ChooseFI Logo

Stay The Course | Ep 188

Rick Ferri joins the show to discuss asset allocation.

This is second installment of his interview. If you’d like to hear about Rick’s backstory and his views on index funds vs the asset under management model check out his first interview, Escape From Wall Street.

Asset Allocation

Asset allocation is like a birthday cake. The layers are your asset classes, stock, fixed income, and cash. How to allocate between these layers is 90% of the cake. The most important decision you make as an investor is how to weight these layers.

The second decision is where to invest each of these layers. Broad market index funds such as total us stock market fund or total world index fund. For bonds, you might invest in a total bond market index fund, or a combo of CDs and a total bond market fund. And cash you’ll likely keep in a money market fund.

At this point you’ve built 95% of your cake–or investment strategy.

The icing on the cake is small decisions like do you want to add some real estate, or emerging markets, or more technology funds. And the candles are one-off speculative such as buying an individual stock.

Small Cap Value

Paul Merriman calls small cap value an asset class but Rick disagrees stating that small cap value stocks are included in a broad-based total stock market fund. Rick believes going after specific types of stocks, such as small cap value, overweights that portion of your asset allocation. Which is fine if you are willing to take that risk.

If you are going to weight heavily towards small cap value stocks you need to stick with it for the long term–like 25 or 30 years.

Listen: Paul Merriman Introduces The Ultimate Buy And Hold Portfolio

Bond Allocation

Conventional wisdom says your age should dictate what percentages you should have in stocks and what percentage you should have in bonds. Rick disagrees with this approach. This is an individual decision. Your risk tolerance drives this decision, not your age.

Rick’s investment philosophy is low-cost index investing. But he believes that investment strategy is determined by the individual and very personal. If you believe in your asset allocation you are more likely to stick with it during a downturn.

Deciding Your Own Asset Allocation

All you need to do is figure out what percentages will be in your cake layers–stocks, fixed income, cash. This will be 90% of your investing decisions.

Which specific index funds you should use is less relevant. How much can you handle in a down market? when the market went down 30% in three weeks, what did you do? What did you want to do? Are you going to follow your own investment policy?

Investing is not a sprint–it’s a long term marathon.

Listen: JL Collins Stock Series Part 1

Should You Invest A Lump Sum Right Now?

The math suggests you should invest a lump sum, however emotionally it may not be the best strategy. If doing so will cause you to lose sleep if things are more volatile going forward. If you aren’t up for taking the risk, dollar cost average the money in over time.

Connect With Rick Ferri

Check out his website rickferri.com

Listen to his Boglehead Podcast

On Twitter at @rick_ferri

He is also active at bogleheads.org

Related Episodes: 

Subscribe To The FI Weekly

Action, accountability, inspiration, and community. Join the movement. Get started on your Path to FI

More To Explore
Life Optimization
Life Optimization
FI Frugal Hobbies | Chris Terrell | Ep 429

Whether you’re years into your FI journey or just beginning, evaluating your finances and spending, you may feel like you have to make some cuts into your favorite hobbies in order to reach your goal quicker. However, deprivation and cutting out the things that bring enjoyment into your life should never be the only option. This week we are joined by friend of the podcast Chris Terell to talk frugal hobbies, new experiences, and the parallels between strategies in board games and the strategies employed while on the journey to FI. While trying to optimize your experiences may mean changing hobbies and evolving, while doing so you may find new enjoyment, new communities, and values that come with these changes. Not everyone may have the same approach to a game, just as not everyone will have the same approach to achieving FI, but as long as you remember that being open to changes will allow you to not only optimize your experiences on that journey but optimize your FI. 

Read More »
Life Optimization
Life Optimization
Fees, Frugality, and 401K Fears | Ep 428

On what is considered a very personal journey, how do you handle changes that feel like setbacks? Whether its spending more when you feel you should be saving, or re-evaluating goals based on what needs immediate attention, do you feel equipped to handle it with confidence? This week we are having a weekly roundup, and are re-joined by Ginger to not only answer listener’s questions, but discuss travel rewards, retirement accounts, and breaking away from the ultra frugal caricature often depicted alongside FI. While saving is an important factor on this journey, the main purpose of FI is to learn and live your life with intention as it relates to your money, goals, and values. Remember that it’s okay if some of your goals and values will change along the way! Allowing yourself to be flexible as it relates to external factors, like market volatility and your investments, will give you more power and control to continue ahead with confidence and optimism! 

Read More »
You Might Be Interested in...
Share This Post
Share on facebook
Share on linkedin
Share on twitter
Share on email
Share on pinterest