How does an award-winning Chief Investment Officer invest his own assets? In this episode, Peter shares how he handles his own assets, liabilities, and spending habits. 

Listen in and learn:

• The story of Peter’s first money lesson
• The metrics Peter uses most often to measure his progress
• The investments and asset allocations for each of his personal accounts
• The system Peter uses to manage his cash and liabilities 

Episode

Outline

My first distinct memory of money was during a night out with my family at a local pizza shop. I don’t remember how old I was, but I’d guess no older than six or seven. 

• We used to play hockey with three coins while we waited for the pizza. We’d drop three coins on the table and you had to flick the center coin through the two outside coins. 
• The restaurant had a jukebox and because we were already flicking coins around the table, I asked my dad for money to pick out a song. Instead of handing over some change, my dad asked, “Is it worth your money?”

I told him no and he responded, “Then it’s not worth mine.”

The next time we went to that restaurant, I found myself eyeing the jukebox again. And again, I asked my dad for some money to pick songs on the jukebox. My dad asked the same question: “Is it worth your money?”

This time, thinking I was clever, I said yes. Then my dad said, “Great, then you can spend your own.”

This lesson in the value of money is one of my most vivid memories as a child. 

My parents generally did the right thing with money: they didn’t spend more than they earned and they were good savers. But they formally taught me about money. Money wasn’t an off-limits topic, but it also wasn’t a focal point of our routine family dinners. My perception is that this isn’t all that uncommon among most families.

So when do we get an opportunity to learn about money?

We don’t learn about money basics in elementary school. We don’t teach high school seniors how to budget or pay bills. Most college graduates don’t take a course in personal finance or receive an unbiased education on the right way to invest money. It’s even more unlikely they took a deep dive into financial planning topics like how to plan for retirement, buy a home, save for a child’s education, or any of the other situations in life that require an understanding of how to manage money.

In school, you are given a lesson, then a test. In life, you are given a test and then you learn a lesson—and money lessons can be expensive.

Since this podcast is all about helping you make good decisions with your money, I think understanding how I manage my own money might provide some helpful context.

How I Invest My Money

I actually wrote a blog post on PeterLazaroff.com called How I Invest My Money that was inspired by a collection of essays compiled by Josh Brown and Brian Portnoy and illustrated by Carl Richards. A variety of financial professionals contributed to the book, sharing personal stories and glimpses into, as the title hints at, the way they personally manage their own assets.

The book is a relatively short read and each chapter reflects a different perspective and approach to personal investment management. The various entries focus less on providing actionable advice or novel investment insights and instead come together to create an overarching theme that shows there is no one-size-fits-all solution to personal finances and investing.

The stories also highlight the reality that all of us advisors who dole out advice aren’t robots – we’re very much human, and our lives are just as messy as everyone else’s. Those personal stories and values helped make the book great, and I’ve already shared something similar in my own book Making Money Simple and on PeterLazaroff.com

What I haven’t previously shared, however, is how I handle my own assets, liabilities, and spending habits. How I Invest My Money inspired me to do just that here.

As I’ve said many times before, we don’t live in a spreadsheet. But I do feel there’s value in contributing to efforts to make professional investment management more transparent and accessible. So with that said, let’s walk through my balance sheet together.

Breaking Down My Assets

It’s tempting to start with how I invest my portfolio, but to me, the portfolio is just one piece of a bigger puzzle and therefore, it’s not my go-to when I want to check on how I’m doing financially.

If I want to know where I stand at any given point in time, I’ll look at the net worth worksheet I’ve maintained over a decade. You can get a copy of this worksheet at WealthWorksheets.com

When I was a kid, I loved seeing hard work translate into earned dollars that I could then use to add to my savings. I worked a bunch of cash jobs throughout the school year and summer – waiting tables, car washing, basketball referee, babysitting, dog-sitting…. 

While many kids might have been motivated by the potential to spend their summer job incomes, I found watching my cash balance grow more satisfying. Whenever I got paid, I’d add the cash to my top dresser drawer stash and count the entire amount. Seeing the cash add up felt like the best reward for my work.

Perhaps that’s why I’ve consistently tracked my net worth in adulthood. It allows me to see the cumulative results of my financial decisions, and updating my balance sheet every six months helps me stay motivated and aware of my progress over time. 

As I’ve grown older, I’ve found other benefits of maintaining an up-to-date balance sheet, too. In addition to providing a sense of accomplishment, it helps me keep perspective because I can see my entire financial picture in one place. It helps facilitate productive financial conversations with my wife because we can sit down and look at the numbers together. And it also helps us plan for the future because it reminds us to narrow our focus to what we can control.

