Otium Goals: Investor Policy Statement

The ongoing coronavirus pandemic and market volatility has upended life as we know it and has motivated me to take stock of our current situation and plans during these uncertain times.

On the financial front, I realized we could benefit from more clearly defining our financial goals, plans and assumptions, which led to creating this Investor Policy Statement (IPS). The idea is that having a written IPS gives us a baseline to evaluate and guide our progress and plans, even if some of it is aspirational. It’s meant to be a living document, so we’ll reassess it periodically and update it as our plans and circumstances change.

With that, our current IPS is below:


  • Who are we: Married couple in our late 30s/early 40s, no kids, living in a high cost of living area, both currently working full-time
  • Annual expenses: Currently, our biggest categories of expenses are rent/utilities, travel, dining/groceries, hobbies/interests and family support


  • Achieve and maintain financial independence: Our main financial goal is to achieve and maintain financial independence at our current standard of living (plus some buffer) for the remainder of our lives, which may be anywhere from 0-60 additional years, give or take
    • While there’s room to trim our expenses, our goal is to maintain our lifestyle and pursue what’s sometimes referred to as FatFIRE
  • Target net worth of >35x annual expenses: Our current target is to reach at least 35x annual expenses, with at least 25x in taxable accounts
    • We want to err on the conservative side of what we’ll need (<4% withdrawal rate, potentially oversave), given the possibility of an extended retirement period without paid work. It’s important to us to avoid ever being forced to seek paid work after retiring, especially if we’ve been out of the work force for a while. It’s likely we’ll find paid work we enjoy during retirement, but we don’t want to count on it.
    • Our target taxable account value is a very rough estimate, based on the idea that we’ll live off of our taxable accounts for about 15-20 years, until we can touch our retirement accounts, which should have grown in the meantime
  • Be in a position to retire by 45: We’d like to be able to retire while we’re relatively young. Retiring at 45 or thereabouts would hopefully allow us to enjoy several decades of good health, to travel and hike or walk long distances. Although retiring at 45 is an aspirational goal, based on our current level of saving and spending (and even if we become a single-income household), it seems achievable if we squint at it.
  • Minimize required effort: We’d prefer to simplify our investment plan so we don’t have to actively monitor or manage our investments, even if we continue to do so for fun and personal education
    • That means, for instance, that we’d prefer to buy and hold stocks over owning rental property and dealing with tenants

Investment Plan

  • Invest according to our risk profile (high risk tolerance): We trust that civilization will progress and markets will increase over the long term during our lifetimes, and we expect not having to use our investments to cover daily expenses for at least 10 years. Thus, we’re comfortable with a heavy equity weighting for our investments (higher risk and reward), so long as we continue earning a paycheck and/or have sufficient cash runway and passive income to ride out extended periods of market volatility for at least 3-5 years.
  • Target an asset allocation (AA) of 90% Stock and 10% Bonds/Cash:
    • Why a 90/10 target AA: This target allocation is more directional than set in stone, given our desire to have a cash cushion of 3-5 years. But, the intent is to be on the efficient frontier of maximizing investment returns for the expected risk of our targeted asset classes, given our risk profile. I’m not a financial expert, so I relied on other sources, such as Wealthfront (which, for our high risk profile, suggests a 95% Stock and 5% Bond/Cash AA) and Personal Capital (which suggests a similar 96% Stock and 4% Bond/Cash AA for our risk profile), to inform our target asset allocation.
    • 90% of Portfolio in Stocks (70% US and 30% International):
      • Wealthfront suggests capping the maximum allocation for each asset class at 35%, to ensure sufficient diversification, so their proposed AA for us is 35% US Stocks, 22% International (Developed), 28% International (Emerging Market) and 5% US Dividend Growth Stocks (and 5% Natural Resources).
      • Personal Capital suggests 60% US Stocks, 26% International Stocks and 10% Alternatives (real estate and commodities like gold and energy).
      • This is more art than science, but we’d prefer to invest more in the US, so a 70% US and 30% International allocation for equity investments feels about right. As our target AA is 90% in stock, that implies US and International Stocks should comprise 63% and 27%, respectively, of our targeted overall portfolio.
  • Follow the Bogle way (save early and regularly, diversify, minimize fees): Following the investment philosophy of Vanguard-founder Jack Bogle, we plan to continue investing in broadly diversified low-cost index funds early and regularly, and to buy and hold for the long term. Generally, we’ll aim to minimize investments in individual stocks or specific sectors, except for a relatively small portion (<5% of our overall portfolio) for fun, until I come to my senses.
    • For our US stock holdings (63% of our overall porfolio, 70% of our equity portfolio), our primary investments will be in the following (although I need to do additional research to figure out the exact allocation among each):
      • VTSAX (Vanguard Total Stock Market Index), VTI (ETF) or equivalent
      • VIMAX/VMVAX (Mid Cap / Value)
      • VSMAX/VSIAX (Small Cap / Value)
      • VDIGX (Dividend Growth)
    • For our International stock holdings (27% of our overall porfolio, 30% of our equity portfolio), our primary investments will be in the following (exact allocation TBD):
      • VTIAX (Vanguard Total International Stock), VXUS (ETF) or equivalent
      • IEMG (Emerging Markets ETF)
    • For our bonds/cash holdings (10% of our overall portfolio), I haven’t looked into this closely yet, so for now, our cash mostly sits in savings accounts or certificates of deposit (CDs), as it’s intended to be our cash runway
  • Regularly invest during capital accumulation phase: While working, in addition to maxing out our 401ks, we aim to regularly invest our savings in taxable investment accounts at Vanguard and elsewhere, regardless of market conditions
    • COVID-19 Note: The “regardless of market conditions” is somewhat aspirational right now, when current valuations still seem on the higher end historically. We’ll still max out our 401ks and save post-tax. But, as it seems likely there will be more market volatility over the near term, we’ll be using dollar cost averaging for our after-tax investments in the coming months (with increased investing after significant market drops). Yes, that means we’re trying to time the market somewhat, but that’s what we’re comfortable with right now and it allows us to sleep at night.

