Where to Put Your Savings

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Should you pay down your mortgage? Invest in VTSAX as much as possible, as many FI blogs recommend? Have an emergency fund in cash? Save it up and buy real estate? The “math” answer would agree with the FI bloggers and stash it all in VTSAX. (Or possibly invest in real estate using leverage – more on that later.) However, in my experience with real people over long time periods, most people do not stick with one strategy for long period of time – it just doesn’t happen that much. Not to mention a lot of people don’t have a very high risk tolerance. If you have difficulty stomaching a decline of your portfolio from $100,000 to $40,000 in a matter of months, you really shouldn’t have all your money in stocks, regardless of your age.

One suggestion is: If you have a lump sum, split it 1/3 cash savings*, 1/3 diversified portfolio of stock & bonds and 1/3 mortgage paydown. That way, no matter what happens to the markets, you will have extra “safe” buckets of capital. Also, if markets do very well, you will have participated in that, too. It is the best of all worlds, especially in an environment where the future cannot be predicted.

Have a lump sum of cash, such as an inheritance? Do the same thing – split it into thirds. Nervous about buying in to an overvalued stock market? Divide the inheritance by 12 and have your advisor invest 1/12 per month until it is fully invested. The advantage to this is that your advisor should buy whatever asset class is low in your portfolio, which is a forced way of buying low. I also advocate letting dividends and capital gain distributions accumulate in cash and then investing those periodically in whatever asset class is low as a % of the portfolio vs your asset allocation. If you only invest in VTSAX, then you cannot take advantage of these price swings. Note that this is different from market timing, which is mostly detrimental to your wealth and cannot be repeated successfully.

The oft-repeated advice to just put all your savings into the simple portfolio of VTSAX or VTSAX and a bond mutual fund just doesn’t account for all the realities of life. Life is not a straight line. It is messy, with divorces, deaths, medical issues, ailing parents, disabilities and many other curveballs that require a change in lifestyle or spending down of savings. This is why I advocate a more diversified approach.

*Such as a high-yield, online bank savings account, like Ally Bank or Synchrony – Google around to find the best rate, or use sites like http://bankrate.com

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