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Part of the idea behind the Max Out of Pocket blog was for me to find a place to organize my thoughts on personal finance, healthcare, and life in general. It just so happens we have an event scheduled in April that will impact all three. So I thought now would be a good time to tighten things up a bit around here.

Outside of Healthcare finance, Max prides himself on being in tune with the personal finance world. However, I have been known to get off course from time to time. As such, I occasionally drift away from my overall strategy and philosophy. In other words, I make things more complicated than they need to be. Ultimately, I chalk all this up to me not formally writing down our strategy. 

As much as I hate to admit it, I do have capacity limitations. I still have a career to manage and other goals. With 2021 shaping up to be a busy year, keeping things simple is important. So, I have been doing just that – simplifying my financial life by following the very principles I preach.

In late 2020 I consolidated several accounts, which included an old and dusty health savings account. I took a hard look at our assets allocation and cleaned up my brokerage account. I even sold off some old individual stock purchases that had aged out. This is all momentum I plan on carrying into 2021.

To make this project successful, I have decided to go ahead formalize a 2021 Investor Policy Statement for the Max Out of Pocket crew. 

What is an Investor Policy Statement?

Others on the internet regularly talk about having an investor policy statement. I read about this concept years ago and thought it was a great idea. I even recall Physician on Fire mentioning it several times when we were talking finance down in Ecuador. But I somehow fell short of implementation.

An investor policy statement is meant to be high level and provide “general direction” for investment goals and objectives. According to Investopedia, specific information on matters such as asset allocation, risk tolerance, and liquidity requirements are included in an investor policy statement. It should also include specific plans to meet those goals. 

I like to consider it overarching, kind of like a mission statement. So without further ado, here is Max’s investor policy statement.

Subject

Max Out of Pocket’s 2021 Investor Policy Statement

Overall Objective

Develop a simple and mostly automated financial plan that maintains a position of financial independence, stability, and growth while releasing myself of frequent decision making.

2021 Specific Objective

Continue to focus on liquidity/access to dollars, building up tax-exempt retirement accounts, correcting our target allocation, simplifying account structure, and tilting more into small caps equities.

Philosophy

• Automation, Simplicity, Systemness (*I like this word)
• Use mostly index funds to access large portions of the total stock market and accept those returns
• Focus on balancing retirement goals while tilting more towards current goals (here and now)
• Still allowed to have some fun with speculative investments, but must keep it simple

Risk Tolerance and Liquidity

We have strategically created an oversized fixed emergency fund and opportunity fund to the point of redundancy. Therefore, we have an extremely high-risk tolerance on all other assets.

Definitions

• Our portfolio is split into four categories:
  • Taxable liquid
  • Tax-deferred retirement
  • Tax-exempt retirement
  • Health savings account (60k)
• The majority of assets live within the following firms:
  • Vanguard – Wife’s IRA, Max’s taxable brokerage with index funds
  • Fidelity – Max’s IRA, Max’s taxable brokerage with individual stocks (3)
  • Lincoln Financial – Max’s active employer 403(b)
  • Health Equity – health savings account
  • US Treasury Direct – I bond ladder

At this point, there is no option for account simplification outside of collapsing Fidelity into Vanguard. I am unwilling to do that at this time; no strategic reason, just preference. It’s certainly not out of the question for 2021.

Evidently, spouses cannot collapse their individual traditional IRA’s into a jointly owned IRA, which is unfriendly. Someone, please correct me if I am wrong on that or if you know of any workarounds.

Target Allocation

Our overall allocation target for our entire investment portfolio is outlined below. I hope to explain this further in a future post.

Hopefully, this adds up to 100%:

• 40% United States equities via low-cost index funds
• 20% International equities via low-cost index funds
• 20% Bonds (this includes our fixed emergency fund, fixed opportunity fund referenced above, and a large I Bond ladder I created)
• 19% Alternatives including REITs, the REIT MOB portfolio, and other speculative investments
• 1% Crypto (I should know better but can’t help myself)
• 0% Cash and cash equivalents

Overall, only 10% of our overall portfolio can be speculative investments, which will eventually include cryptocurrency (Yes, I know cryptocurrency is a currency, not an asset class). I define speculative investment as any individual stocks, which still includes my medical office building portfolio.

As of 12/31/2020, we were at about 9% speculative.

Here is where things were as of 12/31/2020:

Max clearly has some work to do here, and it shouldn’t take me too long to straighten some of this out. I have generally been closer to 75%-90% US equities but I have gotten soft in my old age.

As for the current 14% in US equities, much of that is timing. Some money was being moved around towards the end of the year when this data was populated. Much of that has since settled back into US equities. In particular, a larger transaction of the fidelity bond index (FSNAX) that is landing in equities after 12/31/2020 year-end. In other words, things are stabilizing, but I will still have some work to do in the coming months.

I plan to look at this monthly going forward, similar to how I used to handle our income statement and expenses.

Narrative

After establishing a 50k emergency fund and a 100k opportunity fund in 2020, we have become overweight in cash (currently 6%) and bonds (currently 34%). To correct this, almost all 2021 investment activity below will be directed towards US stocks (14% at year-end). This will mostly be in small-cap index funds through FSMAX.

