The 5th Step to Financial Freedom – Invest in Stock and Bond Index Funds

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Investing in stock and bond mutual funds (not individual stocks and bonds) is the simple way to get higher investment returns than more conservative investments like bank accounts, money market funds, or certificates of deposit (CDs).  By owning stock funds, you own businesses, and the long-term return of these businesses is what will increase your investments and net worth.  In addition, it is the only way you can invest and stay ahead of inflation.

If you put your money in a savings account that earns 1% (the highest rate you can get nowadays) but inflation is 3% that year, you just lost 2% of purchasing power.  With a historical inflation rate of approximately 3%, you can’t even keep up with inflation and break even without taking some risk and earning a return of at least 3%.  The long-term return of the stock market is approximately 9.5% per year.  Adjusting for 3% inflation, $1 of purchasing power invested grows to: (Bogle, 2007)

  • $1.88 in 10 years
  • $3.52 in 20 years
  • $6.61 in 30 years
  • $12.42 in 40 years
  • $23.31 in 50 years

When it comes to selecting stock and bond mutual funds, you will have to take a look at the investments offered by your financial institutions and select from that menu.  The principles to guide you should be:

1. Favor index funds over actively managed funds. An index fund is a fund whose goal is to mirror the performance and composition of a standard basket of investments, like the Standard & Poor’s 500 (S&P 500) Index. An actively managed fund means that a fund manager is buying/selling investments as they see fit in an effort to beat “the market” or a comparable index.  We’re investing for the long-term, and over this time frame almost no actively managed funds will beat their index.  In addition, because past performance does not predict future performance, there is no way to predict which of these very few active funds will beat their index.  Index funds are low cost, tax efficient, simple, and give you a higher return.  Don’t try to beat the market, join it by investing in index funds.

2. Favor mutual funds with low expense ratios. What is an expense ratio? An expense ratio is the percentage of a fund’s assets that is used for expenses.  In other words, if you invest in a mutual fund with a 1% expense ratio and that fund makes 10% in 2016, you’ll only get a 9% return on your investment because 1% goes to pay expenses.  The less of your return you use to pay expenses, the more you get to keep.

What is an average expense ratio?  An average stock mutual fund has an expense ratio of about 1%, but the expense ratios for mutual funds that are similar in their composition can vary wildly.  For example, if you look at a list of S&P 500 index funds offered by investment companies, you’d find expense ratios as low as 0.05% (Vanguard S&P 500 Index Fund Admiral Shares, VFIAX) and as high as 0.6% (Great-West S&P 500 Index, MXVIX).  While 0.55% does not seem like that large of a difference, keep in mind that costs last forever and that small differences compounded over years will cost you a lot of money.

What is an average expense ratio?  An average stock mutual fund has an expense ratio of about 1%, but the expense ratios for mutual funds that are similar in their composition can vary wildly.  For example, if you look at a list of S&P 500 index funds offered by investment companies, you’d find expense ratios as low as 0.05% (Vanguard S&P 500 Index Fund Admiral Shares, VFIAX) and as high as 0.6% (Great-West S&P 500 Index, MXVIX).  While 0.55% does not seem like that large of a difference, keep in mind that costs last forever and that small differences compounded over years will cost you a lot of money.

Let’s pretend that when you are 25 years old your grandparents give you $10,000 to invest in a S&P 500 index fund for 50 years, during which you earn a 9.5% return.  If you invested in the Great-West index fund with the 0.6% expense ratio, you would have $683,000.  If you invested in the Vanguard index fund with the 0.05% expense ratio, you would have $902,000.  That 0.55% difference in the expense ratios cost you $219,000!  Small differences in expenses can make huge differences in long-term investment returns, so you need to pay attention to the expense ratios of your investments.

The expense ratio should be less than 1%, preferably less than 0.5%, and optimally less than 0.25%.  If you want to keep this really easy, just invest in the index funds offered by the Thrift Savings Plan (TSP) or Vanguard as they all meet these criteria.

