One of my online friends, Nomadic Matt, approached me for some investing advice. Matt changed his career path and now travels around the world and writes about it for a living. Not a bad gig, eh?
Matt and I had a short chat about his goals and situation, which he agreed to open up to outside advice as he has some specific investment ideas and leanings that he’d like to explore. I believe he is single in his late 20s or early 30s, and he also has an MBA so he’s not starting from scratch.
MMB: So roughly how much money are we talking about here? How is it currently invested and in what types of accounts (bank, IRA, brokerage, etc)?
Matt: I have a small five figure sum invested in a SEP IRA.
MMB: What is your timeline and goals for this money? Are you looking to save for retirement, a house, or something else? Would you want access part of it if needed? If retirement, are we talking at age 40 or 65?
Matt: It’s in an IRA, so retirement. I just want it to grow. I wouldn’t need to before 65.
MMB: Approximately how much additional money are you going to be able to contribute in the future?
Matt: I’ll be able to add between 15-20,000 per year into the IRA.
MMB: What do you consider to be your risk tolerance in general? What is the maximum tolerable loss that you could endure in a year? (Ex. $50,000 going to $30,000 would be a 40% loss.)
Matt: I’m pretty tolerant of risk. I would rather take more risk then less.
MMB: What is your general investment viewpoint right now? Are you looking to make big bets for big money? Slow, steady growth? Have you considered whether you want passively-managed index funds, or pay extra for an actively-managed mutual fund?
Matt: I see commodities, tech, and energy doing well. I’m bearish on the rest. I’d like to have a few specific stocks but mostly passive index funds and ETFs.
MMB: What other areas are you especially interested in investing in?
Matt: Currencies, commodities, water, tech
Boring Advice from My Money Blog
I warned Matt that my advice would be rather dull, in addition to the usual disclaimer that I am not an investment professional. First, I’ve put a good amount of effort into writing the investing section of my Rough Guide to Money, please check it out and there are some book recommendations in there as well for those long flights. I believe that it’s always best to understand why you’re investing in something beyond someone just telling you to do it. Hopefully, you’ll see why I like low-cost, passive mutual fund investments. In terms of actual things to buy, you could keep things simple with a single Target Retirement Fund at Vanguard, or create a 3-fund portfolio with even parts broad US index fund, broad international index fund, and broad US Bond index fund. You can build this at any major brokerage firm using ETFs. If you’ll be traveling a lot, having most of your money in low-maintenance mode may be a good thing.
Since you have other areas of interest, you should split things into a passive and actively-managed portion (Core and Explore). With the 5-20% of your portfolio set aside for speculation, go for it, use all your travel experiences, and see where you end up. Just know that the odds are against you, and honestly judge your results. If you lose money, just consider that the cost of a valuable lesson.
Reader Advice?
I got the feeling my advice above might not be fully satisfying, so I thought it might be more fun to open this up to reader advice. What do you think he should do, given his lifestyle and desire to investing in some specific sectors? I really don’t know much about currencies, commodities, water, or tech. For example, if you wanted to bet on water, what would the be the best vehicle? Please share in the comments, and Nomadic Matt will read and respond if he’s not busy hiking up a secluded mountain or something. 🙂
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Assuming a long horizon and a high level of risk tolerance, put it all in equities based on the Swensen portfolio, minus the government bonds. As he gets older (and hopefully with more income), add in gov bonds (either in I & EE bonds or low-cost funds, or both) in an increasing share.
The only variable would be if Matt considers it more likely that he would retire outside of the US. If so, he may want more currency diversification, if so, put more in foreign developed funds and less in US (although considering how many of the companies in US/abroad are multinationals, I wouldn’t go too far in this). Consider foreign REIT funds, too, although the expenses in those funds make me queasy.
So assuming he may want to retire outside the US: 33% all-US equities, 33% non-US developed equities, 15% emerging market equities, 15% US REITs, 4% foreign REITs. Rebalance and reconsider based upon retirement age around 40th birthday, with an eye to begin move into government bonds.
Note this portfolio assumes no personal exposure to real estate, i.e. Matt doesn’t own a home.
An active portfolio should be treated as consumption, like a trip to Vegas.
Looking forward to the other comments. Good post.
I think your advice is spot on. I’ve had similar conversations with many people on this subject. Most people don’t like to talk about serious investing and I doubt he will take your advice.
I am pretty conservative when it comes to investing, and since Matt is saving it for the long run, and with all the traveling he is doing, I expect him not wanting to worry too much about short-term market fluctuations. Therefore, I agree with MMB that index fund is a great way to go. However, I am not big on complex portfolio diversification, but lean more towards the hassle-free investing, such as the couch-potato strategy (e.g. http://assetbuilder.com/couch_potato/couch_potato_cookbook).
I personally prefer having only 3 asset classes and divide my money evenly: a) money-in-the-bank, b) ride-with-the-index, and c) Russian Roulette.
For money-in-the-bank, I tug away my safety-net money in inflation-protected securities. This way I know I am guaranteed to have money to spend for street vendor foods in Southeast Asia at retirement.
For ride-with-the-index, there are plenty of low-cost index funds out there so any of them would do. I think in the long run management cost savings will outpace temporal performance differences between different index funds of the same class, so it is more important to research the cost differences rather than to waste hundreds of hours researching their performance differences. This asset class is subject to risks, but if it went down the drain, the whole market crashes, and we will have bigger things to worry about.
For Russian Roulettes, that’s the part of my asset where I personally manage. It could range from stocks (especially dividend stocks for the long haul), lending tree, to real estate rental investments. This is your play money. Be creative, but expect failures.
That’s it! I feel comfortable with how my money is working for me, and I spend little to no time worrying about my investments, and that alone makes me a winner; afterall, time is money.
Taro
Thanks everyone for the tips. I’ll be sure to update you when I put my money somewhere this week or so!