So I’m going to walk you through this balance sheet in detail to help explain the full scope of my money allocation. We’ll start with the assets, take a look at the liabilities, and end with spending (as I believe it’s how you spend that says far more about your values than how you invest).

My Non-Liquid Assets

The least liquid assets on my balance sheet are also my biggest. My ownership stake at Plancorp is the largest asset on my balance sheet. It also has a decent-sized liability tied to it via a business loan I took to purchase my share, but more on that in a later section. 

My stake in Plancorp plus my portfolio assets make my balance sheet closely tied to publicly-traded markets. This reflects where my comfort with market risk lies.

My next-biggest asset is also fairly illiquid: my home. But I don’t actually think of my house as an asset, even though it’s technically on my balance sheet. It’s definitely not an investment either. To me, a house is a form of consumption. A use asset. 

Housing is a bad investment:

• A house should be viewed as a place to live rather than an investment. Unless you are a professional real estate investor, most of us own and live in a single home, which means our real estate success will boil down to good timing and luck.
• Unlike a traditional portfolio of stocks and bonds,
  • a home is an illiquid and 
  • indivisible asset (you can’t slice off a piece of your kitchen and sell it for cash) and 
  • extremely undiversified (a single bet on one neighborhood).
• Home also offers very little long-term price appreciation after adjusting for inflation. According to historical data from Nobel Laureate Robert Shiller, home prices have only risen 0.37% per year after adjusting for inflation over the past 125 years.
• Many people don’t realize the gains in housing prices mostly come from inflation. When adjusting for inflation, a home depreciates in value over time.
• The exception is to the extent you spend additional capital on maintenance and improvements, but that’s not exactly something you want to see in an investment.

My indifference to thinking of my home as an asset is exacerbated by the fact that my investment portfolio will surpass my home in size and the home will continue to be a smaller and smaller part of my balance sheet. 

• My house today represents roughly 30% of my total assets, but I don’t expect it to appreciate in value by more than the rate of inflation (if at all). 
• Meanwhile, I expect my portfolio, which currently represents about 23% of my assets, to average a long-term return above inflation (known as the real rate of return) of 6% or 7%. This return assumption is in line with historical real returns on equities.

I’m also regularly contributing to my investments, whereas I do not plan to regularly contribute money from cash flow into my house in some kind of effort to make its value grow over time. The money I spend on my home is to maintain and shape it to my life’s needs – so that’s purely consumption to me, not investment.

Another reason I don’t really think of a house as part of my long-term financial planning assets is that I never plan to leverage a reverse mortgage to slowly tap my home value in retirement in order to make ends meet. Essentially, this house is an asset for my kids to liquidate when their parents pass. I will never tap the value myself, and therefore, I mentally account for it more as consumption than asset even though the value shows up under assets on my balance sheet.

My Investment Portfolio

OK – So it’s worth stating that this is not investment advice. I know I have the disclaimer at the beginning that you might skip through, so I’ll make sure to say it again since I’m going to be naming specific securities here…

How does the Chief Investment Officer of Plancorp, who oversees more than $5 billion of client assets, invest his own? I aim for simplicity. I own a single mutual fund in my Roth and Traditional IRAs, while my 401(k) uses the most aggressive model portfolio offered.

Roughly 70% of our family’s overall portfolio is in a Roth IRA with the bulk of those funded when I rolled over my Roth 401(k) plan from my first employer. 

• While I worked at that company, I maxed out my retirement plan via payroll contributions on the 15th and 30th of every month over. I never tweaked my asset allocation. 
• I never timed my investments. Every two weeks I automatically invested in the firm’s most aggressive model, which was a 90% stock and 10% bond mix of index funds.

The decision to invest my Roth 401(k) this way was relatively simple because of the way my employer designed their plan. There were only index funds and the model allocations were created by our investment committee. When I made this investment decision coming out of college, I was certain that I didn’t know more than that group of people, so I set it and left it alone.

And boy am I glad I did because while this highly diversified and low-cost index portfolio in my Roth 401(k) benefitted from uninterrupted compounding during the early years of a massive bull market, I made a litany of mistakes in my other investments, located in a taxable account and Roth IRA.

A deep dive into the investment mistakes I made early in my career is a topic for another day, but most of the mistakes I made can be summed up as me trying to outperform the market via security selection and market timing. I also learned how leveraged ETFs worked the hard way, but again, this is a topic for another time.

I’m not entirely sure what my performance was relative to the market over that period of time – a painful truth for basically all do-it-yourself investors – but fortunately the automation and forced discipline of my Roth 401(k) meant I was, overall, in a good position when I joined Plancorp in 2015.