3. As previously discussed, in order to beat inflation over the long haul, you’ll need to invest some of your portfolio in stock index funds. Investing in stock and bond funds is not for the weak hearted because you can lose money. Over the long term, though, assuming higher risk leads to a higher return.  As you progress toward retirement, you will decrease your investment risk by decreasing the amount you invest in stocks and increasing the amount you invest in bonds.

The optimal asset allocation of investments depends on your age, financial situation, risk tolerance, and how soon you will need to utilize the investment.  If you are young, you have longer to ride out the inevitable market swings.  The more financially secure you are, the better you can deal with the swings as well.  Your asset allocation should also reflect the amount of risk tolerance you have.  My opinion is that you should take as much risk as you can tolerate.  If you can’t sleep at night because you are worried about your investments, it is time to dial down the risk, but you should take as much risk as you can up to that point.  More risk yields a higher return over the long-term.

A number of guidelines for asset allocation from trusted references are discussed below:

Malkiel & Ellis suggest this as a conservative asset allocation:

20-30s 75-90 25-10
40-50s 65-75 35-25
60s 45-65 55-35
70s 35-50 65-50
80s+ 20-40 80-60

They also suggest a more aggressive asset allocation, which is my personal favorite due to the protection offered by our inflation adjusted military pension (assuming you stay in for 20 years):

20-30s 100 0
40s 90-100 10-0
50s 75-85 25-15
60s 70-80 30-20
70s 40-60 60-40
80s+ 30-50 70-50

John Bogle, the founder of Vanguard, suggests as a conservative asset allocation rule that your percentage of assets in bonds should equal your age. In other words, at age 30 you should have 70% in stocks and 30% in bonds.  A more aggressive version is to subtract 10 from your age, so at age 30 you’d have 80% in stocks and 20% in bonds.

One very easy way to let someone else make this decision for you is to pick target retirement funds as your investments.  Many investment companies offer these, including the TSP and Vanguard.  You just pick the approximate year you plan to retire or start using the money, that year will likely be in the name of the fund (Target Retirement 2035, for example), and invest in that fund.  Your investments will gradually get more conservative as you age without any action on your part.  Just make sure that the target date funds you use are composed of index funds with low expense ratios (again, using the TSP or Vanguard funds makes this a no-brainer).  A target retirement fund composed of actively managed funds with expense ratios greater than 1% is a target retirement fund to avoid.

When investing you need to keep this truth in mind…the market will go down, and when it does you need to resist the temptation to sell investments or stop investing.  The best time to buy an investment is when it is cheap and you can get the best deal.  When the market recovers, which it will, you will reap the rewards.  Focus on the long-term and just keep investing.

Every time you get a raise, bonus, or income tax refund, use it to increase the amount you invest for retirement.  You should save at least 15% of your gross or pre-tax income for retirement, but if you want to be rich or retire early you’ll need to save 20-30%.  If you find it difficult to save, set up an automatic investment plan so that the money is automatically removed from your pay and you never get a chance to spend it.  The TSP makes an automatic investment plan easy to implement.


Bogle, J. C. (2007). The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. Hoboken, NJ: John Wiley & Sons, Inc.

Malkiel, B., & Ellis, C. (2013). The Elements of Investing: Easy Lessons for Every Investor. Hoboken, New Jersy: John Wiley & Sons, Inc.

Navy Legislative Fellowship NAVADMIN Released

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This NAVADMIN solicits applications for the 2017 Navy Legislative Fellowship Program. The Legislative Fellows Program allows naval officers, senior enlisted and Department of the Navy civilians to broaden their understanding of the legislative process and the operation of the U.S. Congress through a year-long full-time assignment to the office of a Member of the House of Representatives or the Senate. The Legislative Fellows Program also enhances the Navy’s ability to fulfill its role in the national policy development process.

2. This is a highly competitive program. Applicants records must reflect sustained superior performance and potential for future assignments in critical billets. Upon completion of the program, officers earn a Legislative Additional Qualification Designator. Additionally, there is an opportunity to earn a Legislative Studies Certificate through a sponsoring agency.

