VTI and Real Estate: The Pillars of Our Portfolio

This post covers how we spread our risk with Vanguard VTSAX index funds and real estate.

Today you’ll come away with a bit more knowledge about the importance of asset diversification.

How cool is that? I’m going to share how freaking easy it is to invest in diversity when you keep it simple and focus on wealth building.

Several very helpful books and blogs* have helped inform and shape my strategy. The test of time and persistence has shown that this approach WORKS. The reason you won’t find many posts on investing here at Abandoned Cubicle? I did not create this blog as a sleep aid…

Investing is boring. Period. And for good reason: Building wealth is a long-term process that requires you to keep your meddling hands off the wheel.

In the spirit of transparency, and to help inform you fine readers of how I’ve managed to reach key financial milestones, we’ll lay out the goods. It’ll be short, sweet, to the point, and only marginally boring. Promise.

How I Scatter My Investments

Let’s start with a look at where our money is currently invested. A simple pie-chart reveals a heavy lean on real estate, with a still sizable chunk in boring but effective index funds.

Now in fairness, you could lop off about 50% off the current real estate distribution, because we owe a LOT to the bank still. However, by the time we reach our early 60s, we will have fully paid off our house, and the rental mortgages as well.

Not more than five years ago, before we started our adventures in being a landlord and owning an Airbnb hospitality business, we had a more inverse picture. Most of our assets were invested in the stalwart 401K, with the rest representing equity in our home.

With real estate rentals, the idea is to hold property and, well, rent them out. You start getting silly and selling units, and the IRS will come after you for all that depreciation you’d been accumulating to lower your taxes. At any rate, consider the pie graph a current snapshot of assets, exclusive of liabilities. This is our nest egg.

Where We Put Our Money

Here’s the easy part of the exercise. More than 90% of our equity investments are plain old 401K contributions. I know, sexy, right? Here’s the distribution pie chart:

As for where the money is distributed within the big blue Fidelity account? It’s 100% going into the Vanguard Institutional Index Fund Institutional Plus or VIIIX instrument – very similar to VTSAX. The expense ratio is the lowest of any fund in those offered by our company’s plan: 0.02%, or 20 cents per $1,000 invested. I can live with that.

Courtesy of Fidelity, here’s the verbatim Strategy of this handsomely profitable fund:

The fund employs an indexing investment approach designed to track the performance of the Standard & Poor’s 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The advisor attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.

The five-year return has been handsome indeed: 12.94%. The historical lifetime return is a very healthy 9.83%. This is why, good readers, when I show you analyses of opportunity cost, I take that 9.83%, round it up to 10%, and lop off 3% for inflation. Hence, the “7% inflation-adjusted returns on low fee index funds.”

Tax-Advantaged Accounts

They’re quite similar. The mighty Health Savings Account (HSA) allows us to invest all funds saved beyond $3,000 in a variety of 401k-like vehicles. We’re fortunate that our HSA Bank offers the Vanguard 500 Index Fund “Admiral Shares (VFIAX.)”

Normally you’d need at least $10,000 invested directly with Vanguard to pick the Admiral versions. These are simply the lowest fee rate shares Vanguard offers.

With our HSA, we didn’t need 10 grand to pick this fund, though we have it now. And we are certainly not shy about taking advantage of the 500 Index Admiral Share’s nice, low 0.04% expense ratio.

At some point, our traditional and Roth IRAs (direct with Vanguard) will reach the $10K minimum and we’ll convert those to VFIAX or VTSAX as well. Those funds, plus the Fidelity 529 accounts, form the basis for our kids’ college money. Should they choose to apply themselves in school as their mom did, and not be a goof-off like their old man?

Diversify by Spreading Your Risk

A healthy chunk of the first cheese wheel, the green slice, represents Mrs. Cubert’s business. To be clear, you don’t need to own a business to dominate the world with your investments.

You can easily make it rain with 100% of your cheese wheel in either equities or real estate. And if your business happens to be bulletproof and highly profitable, you could rely 100% on that too.

We simply have a business because of my wife’s chosen profession as a chiropractor. How to value her practice is tricky, but I’ve managed to figure it out roughly, based on monthly revenues achieved over time.

Our real estate holdings are for practical purposes also a “business”, but it’s a very passive business, especially compared to the day-to-day service-oriented nature of Mrs. Cubert’s shop.

Granted, the Airbnb Experiment has been a bit less passive than long-term rentals. But at most, I type a few messages to guests every other day, for all of 5-10 minutes.

So, what does it mean to diversify your portfolio? If you’re lazy, go with Vanguard S&P 500 index funds (VTSAX) at 100%. If you like to hustle, go 50% Vanguard, and 50% real estate.

Now I lay me down to sleep to dream about vacations to Costa Rica or Switzerland. Rent check just arrived? Great. Call me in the fall when it’s time to clear out the gutters.

• Helpful Books include A Random Walk Down Wall Street, by Burton G. Malkiel, and of course, most recently, This is the Year I Put My Financial Life In Order, by John Schwartz.

(Note: I’ve recently plunged into the world of Dividend Stock Investing. Check out the post for more on why I’m further diversifying into this new frontier.)