Dr. Jim Dahle (aka, the White Coat Investor) authored a famous 2014 post describing 150 Portfolios Better Than Yours. While an impressive feat, this is not terribly helpful to the newbie physician investor who just doesn’t want to screw things up while she figures things out. Social science and economics research have demonstrated that too many choices can increase anxiety, result in analysis paralysis, and in some cases lead people to make decisions against their best interest.
Cue the financial services industry, which offers to intervene on behalf of the now-intimidated physician investor. Perhaps a doc opting to use an advisor is the definition of going against one’s rational self interest?
Before you sick Chopper on me, let me be clear that I come in regular contact with several advisors socially, and I’m fond of them as human beings. I just figure that, given the choice, you’d rather pass your money onto your kids than my acquaintances.
To that end, consider this a template that a young newbie with a long investment horizon ahead can act on while he is still undertaking his financial education, the “too long; didn’t read” version of what to do with the funds in their 401k.
Option One: A Total Stock Market Index Fund
I’ve referenced this choice before in my post on Financial Puberty, which describes how medical professionals respond to the novel experience of dollars suddenly appearing where dollars have never sprouted before.
A total stock market index fund (VTSAX or VTSMX at Vanguard, FSTVX or FSTMX at Fidelity) is bound to serve as a cornerstone of any passively managed portfolio. It is highly tax-efficient. When you are young and just starting to invest, spending a year or two investing everything into a total stock market index fund while you sort out your asset allocation is simple and reasonable as an interim step. These funds traditionally have the lowest expense ratios around, so the savings are as appealing as the earnings.
Option Two: A Target Date Retirement Fund
For a slightly higher expense ratio than option one, you get (with apologies to J.R.R. Tolkien) One fund to rule them all.
To explain the fund is to review the Cliff’s notes for passive index investing. A target date fund is a collection of other index funds comprising the major asset classes of any good portfolio (domestic and international equities and bonds), which reduces risk through diversification. The fund rebalances automatically, ensuring you buy low and sell high. The asset allocation gets more conservative as you approach your retirement date, ensuring you retire with more bonds and fewer stocks in order to reduce volatility when you can least tolerate a loss of principal. Finally, costs are an order of magnitude lower than what you’d pay a financial advisor to perform the same task.
Option Three: A Three Fund Portfolio
As evangelized by “King of the Bogleheads” Taylor Larimore, a portfolio that is equally split among three major index funds (33.3% Total US Stock, 33.3% Total International Stock, 33.3% Total Bond) is considered by many to be the ultimate lazy portfolio. Provided you rebalance to the original proportions annually, this is a “set it and forget it” portfolio with minimal maintenance required.
Since most passive investing portfolios will utilize each of these funds to some extent, even if you ultimately decide to change your allocation, these funds are likely to play a role in more complex “splice and dice” allocations.
I’ve tried to reduce the inevitable newbie anxiety, paralysis, and intimidation that might otherwise lead you to use a costly financial advisor by reducing 150 choices to a simpler menu of chocolate, vanilla or strawberry.