Learning how to save, seven years later

For the first time in several years, I have the ability to contribute to a 401(k) plan through Sincerely’s new parent company, Provide Commerce. There were only two index funds available among the predictably limited mutual fund offerings: the Spartan 500 Index Fund (FXSIX) with a rock-bottom expense ratio of 0.05% and the Spartan International Index Fund (FSIVX) with a respectable ratio of 0.17%. The rest were all managed funds with expense ratios between 0.8% and 1.2%. Given that my existing investments at Schwab are all index funds with an asset allocation of 40% large cap, 40% international, and 20% bonds, I skipped the bonds and just went with 50% large cap (aka domestic) and 50% international for my 401(k).

Which got me thinking. This retirement money, whether it’s in an institutional 401(k) or an IRA that I control, is going to be locked away for the next 26 years or more. That’s a really looong time. When I first started investing in 2006, I decided on a risk profile of 70% stocks, 30% bonds. A few years later I moved to 80% stocks, 20% bonds. The advice I wish I’d been given eight years ago is that since this money is locked away for such a long time, I might as well go all the way and invest 100% in stocks. As far as stocks go, index funds are a pretty conservative, diversified risk. Well, it’s not too late to make a change. So at the end of 2013 I sold the bond index fund shares in my Roth IRA and purchased more shares of the domestic and international index funds I already hold.

Over the last two years, I’ve also been squirreling away money in my brokerage account at Schwab, which has stood in for my Roth IRA when I hit the IRS income ceiling (thanks to some generous bonuses). It acts as my medium term savings account, one which I had raided in 2011 for our mortgage down payment. So this is a different kind of money. It’s not locked away for 26 years, but I’m not using it to pay bills either. This is where that 80/20 risk profile probably makes more sense. But at the same time, I’ve been disappointed by the poor performance of the bond index fund I’ve been invested in. So I decided to sell all my Schwab Total Bond Market Fund shares (SWLBX) in exchange for Schwab California Tax-Free Bond Fund shares (SWCAX), inspired by another tidbit from Scott Adams (who helped start me off on this financial journey):

However, Adams said he no longer follows his rule to invest 70% in a stock index fund and 30% in a bond fund. The best-selling author says he invests primarily in municipal bonds today, which are tax-exempt, and also owns land in his adopted home state of California.

We’ll see if they do any better. I probably ought to just buy individual bonds directly, but I’m not too concerned about great returns here. I just want the bonds to act as a stable counterweight to the occasional volatility of the stock market. At the very least, I like owning a bond fund with a little personality.

In the coming year, I don’t envision any big financial plans. Stephanie and I have rounded out our emergency fund (as planned!), so we’re good there. We’ll both begin contributing to new 401(k)s at our respective companies. We decided against paying down our mortgage principal, for now. At the present, we felt that having money in hand is more important than than locking it up in equity to save interest payments over the long term. That feeling may change. Until next year…

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