from Vanguard.  As you can see index funds play a large role in my investment benefits and strategies.


What is a stock?

A stock is simply a small piece of a company. A “public” company is one that has issued shares by selling them to the general public. Once those shares have been sold, investors can trade the stock among themselves on the stock market like the New York Stock Exchange or the Nasdaq.

Main benefits of a stock

  • Compound growth
  • Passive income
  • Less taxes

Current Strategy

While index funds are the overarching core of my investment philosophy, what actually is included in a large majority of any index fund I own are stocks.  Investing in stocks or the stock market will allow my money to grow at an accelerated rate.  Compound growth my friends, it’s magical.

As I put the pieces together my investment vehicles are comprised of retirement accounts that hold index funds which are mostly made up of individual stocks.  Like a puzzle all the pieces are coming together.

Investment Benefits and Strategies Puzzle

My current strategy is to invest in the stock market primarily through index funds that are made up of individual companies.  Instead of owning 1 share of Nike stock, my preference is to own a small portion of Nike along with a small portion of 510 other stocks.  Apparently this whole 500 stocks in the S&P500 is a fallacy.  

Because I really enjoy personal finance (I mean I’m a financial coach I love this stuff so much!) and investing I have also chosen to own individual shares of specific companies.  It’s a very small piece of my investment portfolio which I will discuss later.  Remember where there are stocks it’s very likely are bonds.


What is a bond?

When you purchase a bond, you effectively are lending a company or a government money. The bond issuer is the borrower. It agrees to pay whoever holds the bond interest on a regular basis, and then to return the principal on the loan when the bond matures.

Bonds are big IOU’s that borrower’s have agreed to pay back with interest.  There’s certainly more to it, but that’s the quick and easy. 

Jim Carey IOU's Bonds

Main benefits of a bond

  • Consistent passive income
  • Diversification
  • Tax savings

Current Strategy

The stock market can be unpredictable, especially in the short term.  Many investors like myself prefer a little less unpredictability. One of the things than can alleviate some of that short term ups and downs are bonds.

Today I mostly use bonds to reduce my overall risk.  I have 22 years before I reach 59.5 and if I can make the journey to retirement a little less bumpy along the way while giving up a small portion of my returns that works for me.

As time moves on I could very well see a larger portion of my money in bonds for the regular income that bonds produce.  This will happen when I start caring more about monthly income and less about long term growth.

Bond Index Fund

All of the bonds I own are part of an index fund.  I don’t have any intention now or in the future of trying to pick which bond will produce the best rate of return or monthly income.

My current strategy with bonds does tend to lean towards the aggressive side and maybe to a fault.  The bond fund that we currently own is a high yield corporate debt bond. While the investment fees are quite low it is not an index fund but rather actively managed.  So you can already see a difference as compared to an index fund.

Bonds are relatively new to our portfolio as we have added a larger portion this past year to create a more diverse asset allocation.  I’m a pretty aggressive investor so the fact that my bond fund is actively managed and the fund’s goal is to capture high yield income fits my overall investment philosophy.

Some of the bond fund that I own are in tax efficient retirement accounts while some are in taxable brokerage accounts.  This goes against keeping taxes low as bonds will be taxed at our current taxable rate.

It’s kind of hard for me to say but currently I’m investing in a high yield corporate bond fund that is actively managed and not all held in a tax efficient account.  I’ll be looking into this more in 2020.

My current bond strategy is an unfinished book.  Similar to individual stocks, bonds are a small portion of my overall investment portfolio.  It’s one of the few areas that could and most likely will change in the short and long term.  


What is a REIT?

Are good friends over at the SEC are providing us with the REIT definition.

Real estate investment trusts (“REITs”) allow individuals to invest in large-scale, income-producing real estate. A REIT is a company that owns and typically operates income-producing real estate or related assets. These may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. 

For me REITs are another way to invest in real estate without buying an individual property.  

Investment Strategies and Benefits REIT aerial view of houses

With a REIT it’s possible I own a whole subdivision, very different than buying a home and renting it out.

Main benefits of a REIT

  • Compound growth
  • Passive income
  • Diversification

Current Strategy

We have owned rental real estate and when we sold our investment in 2018 our intentions were to invest that money right back into another real estate property. 

It turns out that for the past year we enjoyed not being landlords living in our single family home. We also struggled with investing our money into a real estate market that was not 2009 or 2012 when we originally purchased each property.

Instead we decided to invest in a REIT index fund through Vanguard, which is publicly traded.  The investment vehicle of choice is a Roth IRA as REITs are required to pay out almost all of their profits through a dividend which we would owe taxes.  However since the Roth IRA is in an investment vehicle that is not taxed I don’t have to worry about paying taxes on this dividend yield income from the REIT.  

When next year comes around and we make our maximum contribution to our Roth IRA this money will be invested in a Vanguard REIT index fund.  Keeping things simple.  I fully expect this to be part of our retirement plan for years to come.

REIT Taxes and Experiments

Taxes get a little funny with REITs as the rules have recently changed, but if you hold a REIT in a taxable brokerage account expect to get taxed higher than a qualified dividend which is 15% for most people. 

Quick reminder, like anything I talk about make sure to do your own research and consult a professional. I’m just a guy on the internet.