At that time, I made the decision to roll all of my previous retirement plan’s assets into a Roth IRA and Traditional IRA (company matching contributions are required to be made into a Traditional 401(k) so I rolled those into a Traditional IRA and my own Roth 401(k) into a Roth IRA).

I felt the best way to protect myself from future errors and ensure the largest account in my portfolio continued to thrive was to use a single fund and set up automatic dividend reinvestment. The fund I chose was DFA Global Equity Portfolio (DGEIX), which invests in a global allocation of 100% stocks and utilizes the same systematic factor investing approach we advise for our clients seeking higher expected returns than you would earn in an index fund.

I firmly believe it’s important for financial advisors to themselves use the tools and products that they may recommend to clients so that definitely influenced my decision to use the same strategies we recommend for our clients. 

• The strategy isn’t riskless, but I felt at the time that the worst-case outcome over a multi-decade horizon was market-like returns. 
• I currently don’t own any taxable investments – I sold them all to buy into Plancorp – but I plan to purchase index funds in taxable accounts a few years from now when my business loan is paid down a little more.

I’d never recommend a 100% stock allocation to anyone else because the biggest mistake an advisor can make with an asset allocation recommendation is overestimating an investor’s willingness to tolerate risk. In my experience, this mistake is typically realized amid a market downturn, and dialing back stock exposure once prices have already fallen locks in what would otherwise be temporary losses.

When I’m advising others, I find it’s better to start a touch more conservative if there is any doubt about an ideal asset allocation (and the investor’s potential behavior or reactions) and get more aggressive at a later date (ideally during a downturn). It’s much harder (and more painful) to realize you need to be more conservative in the midst of a market downturn, so I could never advise someone I don’t know intimately to be invested in 100% stocks.

But for me, having lived through the 60% drawdown during the Great Recession and not panicking made me realize I could handle the volatility of a 100% equity portfolio. My wife’s 403(b) is also globally invested in 100% stocks across three index funds. Our Health Savings Account (HSA), perhaps my favorite type of retirement account, is invested in the Vanguard Total World Stock Index Fund (VT).

But I’m not truly 100% stocks. My 401(k) at Plancorp is invested in an 80% stock and 20% bond mix using the same funds that are recommended to Plancorp clients taking a factor investing approach (we also offer all index and ESG portfolios).

Just like with my previous employer, I make payroll contributions every two weeks to this account and max it out over the course of the year. That means my overall portfolio is slowly getting more conservative as my ongoing contributions to that account grow.

The final decision I made regarding my portfolio when I moved to Plancorp was that I would convert my overall allocation to 70% stocks and 30% bonds on my 50th birthday. If we are in the midst of a bear market, I will wait until markets reach their previous high before adopting the more conservative allocation. There wasn’t any science behind this decision. It just felt like the right thing and I’m sticking to it.

The only other investment accounts we have are our children’s 529 plans. Between our two kids, we make monthly contributions up to the amount for which we receive a state tax deduction. Our kids go to private school and we are allowed to use up to $10,000 a year from those accounts to meet those expenses – so of what we contribute, $10,000 of it each year never gets invested and is used to pay the current year’s tuition. The remaining balance is invested in the most aggressive age-based model for both kids.

A final comment on all of these investments: I never look at them. 

• I had to look at them last year to write this article on PL.com that I’m using to relay percentages on this episode, but that was only the second time in 2020 that I have done so. I’m recording this episode in June 2021 and I still haven’t checked my portfolio yet this year.
• The more you look, the more likely you are to make unnecessary mistakes. 
• I have done plenty of due diligence on my fund selections and still do on an ongoing basis as part of my job. 
• But I have a plan and I’m sticking to it – and that’s probably going to be the defining factor in my portfolio’s long-term success.

My Cash

Having an emergency fund is hugely important. In my opinion, you should have three to 12 months’ worth of living expenses set aside to cover the cost of life’s unpleasant surprises. Within that range, the specific size of your emergency fund should correspond with your level of job security and the potential volatility of your income.

I’ve always targeted keeping 12 months’ expenses in cash reserves, but not because I feel my job security and income require it. The real reason is that it gives me flexibility. Flexibility to take a career risk. Flexibility to be opportunistic.

I’ve emptied my emergency fund opportunistically three times now in my career. The first two times were to invest in my business. The third and most recent time was during the 2020 market sell-off to invest at cheaper prices. (I didn’t have much of an emergency fund in 2007-2008, so this was the first time I was able to invest in a recession in a meaningful fashion.)