There are also some large transfers occurring in January 2021 that will move some investments currently classified as bonds back into US Equities.

As my government I Bond ladder matures, I will also likely slowly release our 50k emergency back into equity investments. I haven’t had a chance to cover this much on the blog yet. Additionally, we are slightly overweight in REITs (26%) and I am dealing with that.

Although I have concerns about liquidity and focusing too much on retirement years, I am still leaving the option of maxing out retirement accounts in 2021. That said, all contributions must be tax-exempt ROTH contributions.

I placed too much priority on tax-deferred accounts in my 20s in order to boost our net worth. There were plenty of benefits to this, but these days I am more interested in paying the tax now. Those tax-deferred contributions were in 100% equities for over a decade and have grown to a point where I am concerned about required minimum distributions (RMDs) and our tax burden in retirement years. It is possible for your tax-deferred accounts to get too big, and there are plenty of outdated articles that cover this. I was also considering extreme early retirement options at the time, which I have backed away from in the last 18-24 months. That makes a Roth Conversion ladder challenging for me.

Allocation Correction

There is a need to reduce our bond position by a large sum and it will likely take all of 2021 to make that happen. Aside from the short term correction, I still need to increase our US equity position by more than I will even make with my salary this year.

This will be done through dollar-cost averaging current salary and also replacing some bonds with equities. Unfortunately, I don’t have a great way of automating that process. Although I know lump-sum investing usually wins, I will likely move about $500 a day from bonds to equities to make it easier to accept should the market tank.

The 6% cash is partially related to a poorly timed health savings accounts consolidation. The timing was not my fault; the HSA company required me to sell all assets (US equities) and took their sweet time moving the money to Health Equity while the overall market continued to rise. I have not bothered calculating the cost of the transaction, but I am sure it is in the thousands.

We will continue to live modestly on about $50,000 in 2021 to allow for a higher than normal savings rate. I also plan to immediately reduce our $51,436 emergency fund to match our 2020 spending, which came in at $46,207. That will drop another $5,000 into US equities in the first few months of 2021. This is more symbolic than anything, but I like the practice and symbolism can be important.

Process

• I have the option to max out our tax-exempt Roth 403(b) in 2021 with $19,500. This is one decision I am leaving open-ended. My Lincoln Financial 403(b) currently sits at about $75,000 and is fully invested in VIIIX. This is basically the S&P 500, and it is the best and cheapest investment my employer offers.
  • The goal could be to get this account to $100,000 since we can take a low-cost loan on 50% of the balance up to $100,000 (meaning up to a $50,000 loan).
  • This supports our goal of access/liquidity should we need it. I am starting the year with a 5% automatic Roth contribution to my 403(b) to ensure I get the 4% employer match.
  • The 4% employer match is also automatic and considered tax-deferred. This is a 1% increase from the prior year due to a consolidation of my department at work.
• Max out the health savings account at $7,200 in quarterly contributions.
  • Max’s employer contributes $600 of this limit in early January.
  • The balance of the limit ($6,600) will automatically occur in four $1,650 transactions in early March, June, September, and December.
• Max out both Roth IRAs at $6,600 for 2020 and 2021. This contribution will become liquid again in 5 years if needed. The timing of this contribution is TBD, but the sooner the better. Max’s ROTH IRA is already maxed for 2020.
• All other funds are invested in liquid brokerage accounts after meeting monthly expenses, mostly hitting FSMAX initially.
• Both the emergency fund and opportunity fund have very specific criteria for accessing them, and balances can only be reviewed annually. Those scenarios are documented separately.

Future Considerations

• Consider using a “fixed” bond allocation vs. percentage of net worth
• Potentially use ultra-short-term bonds for the emergency fund
• Figure out an allocation “cap” for the health savings account as the balance is quickly approaching 100k
• Formalize a drawdown strategy
• I could see landing at 50-60% US equities, but changing this too much is not acceptable.

Baby and Other Personal Notes

• We have our first child on the way. I am projecting out-of-pocket costs in 2021 of $6,600, which represents our full max out-of-pocket. Therefore, I will likely keep a small $6,600 cash allocation in my health savings account. Slightly redundant, but I also think this is best practice and I want to set a good example. We have considered birthing the baby in Canada, in which case we would dump this $6,600 back into equities.

• Mrs. Max OOP is still teaching one class remotely which will gross about 10k annually. It is a niche class (AP Stats) and she can likely keep it if she chooses to do so. She is also now a certified butcher, a skillset that we may monetize at some point.
• Mrs. Max OOP’s low income keeps us in a favorable tax situation, which is part of the reason I am utilizing tax-deferred accounts so much.
• As we read about feeding options and our sleeping goals, we are seeing a need for Mrs. Max OOP to stay home and focus on the baby for several months after arrival.

*Systemness – saw this word on an EPIC corporate presentation during a pre-implementation meeting. I got a kick out of it and assumed they made it up. Now I know it is likely a real word.

I am not a financial advisor, so it is not advisable to copy me on any of this. You are always responsible for your own financial decisions. This document will likely be updated with minor changes throughout the year, mostly for clarity and as I firm up a longer-term strategy.