Currently I’m experimenting with an individual stock which is a REIT and an online investment real estate platform called Fundrise.  If you use this link and sign up my advisory fees get waived for 90 days.  I have yet to give my thoughts and experiences on Fundrise so do your research before signing up.

Thee reason for this diversion from avoiding taxes and using an index fund is mostly related to experimenting with the next steps towards financial independence.  I am slowly looking into creating passive income through REITs in a taxable brokerage account.

More to come but again to be clear this is a very small amount of our overall portfolio, less than 1% is invested combined.

Individual Stocks

What is an individual stock?

I talked about this above in “stocks”, but the important point I want to stress here is the individual stock rather than the stock market.  Individual stocks are most commonly purchased in a taxable brokerage account, much different than the core of my investing in index funds.

This is what makes all the headlines and Wall Street experts all the money.  This is not buying an index fund made up of stocks, this instead is purchasing shares of an individual company.  

Welcome to the sexy part of investing.  While I’m going to discuss individual stocks, just know that I hold less than 10% of my investment portfolio in individual stocks.  That’s my way of saying I’m less than 10% sexy in terms of investing. 

Main benefits of an individual stock

  • Compound growth
  • Passive income
  • Less taxes

Current Strategy

Almost all of our current individual stocks are invested in a taxable brokerage account.   The one exception is a small portion, approximately 1% of my wife’s 401K  which is invested in her company’s stock and an even smaller percentage of our retirement portfolio.  I really liked the dividend, what can I say.

Our current strategy is to invest a small portion of our overall investment portfolio in individual stocks through our taxable brokerage account.  The rule is to limit this to less than 10% and currently this sits closer to 5%.

Here’s the clear point I want to make about individual stocks and our investment philosophy.  Individual stocks will have very little effect on our investment portfolio’s gains or losses.  

Individual Stocks are my Gambling Hobby

I don’t want to call investing in individual stocks a hobby, but it’s close.  I consider the money invested in individual stocks as money that I have chosen to gamble with.  The stock market is my new casino.

I’m a little bit of a gambler.  Rather than heading to my local casino I have decided to invest in individual stocks.  The odds of losing all my money at the casino are certainly much higher than purchasing shares of Google or Nike and riding the Lehman Brothers train to bankruptcy, but I do know it’s possible.

Today I invest in a handful of companies.  I look for a few items when picking or gambling on a stock.  

  • Hold the investment for at least for 10 years, most likely forever
  • Buy companies with a clear advantage 
  • Be considered one of the best if not the best in their particular industry

Investment Benefits and Strategies Nike, Inc Stock

Nike Example

My belief is that I will hold Nike as an individual stock in my portfolio for the next 10 years.  I even feel comfortable saying I will end up holding Nike stock until I officially retire which is almost 30 years from now.

Nike has created an advantage in a number of ways including quality, marketing, leadership, and a proven track record.  While there is certainly competition with the likes of Adidas, Under Armour, and even to an extent Lulumon. It’s pretty clear to me that Nike is considered the best in class with a clear advantage.

Notice how I didn’t talk about P/E ratios, Book Value, or any other analytics factors?  My view on picking individual stocks is that information is readily available and even if I was to dive into the numbers it wouldn’t help me to pick a better stock. 

Remember I don’t think I can pick a stock better than the next person. That’s why I don’t spend countless hours reviewing financial statements. My strategy is to keep it simple.  Sure I look at the general information of the company like dividend yield, profit, expenses, etc. but ultimately I use the three items mentioned above as my deciding factor when making the decision to buy an individual stock.  

Individual stocks are part of my investment benefits and strategies that I have chosen, but there’s so much more.

My Investment Benefits and Strategies Summary

An investment philosophy is important to have.  My investment philosophy includes using investment vehicles that ultimately allow my money to grow tax deferred or tax free until I officially retire.  In these investment vehicles I look to keep my investments simple and easy to understand. 

I primarily use index funds as the majority of both my retirement vehicles and taxable brokerage account.  Index funds also are tax efficient in that they rarely sell stocks for a gain which is also tax efficient.

Index funds often produce a qualified dividend yield, which is also tax efficient as these yields are taxed at 15% and in some cases even lower depending on your income.  As a note qualified dividends can also be taxed at 20%, but spoiler alert I don’t make 400K+ so this does not apply.

The rest of my investment philosophy regarding individual stocks, bonds, and REITs is primarily for diversification and asset allocation.  Which simply means if my index funds that are primarily invested in stocks go down, I have some other investments that will go up or at least not down as much.

Investing doesn’t need to be complicated

Invest in a low fee index funds that are comprised of the overall stock and bond market.  Do your best to avoid taxes and fees both today and in the long run. Accept that your returns are going to match the stock market returns.  Above all invest automatically through an automatic investment plan and watch your money grow for years to come.

If I invested 15% or more of my gross income into a Vanguard index fund over the course of 30 years I’ll live with the results.  In fact that’s the plan.

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(2) comments

My only problem with indexing is that the cash flow yields are pretty paltry. I prefer to spend a little extra time picking individual payers for higher yield. Preferred stocks are my favorite.

    Steven Donovan

    Thanks for the comment Ryan! Index fund investing is more about long term growth than dividends but I certainly agree on the small dividend yields. I don’t think I’ve done enough research on my end on preferred stocks, but I certainly understand the intrigue and higher dividend yield attraction.

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