A Short Guide to Lean Investing.

By Brad Beckstrom

Have things gotten too complex?

Today we have more savings and investment options than ever before. Online tools and investment options that give us access to over 10,000 mutual funds and exchange traded funds, with another 40,000+ publicly traded stocks worldwide. Most of these investments are accessible without setting foot in a brokerage firm or bank. Online banking, trading, and mutual fund supermarkets give us access to sophisticated investment tools available only to professionals just a decade ago.

Yet, despite so many options, the US personal savings rate is hovering between 5% and 6% and has been in steady decline since the 50s. The retirement savings picture is even worse, one in three American adults has zero saved for retirement and 62% have less than $1000 saved. Many Americans like to blame the government for this predicament but in fact many countries with significantly higher taxes have savings rates that are 2 to 3 times ours.  On top of our tax advantages, we have a wide selection of pre-tax and post-tax savings options many other countries don’t have, including 401(k)s, IRAs, SEPs, Roth IRAs, Health Savings Accounts, 529 college savings plans, and about 10 more with various combinations of numbers and acronyms in the name. All of them are underutilized by any standard of measurement.

Part of the problem is complexity. We’ve made it easier to go out and get a loan for a new SUV or a 5,000 square foot house than to start saving or put that money away for retirement.  We’ve been incentivizing people to take out student loan debt instead of starting college savings accounts.

To solve the complexity problem we need to make it easier to save and invest. We need to create a simpler path to wealth through regular and efficient investing. I like to call this Lean Investing.

What is Lean Investing?

Lean investing is a minimalist approach to an creating an investment portfolio that reduces taxes, increases returns, eliminates excessive fees, and saves you a lot of time. What if you could create a simple portfolio with only four investments that would consistently beat 90% of professional fund managers and paid investment advisors in returns?  The portfolio is so simple that it would require little change over your investing lifetime. It’s a strategy that Warren Buffett not only recommends but regularly utilizes with fantastic results. You can employ the strategy regardless of the size of your investment account.

Years ago I had a out of balance mix of individual stocks and mutual funds spread across several brokerage accounts and a 401K from a former employer. My goal was to simplify and consolidate all of our family accounts with one brokerage including any 401(k)s, IRAs, individual savings and investing accounts. I wanted one simple statement per month including online access with clear concise account balance and performance information. I wanted a proven group of 4 low fee, high performing index funds that reduced volatility and covered all of my investment needs.  

Here’s how I did it.

1. Have a roadmap. I laid out a lean investment strategy that would minimize taxes, brokerage fees, and paperwork. I wrote these goals down including what the account would look like after I consolidated everything. I included names of funds, brokerage, online tools, and the maximum fees and expense ratio I was willing to pay per fund.
2. Find an online brokerage.I searched for a company that offered simplified rollover options, had extremely low fees on a variety of market index funds. Index funds like the ones below track major indexes and can be combined for tax advantages and lower volatility than individual stocks. It’s like owning a tiny piece of every stock in the market versus having your eggs in a few baskets.
3. Open your account. I found two established companies that offered the most competitive fees on index funds — Vanguard and Fidelity. Both companies offer extensive online tools and customer service available to all investors. If you want to stick with your current brokerage or workplace savings, simply use the fees in the chart below (no. 6) to see if they match up from a fee perspective.
4. Pick your index funds. Once I had everything consolidated into one brokerage account, I began transitioning from funds that had high fees to the lower cost, better performing index funds. This is probably the most important step in simplifying your investments. For instance, some of the funds I owned had fees as high as 1.3% per year. I transitioned those to index funds ranging between 0.045% and 0.090%. To give you an idea of what even a 1% difference in fees can make on retirement savings, take a look at the attached chart from John Bogle’s blog.
5. Have a tax plan.  Once you’ve picked your index funds you’ll want to make sure you talk to a brokerage representative before buying them. You want to confirm that you put index funds that generate taxable income like taxable bond funds, real estate investment trust (REITs) in pre-tax retirement accounts. Also, if you’re selling off an investment, you’ll want to make sure you know if you’ll be paying taxes on the gain if it’s in a taxable brokerage account. I found the chart below helpful in choosing where to put each fund.    
6. Buy Index Funds. Here is a chart of Fidelity and Vanguard funds that meet this criteria. (double click to enlarge) There are others out there, but measure the fees against these as they are some of the lowest. Within this group you can cover all of your investing needs with as few as 3 funds. I recommend holding 4 funds. A total stock market index fund, a total bond market fund, a (REIT) or real estate investment trust fund and a quality international index fund. I have highlighted these below. Before you purchase the funds be sure to balance the percentage you have in bonds versus stocks based on your age and your appetite for risk. There’s lots of different opinions on this but  two excellent books I found on this topic are below.
7. Consolidate. Once you’ve picked your new index funds in one place start by first organizing your holdings in pre-tax retirement accounts. Because 401(k)s and IRAs are pre-tax, there is no penalty for selling one fund or stock to invest in another one within the account. It’s always a good idea to confirm this with a brokerage representative before you click buy or sell.
8. Track and optimize.  One of the biggest differences between investing now, and even a decade ago, are all the fantastic tools that allow you to keep your portfolio in balance and optimized.  By optimized I mean, having the best setup for taxes, lowest fees, and investment mix of three or four index funds based on your age. I primarily use tools that my brokerage provides right on the website, I also use the free version of Personal Capital as it has great tools for tracking fees and fund performance. These tools are especially important when you’re transitioning out of multiple accounts into one, then organizing an account into the minimum number of funds.

So, now you may be thinking, nine steps does not seem very simple! But the payoff comes once your new funds are in place and you’re able to set up monthly automatic deposits. It takes time to transition out of high fee investments, or volatile individual stocks, and I still have a few stocks that I’ve held onto that I am slowly transitioning into the four main funds I own now.

1. Fidelity Total Market Index Premium  FSTVX  50%
2. Fidelity International Index Premium FSIVX  15%
3. Fidelity Real Estate Index Premium FSRVX 10%
4. Fidelity US Bond Index Premium FSITX  25%

International index funds and bond index fund’s help to reduce volatility as they often perform during periods when the total market Index and real estate index are down. Once you have core funds with low fees, investing can be automated and balancing is a snap using the online tools that I’ve mentioned.

I highly recommend JL Collins new book called “The Simple Path to Wealth.” The author makes a strong argument for an even simpler portfolio than I’ve recommended using the strategy I’ve outlined above. The book goes into additional detail about the performance and savings the average investor can experience through lean investing, with detailed tips on transitioning retirement accounts and investment accounts, including how and when to withdraw your money during retirement.

The Frug

I’d love to hear your experience in simplifying your investments. A quick disclaimer — Any concepts presented on this blog are simply opinions and should not be considered as professional investment advice.  As with most other things in life, you are solely responsible for your own choices, make them thoughtfully.

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