Asset Allocation – Part One

I’ve been thinking a lot lately about asset allocation. I know… I’m a wild and crazy guy. This financial independence community agrees on many things including cutting expenses, increasing income, reduction of taxes, and usually on some type of method for accessing capital (i.e. safe withdrawal rate). One thing I’ve noticed is the disparity in the community among the proper asset allocation.

There are many blogs focusing on different methods to achieve financial independence. One size definitely does not fit all. There are paths to financial independence through real estate investing, dividend investing, low cost index funds, etc.

One of the crowd favorites Mr. Money Mustache utilizes real estate and diversified low cost index funds. Dividend Mantra goes the individual dividend growth stock route and recently published a book. Go Curry Cracker and jlcollinsnh keep it simple with low cost index funds.

There are many ways to get to the goal, but no one has the answer of the best way to get there. This is because there is no best way. I have debated with myself over and over again the best way to achieve my goal of achieving financial independence. Do I buy a bunch of diversified dividend growth stocks? Do I buy rental real estate? Do I buy low cost index funds? I won’t lie, those questions played on repeat for a while.

In the past year, I have definitely settled on the low cost index fund method of getting there. The more I keep it simple, the less I have to stress about which is important to me emotionally. I still have some individual stocks that I have picked up over the years. I check my brokerage account daily, sometimes multiple times to see how my little portfolio is doing. If I stress about it that much now, who knows how bad I’d be in 10 years when I’d have a significant chunk of change in individual stocks in my brokerage account. Like I described in my last post, people like Mr. Money Mustache, jlcollinsnh, Rick Ferri, Jack Bogle, etc. have shown me that low cost index funds are definitely the way to go for me personally.

I also would love to add real estate to my assets (physical real estate, not REITs) but my current situation does not lend itself to being the right time to get involved in this investment arena. I’m quite handy and wouldn’t mind having one or two investment properties churning some passive income my way in the future, but not right now.

Are you planning on achieving financial independence through real estate, index funds, or dividend stock investing? How did you decide on your method? Does emotions play a part, in addition to the numbers?

30 thoughts on “Asset Allocation – Part One

  1. Amber Tree

    Hey,
    My plan for now is to go with low cost index funds. Once my portfolio has a significant size (lets say 50pct of the target), I will consider adding either DGI or rental properties to it.

    Living in Belgium, Rental units are a not so easy it seems. Maybe I need to look better. It would require quite a big (way more than 20pct )down payment to make it cash flow positive.

    DGI appleas to me as it is some more active investing. It would satisfy my need to be busy with investing and looking at numbers.

    Amber Tree
    Amber Tree recently posted…I keep debt.My Profile

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    1. Fervent Finance Post author

      The location and real estate market is definitely a determining factor in how profitable a rental property can be. Sounds like we have similar strategies!

      Reply
  2. Mr. SSC

    We do mostly low cost index funds. I’ve been debating about adding more dividend stocks and/or REIT’s with Mrs. SSC lately though. Her take is we’ll switch to dividend stocks when we get to the ER point. Since their return is average 4% ‘ish and the index funds are 6% or higher, she sees it as leaving money on the table putting money into dividend stocks now. I agree though, it’s an interesting debate of how to invest. There is definitely NO “one size fits everything” approach though. Even in the 3 part diversification models there are multiple variations. I’m not into the time commitments and headaches associated with physical real estate. It seems like a lot of work in the beginning and I don’t even feel remotely passionate about that route of side income so it sounds like a disaster waiting to happen.
    Mr. SSC recently posted…Rising Insurance rates saved us $1800/year!My Profile

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    1. Fervent Finance Post author

      At least you know you wouldn’t like investing in physical real estate. Better know that now instead of purchasing a property and realizing it! And yes it definitely is not one size fits all.

      Even though I know I’m going to go the index fund route now (and maybe a little physical real estate down the road) there are so many ways to go about setting up your portfolio. Domestic vs. international, bonds, REITs, growth, value, etc. Definitely going to discuss this in a future post.

      Reply
    2. Jen

      I would be careful with REITs as an investment vehicle. I know somebody that thought they were golden and lost half a million during the real estate collapse. Just be sure to research it thoroughly before diving in!

      Reply
      1. Fervent Finance Post author

        Any asset class can lose a ton of value at any point in time. That’s why you need a diversified portfolio. I hope the person you’re referencing wasn’t 100% REITs. Thanks for stopping by.

        Reply
      2. DivHut

        No doubt REITs can be risky which is why you should diversify among several REIT plays and know that not all REITs are created equal. mREITs can be a lot more sensitive and riskier than REITs that actually own real estate interests and other sectors such as health REITs have favorable long term tailwinds behind them. You are correct about REIT risk but then again every investment carries a certain degree of risk no matter what it’s in.
        DivHut recently posted…Recent Stock Purchase II – June 2015My Profile

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  3. Gen Y Finance Guy

    I really don’t spend much time at all thinking about asset allocation. One thing I do know is that you tend to find a certain asset class that you gravitate towards as you main investment vehicle. For me that is Stocks & Options.

    I do have one investment property, but we have decided for now that is enough. Now we are allocating capital monthly to a non-listed Commercial REIT.

    Good call to choose a strategy that doesn’t give you anxiety and heart burn. This whole journey is supposed to be fun and not full of stress.

    Cheers!
    Gen Y Finance Guy recently posted…You already own your own business, even if you have a Boss???My Profile

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    1. Fervent Finance Post author

      I bet you can’t wait for the day when that investment property mortgage is paid off and every rent check (for the most part) is going into your bank account. I really want to get a run-down foreclosure once I get close to FI and fix it up myself. Hopefully my sweat equity will help it be decently cash flow positive off the bat.