Assumptions and X-Factors:

  • Assumption: No unexpected expenses: The above assumes we will not have significant unexpected expenses, inflation will not significantly increase and that we and our families will remain in good health for the foreseeable future.
  • Assumption: In particular, housing costs hold steady: On the expense side, one big assumption is that we will not rent or purchase a house (a distinct possibility and a topic for another day) that requires monthly payments that are significantly higher than our current rent. That implies that we should only purchase a primary residence if the price doesn’t exceed $700k-800k or so, based on current mortgage rates and estimated insurance, property taxes and maintenance. Otherwise, our expenses will significantly increase and we’ll need to work longer than planned. Conversely, if we move to a lower cost of living area, that would reduce our estimated annual expenses and capital required to meet our goals.
  • Assumption: We continue to earn more than our expenses: Another assumption is that we’ll continue earning enough income to cover our current expenses (so we don’t have to touch our savings) and to save above our retirement contributions. But, that still leaves us significant flexibility to decide how, whether it’s both of us continuing to work full-time (or only one of us) or both of us working part-time. While reducing our income would push out when we reach financial independence, as long as we’re covering our expenses and saving on top of that (and as long as it’s a job we like or can at least tolerate), we’ll continue to make progress toward our goals.
  • X-Factor: If my company IPOs or is acquired: Currently, we’re valuing my private company equity at $0. As long as we keep earning and saving, we’ll be in good shape to reach our financial goals on our cash compensation alone. But, in the event my company IPOs or is acquired, there’s a reasonable chance we would earn a windfall or at least boost our savings. Of course, that’s not something we base our plans on, as my company (like many startups) needs to survive the current recession first before even thinking about a potential IPO or acquisition, but we’re aware that it could happen. Hope for the best, plan for the worst.

Open Questions:

  • Are our current target net worth (35x expenses) and taxable account goals (25x) appropriate (or too high or low) for our anticipated expenses (including post-employment healthcare)?
    • There are several resources we can reference and compare with, including Financial Samurai.
  • How much will healthcare cost after we leave our jobs, but before we’re eligible for Medicare (which itself is not entirely free)?
  • Should we set up a Roth Conversion Ladder? Can we withdraw Roth IRA contributions earlier than retirement age? How would that impact our targeted net worth and taxable account targets?
  • Given the estimated amount we’re aiming for in our taxable accounts before retiring, should we only max out our pre-tax 401ks, but not use strategies like investing in backdoor Roth IRAs?
  • How should we determine our portfolio design (what % to put into which asset classes and specific investments)? How should we allocate our investments within our taxable vs. retirement/non-taxable accounts (while following our overall target AA)?
  • What’s our strategy for generating income during retirement? Should we rely on passive income (such as dividends) or sell investments up to our planned safe withdrawal rate? How should we think about the impact of taxes and sequence of risk?
    • Current thinking is that, even if earning and reinvesting dividends in taxable acounts isn’t tax efficient, it’s appealing to be able to turn on an income stream (by ceasing to reinvest dividends) without touching the principal and risking selling shares in a down market. It might be irrational or not financially optimal, but just like our cash cushion, it might better enable us to sleep at night.
  • While one or both of us are continuing to earn a paycheck, should we invest more of our cash runway in the market until building it back up before leaving our jobs?
    • Current thinking is that, we should keep closer to 3 instead of 5 years of cash runway for now and invest it periodically while markets are still at a discount below all-time highs

Reference Materials:

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