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The author, Alexis Rhiannon.
Courtesy Alexis Rhiannon
The book “Millionaire Teacher” by Andrew Hallam taught me how to invest.
I followed Hallam’s advice and invested in index and bond funds, and my portfolio has grown consistently for four years.
I keep a ratio of 70% stock funds and 30% bond funds, with an even split between international and domestic stocks.
In my opinion, when people throw around the term “foolproof,” what they actually mean is, “I, a reasonably intelligent person, figured out how to do this thing, and I can’t imagine why others might not be able to do the same.” But at the end of the day, I’ve never met a “foolproof” recipe, craft project, dating strategy, or houseplant that I couldn’t botch.
What I have met, however, is a financial strategy that’s as close to foolproof as I’ve ever gotten. And I can tell you this because I was a full-on fool myself when I first came across it in Andrew Hallam’s wildly useful book, “Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned In School.” All I knew about money at that point was that debt is bad, saving is good, and that I should really have a retirement account by now.
But after reading the fifth chapter in the book, titled “Build Mountains of Money With a Responsible Portfolio,” I was finally stirred to action. Not only did I have a view of what my portfolio should look like, but also specific stocks and bonds it would be wise to invest in.
Even better, I’d learned that once my new portfolio was set up, it would benefit more from neglect than from endless hovering. Hallam promised that, barring a shocking movement in the market, I’d only have to futz with my account for just an hour a year, and would set myself up for average stock market returns hovering around 10% annually in the long term.
It sounded both too good and too easy to be true, but four years of success have validated every single word Hallam wrote.
First, I needed to understand the benefits offered by bonds
In previous chapters, Hallam had explained the concept of indexes, so I was already on board with steering clear of actively traded mutual funds in favor of their unsexy peers: low-cost index funds. But now, he explained that just stacking my portfolio with stock market index funds wasn’t going to cut it; I needed to balance them out with a percentage of bonds that I could increase as I inched closer to retirement.
If stock market index funds are unsexy, then bonds are flat-out frumpy. As Hallam explained, they’re basically promises that you make to the government or corporations, a vow on your part to lend out money for a certain amount of time, and on theirs to return your funds with interest. The risk is often low, as the only thing that could prevent your return is the company or government’s collapse, but so too is the reward — the interest rate for the average bond (around 5%) is dwarfed by the returns on the average stock (10%).
But one thing that reliably makes bond prices go up? Dips in the stock market. So when you cushion your portfolio with bonds, Hallam says, you’re essentially strapping yourself into a parachute that will ease your fall when the bottom drops out of the market.
It was time to shop for the bonds that would suit me best
Hallam advises investors to look for short-term and intermediate-term bonds so that the interest rate you sign on for is more likely to remain competitive over the years. So you’d be angling for one- to five-year bonds versus 20- to 30-year ones, and either re-upping at the maturity date, or investing in a different individual bond.
That’s great advice for the active investor who loves spending time in their investing app, but for fools like me who would rather skip the constant shuffling and decision-making, Hallam suggests going for a bond index. (A slice of all the bonds on the market, so you get a little piece of everything.) It keeps up with inflation all on its own and can be sold whenever, making it a lot more liquid — although honestly, the author had sold me so effectively on stock indexes previously that he had me at “bond index,” no further convincing required.
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The portfolio I settled on thanks to Hallam’s advice
According to Hallam, a beginner portfolio should consist of just three items: an international stock index, a domestic stock index (for the country you live and work in), and a bond index. And that’s it.
When it comes to the proper ratio of stocks to bonds for a diversified portfolio, you’ll have to make your own decisions, because experts are pretty divided. But it’s still well within the range of foolproof, so don’t worry. If you’re a more conservative investor, experts recommend a ratio equivalent to your age. I’m in my 30s, so with that thinking, I should have 30% bonds and 70% stocks. For a moderately risky portfolio, you can take your age minus 10 (so 20% and 80% for me), or 20 (10% and 90%) for an aggressive portfolio.
From there, once your automatic monthly transfers are set up, you need to adjust your allocations just once a year. Which is a fancy way of saying, “buy and sell more of whatever you need to get back to the ratios you decided on.” In a wildly volatile year, when the stock market is moving by 20% or more, you could absolutely get in more frequently to try to rebalance your ratios. (Plus, it’s a chance to snag struggling assets on sale.)
But here’s the thing: You don’t have to.
If you embrace this strategy, it will only take a big chunk of your brain power once. And from there, it will only take a small amount of your brain power for an hour every January, or April, or whenever you want to do it, while your money grows quietly, nourished more by being ignored than it ever would be by your (read: my) attentive micromanaging. And that, my friends, is about as close to foolproof as anything can get.
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This article was originally published in January 2021.