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shminux comments on The Rational Investor, Part I - Less Wrong
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Comments (29)
TL:DR:
Surely 7. should come before 6., and probably 4. and 5. as well.
No, IRA's avoid a tax which the other investments don't, so money in an IRA is worth more than money outside. There is a cost, namely you have restricted access to it.
It's worth pointing out that the money you put in there can still be held in a money-market account or similar, and that it acts as an emergency fund because you can withdraw it or take loans against it, subject to modest penalties.
Re #8, I actually prefer the rule of thumb of having (your age)% in a bond fund, and the balance in stocks. It's a nice transition towards conservatism with age. Also, this is what you should do with the money inside a 401k as well.
Putting six months worth of expenses in a money-market account seems like a needless 'mental accounting' bias. You can easily and quickly liquidate a portion of your " 70% in a stock index fund and 30% in a bond fund" if you need the cash in an emergency.
The 70% stocks 30% bonds seems somewhat arbitrary. I remember reading a paper once that advocated allocating 130% equities through the use of leverage. Of course, there is always the chance that the stockmarket underperforms over the long run. But, that's the risk that you are ostensibly being compensated for.
These are general guidelines/priorities for safe and effective financial planning, not the "best possible" investment. They are apparently vastly better than what most americans have now: no will, cc debt, unaffordable mortgage, no (liquid) savings, inappropriately conservative, reckless or high-fee investment etc. You can certainly optimize and customize these guidelines, but you have to know what you are doing, which most of us don't. These guidelines are probably not quite suitable for places other than the US.