My "Dumb Money" i401(k) Barbell Investment Strategy

Plus, Irk's Shopping List for his 60+ Individual Stocks! | Issue #34

My “Dumb Money” ETF Strategy

As I discussed in a prior Shopping List update, I hold three separate ETF portfolios with each using completely different strategies:

• My Dumb Money Account doesn’t add in stages. Instead, it Dollar-Cost Averages (DCA) by adding to five different ETFs every Friday, regardless of the price action. It also never sells unless I adjust the allocation sizes for the ETFs which I have no intention of doing so. I call this my “Dumb Money Account” because it does what financial “professionals” tell us to do: it buys and holds.
  

• My Retirement ETF Account adds in stages but never trims unless I’ve adjusted the allocation strategy for the held positions.
  

• My End-of-the-World ETF Account which remains mainly in cash in the event that we have a Black Swan Event like the COVID-19 pandemic where it will put significant cash to work at much lower levels. Like my publicly-traded portfolios, this account also adds and sells in stages.

I’m going to provide a deep-dive into each of these three different portfolios in their own updates starting with the Dumb Money Account.

My Dumb Money i401(k)

When I’m not investing (my true obsession and passion), I’m the CEO and owner of a small business. Since I’m not working for anyone else, I have an i401(k) (the “i” stands for “individual”). An i401(k) is identical to a standard 401(k) except I get to control the account instead of my employer dictating how it’s managed; I have full control over a i401(k) standard brokerage account that allows me to buy absolutely anything I want (as well as use options, trade futures, and buy cryptocurrency).

Since I already have so many portfolios that I micro-manage by choosing buying targets and profit-taking targets, I wanted to hedge against my own hubris: what if my strategies don’t work, I don’t make any money, and I can’t retire?

Accordingly, I decided to create a “Dumb Money” account that follows the advice many financial professionals provide: buy and hold. This account adds on a weekly basis and isn’t allowed to sell for any reason other than reallocation.

My “Barbell Approach” to the ETFs in my i401(k)

Rather than throw all of the money into a single index fund tracking the S&P 500 or Nasdaq or buying an “age-determined” fund that automatically adjusts allocation as I get older, I decided I wanted to own five ETFs to target five different sectors with investing narratives I believe will outperform in the future:

• Technology (22.5%): Unlike certain pundits who believe technology will stop being a leader into the future as it has in the past, I fundamentally disagree with this thesis. Technology is the driving force behind economic growth and I see no reason why it won’t continue to be into the future, too.

  
  Using Fidelity’s low cost technology ETF (FUTY), I’m putting a big weighting into companies like Apple (AAPL), Nvidia (NVDA), Microsoft, (MSFT), Broadcom (AVGO), and more.

  
  Technology companies rarely pay dividends as most prefer to buy back stock or reinvest capital for future growth. That being said, FTEC does carry a yield of 0.61% at current prices.
  

• Mega-Cap Growth (22.5%): While there is quite a bit of overlap between Fidelity’s technology fund (FTEC) and Vanguard’s Mega Cap Growth Index (MGK), there are some key differences: While MGK does provide me with even more exposure to leading tech companies like Apple (AAPL) and Nvidia (NVDA), it also provides key exposure to other non-tech, high-growth sectors including pharmaceutical company Eli Lilly (LLY); credit card processors Mastercard (MA) and Visa (V); wholesaler Costco (COST); medical tech company Intuitive Surgical (ISRG) and many more.
  
  Like the technology sector, Mega Cap Growth stocks aren’t known for their dividend payouts as they prefer to reinvest the capital into future development. Accordingly, the ETF pays less than 0.50% annually at current prices.
  

• The Energy Crisis (22.5%): As much as I would like the world to instantly switch entirely to using environmentally-friendly energy sources like nuclear, wind, and solar, the world’s reliance on oil and gas will be critical heading into the next 20-30 years. In fact, after spending many years studying the sector and consulting with leading experts, I believe we may see an “Energy Crisis” within the next 5-10 years which will cause energy stocks to skyrocket in value.
  
