My investment portfolio is a mess. I hold tech stocks, including Google and Chinese internet startups. I have $30,000 in REITs. I have over $200,000 on Facebook.

The reason my investment portfolio is so diversified is simple: it’s a relic of early thinking, where I liked picking stocks and experimenting.

My allocation isn’t ideal, and won’t be for a long time. If I were to transfer all the funds at once, I’d face significant capital gains taxes, so I’m slowly rebalancing. It will take years to complete.

2028a0d928c1bbea01f993ab995a1125What do I want? Where do I want to move the money? What if I could start over?

The mutual fund portion of my investment portfolio is around $1,000,000, so if I could start from scratch, how would I invest it?

I’ll answer these questions, but first, let’s do a thought exercise.

Ice Cubes and Trays

Imagine a conversation with a salesman trying to sell you an ice cube service:

Salesman: I have something new and cool to tell you about! I endorse Cube & Tray, an exciting new service. We handle ice cubes, so you don’t have to! You: What? Salesman: Yes, ice cubes! Cube & Tray manages the production of ice cubes in your home. No more filling trays. We take care of everything! Our trained ice artisans ensure you never run out of high-quality ice cubes. You: Is this a joke? Where are the hidden cameras? Salesman: Sir, this is no joke. Only the finest cubes. We turn water into ice. For you. The phase transition from liquid to solid is not simple. Do you remember the chemical reactions from high school? You: Uh… Salesman: I didn’t think so. Please, bear in mind, our service only charges 2% of the water bill. You: My fridge already makes ice automatically. There’s even a water dispenser on the door. Salesman: We can do better! Our experts craft the most exquisite, luxurious cubes for you. You: Leave before I call the cops.

No sane person would sign up for Cube & Tray. Yet many people sign similar plans to manage one of the most important aspects of their lives—money.

Fees Will Eat Your Retirement

It wasn’t until recently that I began paying attention to mutual fund fees. I ignored and dismissed them:

Hey, it’s only one or two percent. Not a big deal.

Turns out, fees are a big deal. A really big deal.

Back in July 2013, my investment portfolio was worth around $685,000. I recently signed up for Personal Capital, a highly useful (and free!) investment aggregation service. One of the tools on the Personal Capital website is the Fee Analyzer.

One day, I fired it up, and was shocked to discover that if I continued with the current funds, I would pay nearly $600,000 in fees over the next 26 years; losing three precious years of retirement:

I took immediate action, rebalancing into lower-cost funds. While the mutual fund portion of my investment portfolio has since increased in value by $300,000, I paid only $144,880 in fees:

By reducing my fee ratio from 0.79% to 0.11%, I saved over $450,000.

You can use Personal Capital’s Fee Analyzer to see how much of your retirement is currently being eaten up by fees. Completely free!

Why Fees Aren’t Worth It

The dirty secret of the investment world is that the most actively managed funds (i.e., the ones with high fees) fail to outperform their benchmarks. This article from US News points out:

“A year-end study by Standard & Poor’s Dow Jones Indices found that over 10-year investment horizons, 82.14% of large-cap fund managers, 87.61% of mid-cap fund managers, and 88.42% of small-cap fund managers failed to beat the S&P Composite 1500 index.”

Incredible as it may seem, one of the most critical factors for long-term success is fees. But that’s the fact. Low-cost funds that track an entire index typically beat out their higher-priced, actively managed counterparts. The simple answer is the right answer. A good read on this subject is “The Little Book of Common Sense Investing” by John Bogle.

The success of simple index funds flies in the face of our intuition. It’s contrary to what we see every day:

Why are there so many websites dedicated to finance? How do fund managers make millions every year? What’s the point of that bald guy screaming on that financial TV show?

The answer is simple:

Managing money can make a lot of profit. If things seem complicated, fund managers benefit. If everyone knew just how simple it really is, many would be out of a job.

That’s why many financial advisors have the ability to charge very high prices for wealth management leads.

If you still don’t believe it, consider index funds recommended by Warren Buffett, one of the most successful investors of all time.

Investing $1 Million in 2024

So you want to know how to invest $1 million: If I had to start over, this is how I would invest $1 million.

If I had $1 million to invest today, I’d put most (at least 60%) into VTSAX. This is Vanguard Group’s Total Stock Market Index Fund. It has a fee ratio of just 0.05% and provides investment in the entire US stock market.

I’d put a small portion into VTIAX (Vanguard Group’s Total International Stock Market Index Fund) and VEMAX (Vanguard Group’s Emerging Markets Stock Index Fund). I’d rebalance annually. During market downturns, I’d also take advantage of tax-loss harvesting. This is the best way to invest a million dollars, and you might also consider real estate investment, where with effort, you might get higher returns, but it’s not truly passive investing.

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