An Approach to Personal Investing

This blog post appeared in Seeking Alpha.

After graduating from Dartmouth College, I moved to New York City to begin my first job as an investment banker.  The money I earned went almost entirely towards rent, food and alcohol, but I still managed to contribute 5% of each paycheck into a 401(k).

Now that I had money to invest, I figured it would be prudent to research different investment strategies, asset classes, and how to construct a balanced portfolio.  But after some investigation, I quickly realized how complex things could get.  The number of investment options and strategies out there was overwhelming.  I wanted to learn about them, but with the long hours I worked as a banking analyst, I barely had time for anything else.

Over the next few months, I developed a deep interest in personal finance.  I wanted to find a smart way to invest my money without effectively becoming a day trader.  It needed to be simpler than that.

Some more research led me to a book called Unconventional Success, written by David Swensen.  Swensen is an icon among institutional money managers and has run the Yale endowment since 1985.  In his book, he outlines a passively managed index investing approach for individuals that focuses on a “well-diversified, equity-oriented portfolio.”  He recommends the following asset allocation:

Asset Class                                                      ETF Ticker                 %
Domestic Stocks                                                         VTI              30%
Foreign Developed Stocks                                        VEA              15%
Emerging Market Stocks                                         VWO                5%
Real Estate                                                               VNQ              20%
U.S. Treasury Bonds                                                  IEF               15%
U.S. Inflation-Protected Securities (TIPS)                 TIP               15%

In order to implement this strategy, you can purchase low cost exchange traded funds (ETFs) that track each of the six asset classes.  The ticker symbols for each are listed above.

Recently, several web based investment advisors have appeared, including Betterment and Wealthfront.  These tools make it easy to invest in a well-diversified portfolio without having to buy the different ETF funds individually.  When I first discovered Betterment, I was curious which ETFs they included in their portfolio.  Would they mirror Swensen’s recommendation?

It turns out the asset allocation is strikingly similar.  A few of their ETFs are even the same as those used to construct Swensen’s portfolio.  Betterment has recently expanded their ETF selection, but their general approach hasn’t changed.  Like Swensen, they follow a diversified, equity-weighted, low cost approach.

I’ve been using Betterment for eight months now, and so far I really like it.  If you have money sitting idle in a checking or savings account that you don’t need to access in the near term, I would suggest opening an account with Betterment.  Alternatively, if you want to learn a little more about ETFs, you can open a brokerage account (I use Schwab) and purchase each of the ETFs individually.  It’s a little more work to set up, but it can be fun to go through the process of buying them yourself.

All that said, this isn’t the best investment strategy for everyone out there.  There are probably many other options that could work just as well or better depending on the type of person you are.  But for someone like me who wants to invest in the market, but doesn’t want to check their account on a daily or weekly basis, passively managed indexed investing is a great option.

A New Online Bank

I am obsessive about tracking my finances.  When I graduated from college and started working, I created a spreadsheet to record my monthly income, pre-tax deductions, tax withholdings, 401-K contributions, and expenses by category.  Every month or so, I’d review my online credit card statements and input each transaction into Excel, which would then flow into a monthly summary tab.  I continue to track my expenses like this today.

I set up an account with but rarely use it.  In my opinion, the Mint platform has several shortcomings that render it unusable for me – namely their inability to accurately categorize a significant portion of my transactions.  Mint also has trouble distinguishing cash transfers between accounts from actual spending, so when I transfer $1,000 from Schwab to Ally, Mint thinks I’ve spent $1,000 somewhere.  Their advertisements for various financial products don’t do much for me, either.

The one Mint feature I do like is the ability to see a real-time snapshot of all my accounts in one place.  If an online bank offered all the services I use (which aren’t very many), then I’d just keep all my money with them and avoid Mint as an intermediary.  I keep most of my money in Schwab checking and brokerage accounts, but since they don’t offer a very good rate on their savings account, I use Ally instead.  I recently opened an account with to easily invest money in a diversified market portfolio without having to choose the various ETF funds myself.  And I’ve also been using to invest in consumer debt the same way a traditional bank would.

Which led me to thinking – why not create an online bank that offers all of these products?  Even if you ignore Lending Club, an online bank that combines the same automated stock/bond investment tool as Betterment with a traditional high yield checking and savings account would be very appealing.  I believe that a service like this would be sufficient for most people who want to keep their spending money with an online bank and also invest in a diverse portfolio without having to choose individual stocks, bonds, or ETFs themselves.

If an online bank offered me a checking account, savings account, automated investing account, credit and debit card, and reasonably powerful expense tracking tools, I would keep 100% of my money with them.  So why doesn’t a bank like this exist?

Maybe I should create one.