Life Inventory: Sample Mutual Fund Portfolio

When investing for the long-term.  It's important to include investment assets that allow your portfolio to not only survive market fluctuations but also survive the constant erosion of buying power by inflation.  This post provides a sample portfolio.  Since I tend to invest directly in the underlying assets (stocks and bonds), I do not use this portfolio.  However, my broad asset classes do match the percentages presented in this portfolio and this is the portfolio I recommended to my spouse in case I die or am incapacitated.

I think I've covered most of this in prior posts but I wanted to ensure all required information was contained in this post.

Defining Risk
When managing a portfolio the manager must balance risk from two separate categories of risk.  The problem is, compensating for one risk (say capital risk) causes the manager to use assets that increase the portfolio to higher levels of the other type of risk (cash has almost no capital risk but it increases exposure to inflation risk).

Capital Risk  - The risk of an asset losing value due to market fluctuations
Inflation Risk  - The risk of an asset losing value due to inflation

The trick with Capital Risk is that over long periods of time (> 15 years), capital risks even out and it (arguably) is not essential to include multiple asset classes.  As your investment horizon drops below 15 years, then the including mix of multiple asset classes becomes more important.  When it drops below 10 year, including a mix of multiple asset classes becomes essential.

Portfolio Rebalance
Different types of assets (e.g. cash, bonds, stocks) tend to not increase and decrease value at the same time.  For example, when there's a stock market crash, cash assets retain their value and sometimes bonds will increase in value.  So a method of decreasing capital risk (which permits the manager to reduce inflation risk) is to invest in multiple asset types.

When one asset type (like stocks) increase in value, you sell enough assets to bring that asset type back into the desired percentage.  This process is called rebalancing.


Mutual Fund
Mutual funds provide a means of buying a wide variety of assets of the same type with not much money.  Mutual funds also provide a means of investing in stocks without having to perform a lot of research on individual stocks.


Sample Portfolio
This is the portfolio that I recommended that my wife use in the event of my death or incapacitation.

Type and Percent		Fund and Percent
60%	Stock Mutual Funds	15%	Small Cap Value Index	VSIAX
		15%	Large Cap Value Index	VVIAX
		15%	International Value Index	VTRIX
		15%	REIT Index	VGSLX
20%	Bond Mutual Funds	7%	Long-Term Gvmnt Index	VLGSX
		7%	Intermediate-Term Corp Index	VBILX
		6%	International Bond Index	VTABX
20%	Cash / Money Market	20%	Vanguard Prime Money Market	VMMXX
	Total	100%	Total

Safe Withdrawal Rates (SWR)

A safe withdrawal rate is the rate you may withdrawal your money so that you do run out of money before the designated period ends.

The table below shows the likelihood your portfolio will survive given different safe withdrawal rates.

If you withdraw 4% of your portfolio for living every year, then the portfolio is 85% likely to last 30 years or more.  If you withdraw 3% of your portfolio for living every year, then your portfolio is 95+% likely to last 30 years or more.

SWR	Duration (yrs.)	Probability
2%	30	99.8%
3%	30	95%
4%	30	85%

If the portfolio must last longer than the indicated duration (e.g. 40 years instead of 30), then I recommend not using greater than a 3% SWR.  If you only require the portfolio to survive 30 years (e.g. from age 65 to age 95), then you may use up to a 4% SWR.

Adjusting SWR

On years in which your portfolio balance increases, you get to reset your withdrawal amount.  If you originally got to withdraw 3% of a $1,000,000 ($30,000), then if your portfolio increased to $1,200,000 you would now get to withdraw $36,000.

On years in which your portfolio balance decreased, you keep your withdraw amount equal to the amount of the previous year.  So if your portfolio decreased in value from $1,200,000 ($36,000 SWR) to $1,000,000; you would get to continue withdrawing $36,000 in year anyway.

Life Inventory: Finances

If someone must step into your life to ensure your household keeps running, perhaps nothing could be as important as a list of your finances: where the money is and was it is for.

I started collecting this information as means of evaluating our finances, were we improving our lives or making them worse?  To this end, my list of finances included both assets (e.g. checking and savings accounts) but also retirement and debt accounts.

The list of accounts included in my financial spreadsheet includes:

Debts / obligations:

• Mortgage
• Second mortgage, HEL, HELOC, etc.
• Revolving credit (credit cards, etc.)
• Auto loans
• Medical loans
• Money that I’ve promised my kids (e.g. assistance with college)
• Other obligations

Assets:

• Checking account(s)
• Savings account(s)
• Investment account(s) (stocks, bonds, money markets, etc.)
• IRA / Roth Accounts
• 401k Accounts
• Treasury accounts
• 529 Accounts (e.g. college savings)
• Universal Gift to minors (UGTM)
• Custodial accounts
• Any other financial assets

If you intend for someone to use this information to keep your household finances running in the event that you can’t (incapacitation or death), then you need to include all of the information a person taking control of these accounts would need.  The information that I’ve included is:

Important information

• Account Name
• The purpose of the account!
• Account Company
• The type of account
• Account number
• URL
• Account username
• Account password
• Balance (positive / negative)

I do not trust including both the username and password digitally (especially on the same document!), so you should either use an electronic account vault (e.g. KeePass2) or you should put a reminder in for the password and then only write the password on the printed sheet that you pass out to your Financial Power of Attorney.

You must trust the person you assign power of attorney!