  As a result, I have allocated 22.5% of my portfolio to Fidelity’s Energy Index ETF (FENY) which provides key exposure to the energy sector through energy producers like Exxon Mobil (XOM) and Chevron (CVX); developers like EOG Resources (EOG); energy technology developers like Schlumberger (SLB); and refiners like Phillips 66 (PSX).
  
  Additionally, energy companies pay handsome dividends with the ETF yielding nearly 3% annually at current prices.
  

• Utilities (22.5%): The utility sector may be the most boring in the entire stock market. These companies provide a steady stream of earnings which results in substantial dividends. Additionally, since their services are recession-resistant, the utilities sector is typically far less volatile than the rest of the market (consumers don’t stop flushing the toilet or quit using electricity during economic downturns).
  
  But, here’s a fact that might shock you:

  
  When accounting for reinvested dividends, the performance of the utilities sector has been nearly identical to the performance of the S&P 500 since 2000! That’s right! The utilities sector has yielded the same gains for nearly a quarter of a century all with significantly less stress thanks to utilities’ lesser volatility.
  
  For exposure to this sector, I’m using Fidelity’s Utilities Index ETF (FUTY) which pays a 2.61% dividend yield at current prices and includes notably dull companies such as Duke Energy (DUK) and The Southern Company (SO); but also ones with exposure to the revitalization of the nuclear energy sector including NextEra Energy (NEE) and Constellation Energy (CEG).
  

• General Stock Market Exposure (10.00%): You’ll notice a recurring theme throughout my investing is to find ways to hedge against my own arrogance in thinking I can outperform the S&P 500. In my i401(k), this hedge is represented by Vanguard’s Total Stock Market Index Fund (VTI).
  
  Unlike index funds that track the S&P 500 like SPY and VOO, VTI doesn’t just buy the top 500 companies, it strives to represent the entire U.S. stock market by buying every available stock adding small- and mid-cap exposure to the large-caps in the major indexes like the S&P 500, Nasdaq, and Dow Jones Industrials.

  
  Naturally, VTI still has significant exposure to the major companies in the Technology and Mega Cap Growth funds discussed above like Apple (AAPL), Nvidia (NVDA), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL) since they are the largest companies, however VTI holds a total of 3,586 different stocks at the time of writing! Naturally, these are all calculated using market-cap so the smaller the company, the less representation it has in VTI.
  
  Since VTI represents the entire market, it does have a higher dividend yield than MGK but it’s not nearly as bountiful as the energy or utilities sector, ringing in at 1.25% annually at current prices.

The Contribution Strategy

Now that we know what makes up my Dumb Money account, how do I go about putting money to work throughout the year?

• At the beginning of each year, I know how much money I want to contribute into my i401(k) throughout the course of the year, so I divide that amount equally across the number of Fridays in the year.
  

• Every Friday (or last day of each trading week if Friday is a holiday), I am required to put that week’s allocation of money to work regardless of whether the market is up or down.
  
  The only decision I allow myself is what time during trading hours I will put the money to work. Sometimes, I put half to work at the market open and wait until midday to put the other half to work, and, sometimes, I put all the money to work at once either at the start of the day or near the end (if the market opens down, I will put it all to work at the start; if it opens up, I’ll wait to see if the market reverses course at some point throughout the day).
  

• The i401(k) holds five different ETFs (discussed above). I calculate how much of each week’s contribution needs to be allocated to each ETF to balance them to their proper allocation. By doing this, I’m always putting more money into the weakest performer, adding to weakness (buying low to sell high).
  
  As the weaker performers come back, the allocation balances, and, eventually, I’ll be putting the same amount (or roughly the same amount) into each ETF every week based on their target allocation size.

There you have it - my Dumb Money account! Over the next two weeks, I’ll cover my other two ETF accounts: my Retirement ETF Account and my “End-of-the-World” ETF portfolio!

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My Individual Stock Buy & Sell Targets

Premium Members: Read on to find my shopping list for each of my 60+ individual stock positions across my three publicly-traded portfolios: Speculation in Play, the Pandemic Portfolio, and, my flagship portfolio: Investments in Play.