Securing Your Retirement: A Buy-and-Hold Investment Strategy

Securing Your Retirement: A Buy-and-Hold Investment Strategy

Bullyrooks Financial Strategy

A series of articles that lays out a long term strategy for financial planning.

full course
  1. A Layered Approach to Financial Security: Protecting Your Long-Term Investments
  2. Mastering Your Money: How to Create and Maintain an Effective Budget
  3. Securing Your Retirement: A Buy-and-Hold Investment Strategy
  4. Goal-Based Long-Term Investment Strategy
  5. Short-Term Investment Strategy: Maximizing Returns Beyond Traditional Savings Accounts
  6. Emergency Fund: Your Financial Safety Net
  7. Insurance: An Essential Investment in Safety
  8. Managing Day-to-Day Expenses and Surplus Funds

I. Introduction

In the world of investing, there are numerous strategies to choose from, each with its own set of benefits and risks. However, when it comes to retirement investing, one strategy often stands out due to its simplicity and potential for long-term growth: the buy-and-hold strategy. This approach involves purchasing investments, like stocks or ETFs, and holding onto them for a long period of time, regardless of market fluctuations.

II. The Benefits of Buy-and-Hold Strategy

The buy-and-hold strategy comes with several advantages. First, it has the potential for long-term growth as historically, the market tends to increase in value over time. Second, it’s tax-efficient. By holding investments for longer periods, you’re more likely to qualify for long-term capital gains tax rates, which are generally lower than short-term rates. Lastly, it’s simple. Unlike more active investment strategies, buy-and-hold doesn’t require constant monitoring or frequent transactions, making it a good fit for investors who prefer a more hands-off approach.

III. Using M1 Finance for Buy-and-Hold Investing

M1 Finance is a platform that aligns well with the buy-and-hold strategy. Its interface allows you to easily create and manage a diversified portfolio, and its automation features can help you stick to your investment plan. Additionally, it offers fractional shares, enabling you to fully invest your money and take advantage of compounding, regardless of how expensive individual shares might be.

IV. Building a Diversified Portfolio

Diversification is a key concept in investing. By spreading your money across different types of investments, you can mitigate risk and increase the potential for stable growth. One effective way to achieve diversification is through exchange-traded funds, or ETFs. These funds contain a variety of investments and allow you to invest in a broad market sector or index with a single purchase.

For a buy-and-hold retirement portfolio, low-cost, index-aligned ETFs can be an excellent choice. They typically have lower expense ratios compared to actively managed funds and are designed to track the performance of a specific index, providing you with exposure to a wide range of assets.

V. Choosing Your Investments

In a diversified portfolio, different investments play different roles. A total market stock ETF, like VTI, can provide broad exposure to the U.S. stock market. A growth ETF, index-aligned to include companies expected to grow at an above-average rate, can add potential for higher returns. A foreign growth ETF can offer exposure to international markets, while a bond fund can bring stability and income.

Here is a very basic outline of a possible portfolio:

  1. Total Market Stock ETF (VTI, 40%): VTI provides broad exposure to the U.S. stock market by aiming to track the performance of the CRSP US Total Market Index.
  2. Growth ETF: Vanguard Growth ETF (VUG, 25%) is a popular choice. It tracks the CRSP US Large Cap Growth Index, which includes companies in the U.S. that are expected to grow at an above-average rate compared to other companies.
  3. Foreign Growth ETF: Vanguard FTSE All-World ex-US ETF (VEU, 20%) provides exposure to a diverse group of companies located in countries outside of the U.S., spanning developed and emerging markets.
  4. Bond Fund: Vanguard Total Bond Market ETF (BND, 15%) is a commonly recommended choice. This ETF provides broad exposure to U.S. investment-grade bonds, aiming to keep pace with U.S. bond market returns.

The weight of each investment in your portfolio should depend on your investment horizon and risk tolerance. Younger investors with a longer timeframe until retirement may want to lean more towards growth-oriented investments, while older investors nearing retirement might want to shift more towards bond and income ETFs for their stability.

VI. Adjusting Your Portfolio as You Age

As you age and your retirement horizon gets closer, your investment focus should gradually shift from growth to income and preservation of capital. This can be guided by the “age in bonds” rule. According to this traditional rule, the percentage of your portfolio in bonds should be equivalent to your age. For instance, if you’re 30 years old, 30% of your portfolio would be in bonds, and the remaining 70% would be in stocks. If you’re 60, then 60% of your portfolio would be in bonds, and 40% in stocks.

However, this rule may be too conservative for some, especially considering longer lifetimes and lower bond yields in today’s environment. A revised version of the rule suggests subtracting 20 or 30 from your age to determine your bond allocation. For instance, if you’re 30 and following the “age-20” rule, 10% of your portfolio would be in bonds, and the remaining 90% in stocks.

This gradual shift from higher-risk growth ETFs to more stable bond or income ETFs can help protect your portfolio from major market downturns as you approach retirement.

On the other hand, if you’re more interested in seeking higher yields, you might consider turning to income-based dividend ETFs as an alternative to bonds. Dividend ETFs focus on stocks that are known for their dividend payouts, which can provide a consistent income stream. This strategy can potentially offer higher yields than bonds, while still providing some level of stability and income in your portfolio. Keep in mind, though, that while dividend-paying stocks can provide income, they can also be more volatile than bonds.

Remember, these are general guidelines, and the best strategy for you depends on your personal financial situation, risk tolerance, and investment goals. It’s recommended to consult with a financial advisor for a more tailored approach.

VII. Conclusion

Investing for retirement doesn’t need to be complex. A buy-and-hold strategy, facilitated by a platform like M1 Finance and implemented through a diversified portfolio of low-cost, index-aligned ETFs, can be a straightforward and effective approach. As you journey towards retirement, remember to review and adjust your portfolio to align with your changing needs and risk

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