Beyond my emergency fund, I try not to keep a ton of cash on hand. The only extra that sits around is a cash buffer of 1-2 months’ expenses in my primary checking account to cover reimbursable work expenses and protect against cash flow mismatches in my automated savings system.

Breaking Down My Liabilities

My mortgage is the biggest liability on my balance sheet. There was a point earlier in my career when I was determined to pay my mortgage off as quickly as possible, but that changed once I took out a loan to purchase a stake in Plancorp. 

• The business loan is the second-biggest liability on my balance sheet and comes with an interest rate that is currently 3.5% but can rise to as high as 5.5%. 
• Historically, I aggressively pay down this loan with every penny of income I earn from my ownership stake rather than make the minimum payments.

Aside from maxing out retirement accounts, contributing to 529s, and building up my emergency fund, all of my excess cash flow goes to paying down my business loan. Once it’s done, I will assess how to use that freed-up cash flow. I want some of it to be invested in a taxable account, but beyond that, there aren’t any solid plans for the use of that money.

What I do know is that I won’t pay down my mortgage in advance unless I have a significant windfall or liquidity event. Examples of such events that I could reasonably imagine (but don’t count on) happening include a corporate action at Plancorp or BrightPlan, receiving an inheritance, or winning the lottery (although we don’t buy lottery tickets, so maybe that’s not so reasonable).

I have no doubt it would feel great to be without a mortgage payment in my 30s or 40s, but I’ve been making mortgage payments since 2010, so it’s like money I’ve never had and I don’t really miss it. The bigger driver for my decision to pay my mortgage on a normal, non-accelerated schedule is that I can’t handle the math differential in return I could earn in the market. If I were going to take excess cash flow to pay off any loan, it would be my business loan with the higher interest rate.

I think I’m allergic to auto loans. I’ve historically saved up for car purchases, then paid in cash. But I did break down and took out my very first car loan in 2017, the day after our second child was born and we realized we couldn’t fit two car seats in my existing car. There was enough cash in our emergency fund to avoid taking an auto loan, but the interest rate was so much lower than my business loan that I couldn’t stomach using cash to avoid a cheaper debt.

I figured it was better to aggressively pay down my business loan and, like my mortgage, maintain a normal repayment schedule on the auto loan. But after a few months of car payments, I couldn’t handle it anymore and paid off the loan in full. When I say “I don’t live life in a spreadsheet,” this is a great example of what I mean.

My wife recently purchased a new car and we tapped our emergency fund to avoid an auto loan, which means that we are making auto-loan-like payments to our emergency fund so that we can restock it.

Breaking Down My Spending

We spend so much time talking about how to save and invest, but I don’t think we spend enough time talking about getting the most out of our spending. My favorite resource on the topic is Happy Money: The Science of Happier Spending. I can’t recommend it highly enough.

I don’t think a ton about my day-to-day spending because I follow a reverse budget. This system requires that I define how much I need to save to meet my goals, automates those savings contributions, and then allows me to spend whatever remains as I please.

We use a few credit cards that earn rewards for all possible expenditures as long as there isn’t a service fee – for example, we can pay our daycare bill using a credit card, but we don’t because they charge 2% to do so – and we automatically pay off balances in full each month. All other recurring expenses are put on automatic bill pay.

I’m not super into “stuff,” but I definitely buy high-quality items when I need something. I drive a relatively nice car, but I drove my last one for 10 years and I intend to do the same with this one. 

I live in a relatively nice house, which I view as consumption, but again, I see it as a long-term purchase; I intend to live here until I can’t walk upstairs to the master bedroom. 

I think the best spending habit of mine is that I never buy something on impulse. Even the simple exercise of buying a work shirt takes multiple store (or online) visits for me to make a final decision on how I want to spend my money.

The place I spend most lavishly is on experiences, from vacations and playoff baseball to live performances and special occasion dinners. Experiences become part of our identity. Unlike most material purchases, the memories from our experiences make us feel more connected to friends and family.

Our family also prioritizes giving back because we are fortunate in so many ways and feel it’s important to help others. For whatever reason, we’ve typically given 2% of our income to charity. I have no idea if that is a reasonable amount or not, but it feels right to us. We’ve also made giving part of our oldest son’s allowance.

Final Thoughts

So there you have it. That’s how I invest (and save, and manage, and spend) my money.

I wish I had done something like this for the conclusion of my book, which remains the best resource if you want to understand the money management systems I believe are best to implement if you want to save well, spend wisely, and invest for long-term growth. I follow my own advice pretty closely, but I’m not a robot and occasionally deviate from what I would be comfortable recommending to others.

Resources

• How I Invest My Money

About the Podcast

Long term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence. 

Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.

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