Military Investing - Step 6: Diversify

This post is part of the “Step-by-Step Guide to (Passive) Military Investing” series:

1. Maximize your TSP matching
2. Eliminate your consumer debts
3. Start investing small (1%)
4. Buy investments
5. Increase your monthly contributions
6. Diversify
7. Keep buying and holding… don’t panic sell!

Once you’ve started to build a significant nest egg, you’ll need to diversify further. Market down turns can cut your nest egg quickly. Though the U.S. stock market has always bounced back stronger, one way to mitigate the effects of a market crash is to buy different types of investments.

Recommendations I’ve read concerning how much stocks vs. bonds to hold are all over the place. Some writers that a 80% stocks/20% bonds ratio is a good ratio (if a little aggressive) for most younger investors. Then, recommend a mix of 65% stocks/35% bonds as you approach retirement age (55-70 years old). Then, finally, a 50% stocks/50% bonds splits when you are at retirement age (70 years and older) and selling off parts of your investments for your living expenses. This way, a portion of your investments are still growing even as you are retired.

Note: There are other, more conservative recommendations… such as those from “The Bogleheads’ Guide to Investing.” However, below are the allocations for myself.

For TSP:

This is a fairly aggressive distribution for my age (nearly 40). Though I could add more safety to my investments by increasing my investments in bonds/TIPs, I have 25 years until retirement so I’m banking that any major downturn will only last 3-5 years, and that the markets will recover like it has in the past. This allocation is more suited to investors in the accumulation phase. Younger investors who are far from retirement should usually invest more heavily in stocks (i.e. C/S/I Funds and total market/international index funds) vs. bonds and government securities.

Here is my TSP portfolio:

• 40% in C Fund (U.S. large company index fund)
• 30% in S Fund (U.S. mid/small company index fund)
• 20% in I Fund (International index fund)
• 10% in F Fund (Bond market index fund)
• 0% in G Fund (Risk-free, low-yield government securities)

For Roth IRA:

My distribution is nearly the same for my Roth IRA (though, I included a percentage of Real Estate Investment Trusts, or REITs):

• 65% in U.S. Total Market Index Funds
• 15% in International Index Funds
• 10% in Real Estate Investment Trusts (REITs)
• 10% in Total Bond Market Fund
• 0% in Treasury Inflation Protection Securities (TIPS)

In this distribution, my allocations are largely the same. The main differences is that I am also purchasing 10% of Real Estate Investment Trusts (REITs). These securities pay dividends from the profits of hundreds of rental properties, or mortgages. I’ve included them because they provide a little more diversity to my portfolio. Finally, I’ve added an index fund of Treasury Inflation Protected Securities (TIPs) instead of some of my investment in bond index funds.

Of course, your allocations are an important personal decision, so please make your own judgements. If you are younger, you’ll want to be more aggressive. If you are closer to retirement, you’ll want to be much more conservative.

Step 6A: Total Stock Market Index Funds:

Like I stated in “Step 4. Buy Investments”, the majority of your investments should be in no-load, low-fee total market index funds. In a world where the majority of active fund managers fail to match the returns of these passively managed funds, total market index funds are usually a better bet than picking individual stocks.

There are a number of ETFs and index mutual funds that meet this criteria. Here are a few that I’ve found:

• VTI – Vanguard’s total market index ETF. It charges 0.03%/year in fees, with no load. Vanguard is also the company that created index funds, so they have a solid reputation in this space.
• VTSAX – Vanguard’s Total Stock Market Index Fund Admiral Shares. Charges 0.04%/year in fees, with no load. This is a mutual fund vs. an ETF.
• SWTSX – Schwab’s Total Stock Market Index mutual fund. It charges 0.03%/year in fees with no load.

Step 6B: Bonds

The standard hedge against the volatility of stocks are bonds. These are loans to the federal, state, or local/municipal governments, or to companies, that pay dividends back to the holders of these loans. They have different payback periods, and the longer the loan period, the larger the return.

For those who are not interested in investigating the best bonds to buy, bond index funds are your friend. They operate like stock index funds (like were recommended in step 4), but with collections of bonds.

Here are some examples (though, do your own research):

• VBTLX – Vanguard Total Bond Market Index Fund
• BND – Vanguard Total Bond Market ETF
• SWAGX – Schwab U.S. Aggregate Bond Market Fund

Step 6C: Other Investment Types

There are lots of other ways to diversify your holdings beyond just paper assets like stocks and bonds.

Real Estate (i.e. buying a house, or rental property) does not follow the stock market, and is therefore a good investment for diversification. In addition, the price of real estate tends to outpace inflation by a wide margin. However, do your homework. There are tons of pitfalls, especially as military members. Buying a house and then PCS’ing to another base can make it difficult to sell in a slow market. And, being an out-of-state landlord can be a very costly, and perhaps even unprofitable, business model.

Real Estate Investment Trusts (REITs) are funds that trade like stocks, but represent collections of real estate. REITs pay a huge amount of dividends, as they are required to pay 90% of their profits each year as dividends to their stockholders. However, these investments can be very risky, and require digging into the financials of the companies. Also, beware of expense ratios, as even a small percentage (i.e. 0.2% or higher) can cut deep into your profits. There are also a few index funds for REITs that provide a little more diversity than buying individual REITs, including Schwab’s SCHH.

Cryptocurrencies like Bitcoin and Dogecoin are the “wild west” of speculative investments (i.e. gambles). The gambler and technology-enthusiast in me loves cryptocurrency, as there is a huge upside to these assets. However, they are way, way riskier than stocks. I’ll write an article that highlights the strengths and weaknesses of crypto speculation. If you are unfamiliar, be wary… and don’t invest more than what you are willing to lose. If you pick the wrong crypto, you could lose 100% of your investment.

Entrepreneurship / Side Hustles are other ways to generate additional returns on your investment dollars. Investing in your own business or side hustle can be a great way to create additional revenue, open up new tax benefits, and potentially allow you to add revenue into your other investments.

Return to the Step-by-Step Guide to (Passive) Military Investing” series