This post explains how we spread our risk between Vanguard VTSAX index funds and real estate. By the end you’ll have a clearer sense of why asset diversification matters and how simple it can be if you focus on long-term wealth building.
Several books and blogs helped shape our approach, and time plus persistence has shown it works. I don’t post much about investing here because, honestly, investing is boring—and that’s a good thing. Building wealth takes time and a hands-off approach.
In the name of transparency, here’s a quick look at where our money is invested. The pie chart shows a heavy lean toward real estate, with a sizable chunk in low-cost index funds.
To be fair, you could cut the real estate slice roughly in half because we still owe a lot on those mortgages. By our early 60s we expect the house and the rental mortgages to be paid off. Five years ago the picture was flipped: most assets were in the 401(k) and home equity before we started renting and running an Airbnb. With rentals, the plan is to hold property and rent it out—selling too many units brings tax consequences from depreciation recapture. Think of the pie chart as a snapshot of assets, not net worth. This is our nest egg.
More than 90% of our equity investments come from plain old 401(k) contributions. In our big Fidelity account the money goes into the Vanguard Institutional Index Fund Institutional Plus (VIIIX), which is very similar to VTSAX. It has a tiny expense ratio: 0.02% (20 cents per $1,000 invested).
The fund uses an indexing approach designed to track the S&P 500 by investing in the stocks that make up that index in roughly the same proportions. The five-year return has been about 12.94%, and the long-term lifetime return is around 9.83%. When I do opportunity cost math I round that to 10% and subtract 3% for inflation, which is how I come up with the common “7% inflation-adjusted returns on low-fee index funds” figure.
Our HSA works similarly. After keeping a $3,000 cushion we can invest the rest in 401(k)-style options. We’re lucky our HSA bank offers Vanguard 500 Index Fund Admiral Shares (VFIAX). Normally you need $10,000 at Vanguard to get Admiral shares, but our HSA lets us access VFIAX with its low 0.04% expense ratio even before hitting that threshold. Eventually our IRAs held directly at Vanguard will reach the $10K minimum and we’ll convert them to VFIAX or VTSAX. Those funds, plus our Fidelity 529 accounts, form the basis of our kids’ college money.
A big green slice of the pie represents Mrs. Cubert’s business. You don’t need a business to win at investing—you can do well with 100% equities or 100% real estate if you prefer. We have a business because my wife is a chiropractor. Valuing the practice is tricky, but I estimate it based on steady monthly revenues. Our real estate holdings are also a business, though more passive than her day-to-day practice. The Airbnb side has been a bit less passive than long-term rentals, but in practice I’m usually just sending a few messages to guests every couple of days for five to ten minutes.
So what does diversification mean in practice? If you want simplicity, go 100% Vanguard S&P 500 index funds (VTSAX). If you like a bit of hustle, split it roughly 50/50 between Vanguard funds and real estate.
Rent check arrived? Nice. Call me in the fall when it’s time to clear the gutters.
Note: I’ve recently started exploring dividend stock investing. See the related post for why I’m adding that to the mix.