Investing 101, Part 5: My Case Study

We have finally arrived at the last part of the Investing 101 series, in which you get to creep on my own investments. I wanted to do a final segment on what it actually looks like to go apply the investment stuff we have been talking about, because there’s the potentiality for it to look really intimidating. How intimidating?

I wanted to go set up the three-fund portfolio we talked about last time in my 403(b) account. (That’s just a 401k for non-profit employees, you’ll recall.) My provider happens to be TIAA-CREF, but your employer likely uses someone different, like Fidelity or Vanguard. So I logged in, went to the “Change My Investments” page, set my preference to move 100% from my investments from the target date fund they were in, and then:tiaa-cref
THIS. LIST. The options went on for many more page lengths! I’m glad for the options, employer, but it was really a lot to take in. How the heck was I going to figure out which funds to use from this huge list?

How I Chose My Investments

I solved this problem the same way I solve any conundrum: I broke it into smaller pieces, based on what I knew or could easily figure out. I knew I needed to end up with three index funds that represented as close to the entirety of the market in their type of investment as possible: a domestic equity (stock) fund, an international equity fund, and a bond fund. (Why? See part four of Investing 101.)

I started by focusing on equities (stocks), leaving bonds to the side for now. My list already grouped broad types of investments (equities, bonds) together, so that was easy. Then I removed anything that didn’t have “index” in the name, since I knew I only wanted index funds. That left the following list:

TIAA-CREF International Equity Index Fund – Instl Class TIAA-CREF Enhanced Large-Cap Value Index Fund – Instl Class
TIAA-CREF Enhanced Intl Equity Index Fund – Instl Class TIAA-CREF Enhanced Large-Cap Growth Index Fund – Instl Class
TIAA-CREF Equity Index Fund – Institutional Class TIAA-CREF Large-Cap Growth Index Fund – Institutional Class
TIAA-CREF S&P 500 Index Fund – Institutional Class TIAA-CREF Small-Cap Blend Index Fund – Institutional Class
TIAA-CREF Emerging Markets Equity Index Fund – Instl Class TIAA-CREF Large-Cap Value Index Fund – Institutional Class

Phew. Ten is a lot more manageable than several pages. Now I needed to continue ruling out any funds that did not represent the entire market in that type of asset, which meant that I needed to know what was in each one of these funds. How did I find out?

Each fund has a thing called a “prospectus.” It will tell you all sorts of handy info about the fund, such as its expense ratio, past performance, and what types of investments it contains. In short, it has pretty much everything you need to know to make a decision. It should be easily accessible somewhere on the investment website.

I started by knocking out funds with hyper-specific names, since those seemed least likely to cover the entire market. The prospectus will show you (or now you will know!) that anything with “cap” in its name only represents a certain portion of the stock market. (The different “caps” refer to how much of the market a company holds.) The S&P 500 refers to just 500 large companies. The Emerging International Markets fund only represented investments in up-and-coming economies. The “enhanced” funds performed about .4% better than the more vanilla index fund… and charged .4% more in fees. That meant that all of those funds were off the list.

Now I had it down to two funds that seemed like winners for the equity portion of my portfolio. I just needed to confirm that they were, indeed, funds that represented the entire market in that type of investment. In the case of the Equity Index Fund, the prospectus told me it was trying to match the Russell 4000. Google subsequently informed me that the Russell 4000 represents 98% of the US stock market. Good to go on my domestic fund.

I looked at the prospectus for the International Equity Index Fund, and discovered–gasp–it only represented developed markets. That means up-and-coming markets would not be represented in the fund. Since I had ruled out all of the other international index funds, I needed to see if I could find an additional index fund that represented emerging markets. Thankfully, you might recall that there was an Emerging Markets Index Fund in that handy little table up there. I needed to invest in that fund, too, to be sure I was invested in as much of the international stock market as possible. Suddenly my three-fund approach became a four-fund approach!

With the equities portion of my investments decided, I still needed to choose my bond fund(s). There was exactly one bond index fund, which the prospectus informed me covered the entirety of the US bond market. I had no index fund options for international bonds, so it made that choice fairly simple.

That was a huge wall of text, friends, but really, the process wasn’t hard. I just needed to be clear on what I wanted from my investments, then carefully read about the investments until I found what I wanted. If you can read this blog, you can figure out your investments.

So What About Your Allocation?

I had decided on my four funds: the Equity Index Fund, International Equity Index Fund, Emerging Markets Equity Index Fund, and the Total Bond Fund. Now I needed to say what percentage of my money needed to go in each. As a 28-year-old, I decided on the following allocation, emphasizing the neatness of the numbers.

  • 75% Stocks:
    • 55% Domestic Stock – TIAA-CREF Equity Index Fund
    • 20% International Stock
      • 15% in the TIAA-CREF International Equity Fund
      • 5% in the Emerging Market Fund (just enough to dip my toe in)
  • 25% Bonds: I started with my age as the number, but since I hope to make up for a little bit of time I lost not investing in grad school and feel relatively confident in my ability to weather economic storms, I decided to smudge it down slightly. (Having never actually invested during an economic downturn does help one’s ability to feel confident…)

I needed to apply my asset allocation to each account in my portfolio (both the one that my employer held, since I wasn’t vested at the time, and the one I get to keep no matter what), followed by changing my future allocations. Once I did all that, I can basically forget about it until I tell it to rebalance in a year or two, at which time I will slightly decrease my stock percentage in favor of bonds.

That’s all folks. Ultimately, changing my investment portfolio into something that I feel will perform well, is less risky, and gives me a finer sense of control (all while costing me less in fees!) was done over a few lunch breaks. I hope this shows you that, while it’s going to take some reading and thinking about what you want from your money, ultimately investing isn’t insurmountably hard. I hope Investing 101 gave some of you that are new to investing a little more confidence in tackling your first investment accounts!

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