      I don’t find myself checking my investment balances nearly as much when I’m invested in low cost index funds. Definitely keeps me more sane!

      Reply
  4. DC @ Young Adult Money

    My answer would have to be “all three.” We plan on saving my employee stock purchase money the next 8-10 years and use that to fund a down payment on a house. We would prefer to NOT sell our current house and spend the next 8-10 years fixing it up and essentially prepping it for rental. We already rent a portion of it (studio apartment in the basement) and it would just be a matter of taking the landlord thing to a new level. I think dividends are definitely the “holy grail” of passive income and financial independence. My ultimate goal is to live solely off of dividend income. It’s a matter of getting to that point, though 😉 I am a fan of index funds as well and will always have a portion of my capital in them.

    I would have to say that I side with Dividend Mantra more so than other bloggers on this one. You just can’t beat dividend income.
    DC @ Young Adult Money recently posted…4 Reasons Why Your Credit Score Is ImportantMy Profile

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    1. Fervent Finance Post author

      I think it’s a great idea to convert your primary residence to a rental property. Much easier than trying to convince the bank to loan you money to buy an investment property.

      I’m a fan of dividends too, but I’ll take the “easier” route and just collect my dividends from my low-cost index funds rather than assembling a large portfolio of individual stocks. Take care.

      Reply
  5. Vawt

    I am almost finished with a post relating to this very topic! I agree there are a lot of ways, but what it comes down to is your comfort level and risk tolerance. If you don’t want to do it yourself, use Personal Capital, Motif, or something else. If you want lowest cost, use index funds. And so on.

    I think we sometimes assume everyone that wants to have some financial freedom wants to become an investing expert! I don’t think you have to do both to get freedom (though it may help or speed it up).
    Vawt recently posted…Home Repair BluesMy Profile

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  6. The Professor

    Agreed. Lots of blogs focus on individual stocks, saving, etc. and don’t give us the 30,000-foot view of asset allocation. I really try to stick to the plan that works for me (80% public equity, 10% fixed income, 10% P2P lending). If I’m fortunate enough to have more money in the future, I’d like to invest in some private equity funds.

    Hope to see more posts on this topic!
    The Professor recently posted…How to Invest in BondsMy Profile

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    1. Fervent Finance Post author

      It’s nice you have a set allocation for your capital, alleviates the stress when investing new money. I hope to get deeper into my plan in the next post.

      Reply
  7. Chris Muller

    DUDE! You took the words out of my mouth. I am constantly going back and forth on all things money. I’ve become extreme over the years, so I’ve tended to be black or white. The truth is, the best answer is to be “grey” (balanced).

    What works for me may not work for you, but the best advice I can give is to ‘set it and forget it’. Pay yourself first, do as much as you can automatically, otherwise you’ll lose your freakin’ mind trying to come up with the perfect plan.

    I agree, though, my method of madness has typically geared toward low-cost index funds that I just automatically invest in and check on occasionally. The more I think about it, the more I want to change it – and that’s not helping anyone.
    Chris Muller recently posted…How to Identify the Fake Rich From the Real RichMy Profile

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    1. Fervent Finance Post author

      I am definitely a proponent of set it and forget it. And low cost index funds is definitely a great way to go for people like us that tend to over think some things. I can’t wait to dive into the subject so more in part two. Thanks for stopping by Chris.

      Reply
  8. Jason@Islands of Investing

    It’s a great topic, and one that’s been on my mind a lot recently. Even as an individual stock investor, I’ve been thinking more about portfolio allocation within my stock portfolio. I have a tendency to invest greater weighting in smaller / more speculative businesses than I think I should, so am just tweaking my portfolio allocation plan as we speak.
    Jason@Islands of Investing recently posted…Remembering self vs experiencing self – who is more important for a happy life, and what role can Financial Independence play?My Profile

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    1. Fervent Finance Post author

      I think some speculative investing is a great idea during the accumulation phase of financial independence. Right now I’m a little higher than I feel comfortable with myself, but I’m deploying my new capital to low cost Vanguard index funds which will bring down the speculative stock weighting over time.

      Reply
    1. Fervent Finance Post author

      Real estate is great if you have the time and patience for it. I’m not ready for it yet personally, but glad you found a way to get involved!

      Reply
    1. Fervent Finance Post author

      Personally that would drive me crazy. I’m a plan guy when it comes to this type of thing. But as long as you aren’t only invested in a money market or high cost mutual funds, I’m sure you’re doing fine. 🙂

      Reply
  9. DivHut

    For now my method rests exclusively with dividend growth investing. While I’m not against real estate by any means it just seems like a lot of work for real passive income. I have owned rental properties in the past and it was never fun finding new renters, fixing/replacing washers, sprinklers, carpet, paint or whatever. Now I guess you can talk about asset allocation within ones portfolio for another angel to this discussion. Thanks for sharing.
    DivHut recently posted…Recent Stock Purchase – June 2015My Profile

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  10. Mr. Enchumbao

    Hi FF,
    Mr. Enchumbao here, a newbie on your site, (I think). This is such a timely topic because I’ve been thinking about this a lot lately. You hit on major points, especially when you talk about the disparity in the asset allocation arena. We’re about 3 years away from FIRE so we want to start aligning our asset allocation to where we want to be. I think we already made our final decision and we’ll be writing a post on it once we’re closer to FIRE. Thanks for sharing your thoughts on the subject.

    Reply
    1. Fervent Finance Post author

      Hey Mr. Enchumbao. Thanks for stopping by! Asset allocation is not one size fits all for sure. A lot of things go into your decision such as the numbers, goals, personal risk tolerance, etc.

      Reply

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