Total World Stock Index

Recently Vanguard opened a new mutual fund, the Total World Stock Index. This is an index fund tracking the FTSE All-World Index, which is a close approximation of all the stocks in the entire world.

This is interesting for me because in general I'm a believer in allocating equities between US and foreign stocks according to their markets' capitalizations. Until now the simplest way of doing that was buying a total US fund (e.g. VTSMX) and a total ex-US fund (e.g. VGTSX) in roughly a 50/50 split. Now you can get the same effect with a single fund, and you don't have to worry about revisiting that 50/50 ratio over time.

In fact, I'm contemplating the following three-fund portfolio for my Roth IRA:

1. Total World Stock Index, for 100% of equities
2. Short Term Bond Index, for 50% of bonds
3. TIPS fund, for 50% of bonds

You could carry the minimalist aesthetic even further and merge the bonds into a single fund (I'd probably use short term), but I think TIPS are worth having in there as an inflation hedge.

"Investing" entertainment experiences

Mass-market entertainment gets cheaper as it ages. Examples:

• movies start showing at dollar theaters
• shows on premium TV channels become available for rental through Netflix
• DVDs, CDs, video games, and books become available used

And on longer time frames,

• libraries add media to their collection
  
• movies are broadcast on over-the-air television
• media formats go obsolete (e.g. VHS tapes now, CDs and non-HD DVDs soon) and become extremely cheap
  

As I discussed in my post on old video games, this creates an opportunity to enjoy media for pennies on the dollar. Instead of paying for entertainment when it first comes out, set it aside until its price lowers to a "strike price" you're comfortable with. The cost becomes much smaller, so you can either

1. consume more with the same amount of money, or
2. use a lot less money for the same amount of consumption.

There are two big downsides:

1. you don't get to experience the excitement of premieres at the same time as other people
   
2. if you're excited about something you have to wait until it eventually shows up under your terms

At first downside #2 is discouraging because it effectively cuts off your flow of entertainment. I.e. if you decide to only watch movies at a dollar theater and you've already watched everything that's showing there, then you can't watch any movies. However once you wait through an entire release cycle you will enter a "steady state" where movies debut at the dollar theater at the same rate as a first-tier theater, just offset a few months later.

These tradeoffs parallel those of investing. Let's say you decide to invest $1,000. Then you are depriving yourself of the short-term gratification of $1,000 worth of consumption now, for the promise of much more than $1,000 worth of consumption later. If you choose to wait to see Iron Man until it's at the dollar theater or on Netflix, in a sense you are "investing" the experience of watching Iron Man for the promise that the experience becomes much cheaper in the future.

We apply this mentality to the media we consume. When something comes out we make a quick assesment as to where our "strike price" is. A movie is either worth seeing at a full-price theater, a discount theater, renting on Netflix, or not seeing at all. In addition to saving money, this moment of reflection also helps us sort out the movies that are actually worth our time, from the ones that we're only interested in due to marketing pressure.

Boglehead investing

I am a "Boglehead."

Generally, a "Boglehead" is one who invests in accordance with Modern Portfolio Theory (MPT), using predominantly Vanguard index mutual funds, as espoused by John Bogle. In some contexts, though, a "Boglehead" is a participant in the Vanguard Diehards (aka "Bogleheads") forum.

That's a lot of mumbo-jumbo, but the gist of Boglehead-style investing is to:

• live below your means and set aside money every month to invest
• commit to a risk/reward level based upon your need for growth and ability to withstand market volatility
• translate your desired risk/reward level into an asset allocation, which is a breakdown of what kinds of assets you should hold. For example, "30% US stocks, 30% non-US stocks, 10% real estate, and 30% bonds."
  
• hold a small number (usualy 3-7) of low cost index funds, in proportions consistent with your asset allocation
  
• "stay the course:" stick to your plan regardless of what the markets are doing
  
• occasionally (e.g. once a year) rebalance the mutual funds so they don't move too far away from your intended allocation
  

I like this method because:

• Academic research says it works well; I'm an academic researcher, so I take this to heart.
  
• It requires very little ongoing time or effort. After the initial effort of deciding on an allocation and opening the accounts, all your decisions and legwork are finished. You can set up future investments as automated transfers, at which point the only work is an hour or so every year to rebalance the funds.
• There are few decisions to make, so I don't wind up second guessing myself and regretting "mistakes," as I would with a more active approach.
  
• I can do 100% of this over the internet.

I could go on and on about this stuff, but I think it's been covered thoroughly in blog-space. The aptly named Boglehead's Guide to Investing is an excellent primer on all things Boglehead. If you don't mind wading through forum posts, you can get a lot of the same information in raw form by reading the forum's Reference Library area. Vanguard's Plain Talk series also covers the same ground.