3. Military Applicants. Participation is open to unrestricted line officers, restricted line officers, and staff corps officers in the permanent grades of O-3 through O-5. Enlisted participation is open to all rates in the permanent grades of E-7 through E-9. The selection process will focus on individual performance, promotion potential, academic and subspecialty qualifications, needs of the Navy, and availability for follow-on assignment. Officers with permanent change of station orders already issued will not be considered.

a. Applicants must be available for Permanent Change of Station assignment to Washington, DC, from November 2016 through December 2017. During the fellowship, officers and senior enlisted will be assigned to the Office of Legislative Affairs (OLA) for administrative purposes. Upon execution of orders, fellows agree to serve for three years following completion or termination of the fellowship. A follow-on utilization tour in legislative affairs is preferred (making career timing an important consideration), but depends on community-specific billet requirements, needed
officer progression, and availability of legislative assignments. All officer applicants must contact their detailers for counseling on the career impact of participation in the Legislative Fellowship Program.

b. Submit applications via e-mail to the OLA point of contact no later than 29 April 2016. Program information and submission guidance are available on the Navy legislative affairs website.
c. Points of contact are LCDR Nicole Williams, Navy Fellows Program Manager, OLA, who can be reached at (703) 697-2885/DSN 227 or via e-mail at nicole.williams3(at); and LCDR Angelin Graham, PERS-440, who can be
reached at (901) 874-4056/DSN 882 or via e-mail at angelin.graham(at)

FY17 CAPT Board Convening Order Deconstructed

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The FY17 Staff Corps O6 Board Convening Order was released after conclusion of the board.  The best news was that the promotion opportunity for Medical Corps was 70%, up from 50% last year, which was an all-time low.  Aside from that, though, if you read through the convening order, it basically tells you how to get promoted to Captain.  I’ve read through it and pulled out quotes that you can turn into actionable items.  Enjoy:

“Their personal and professional attributes include…physical fitness…”

ACTION ITEM: Workout and never allow yourself to fail a PFA.

“…successful performance and leadership in combat conditions demonstrate exceptional promotion potential and should be given special consideration.”

“The board may give favorable consideration to those officers who have displayed superior performance while serving in IA (Individual Augmentee)/GSA (Global Support Agreement)/OCO (Overseas Contingency Operations)/APH (Afghanistan-Pakistan Hands) assignments that are extraordinarily arduous or which involve significantly heightened personal risk.”

“Success in these assignments [joint duty assignment billets] should be given special consideration…”

“Navy Medicine needs leaders with knowledge and experience in a variety of settings including operational medicine, joint medical operations, and current peacetime health care delivery initiatives.”

“Navy Medicine greatly values joint experience…”

“You must ensure that Navy Medicine’s future leaders possess the broad knowledge necessary to support the operating forces and are acknowledged leaders within their operational…specialties.”

“The officers selected must have demonstrated exceptional managerial skill and professional competence in executive and staff roles both in support of the fleet and Marine Corps and within the naval shore establishment.”

“…you should select those officers who have served in a broad spectrum of assignments requiring expertise in diverse functional areas.”

“…those you select will be placed almost assuredly in positions that require broad military and medical perspectives beyond the Department of the Navy.”

“Best and fully qualified officers for the rank of captain, will be those who have demonstrated experience and expertise across the spectrum of military treatment facilities, operational platforms in support of the fleet or the Marine Corps, and the intersection with the strategic and tactical issues in provision of military healthcare through experience in headquarters or other associated DoD agencies.”

ACTION ITEM: Deploy, preferably in a combat or joint environment, if available.  PCS when you can, and take a variety of assignments, including senior operational positions and positions with other services.

“The board shall give favorable consideration to those officers with relevant graduate education…and Navy and Joint Professional Military Education (JPME).”

“The Navy values completion of graduate education and development of a subspecialty.  Degrees from the Naval Postgraduate School, the Naval War College and equivalent Service institutions, and civilian education programs…are desirable.”

“Navy Medicine greatly values…formal education to include JPME I.”

“The Navy values completion of graduate education and development within and officer’s subspecialty.”

ACTION ITEM: Get a masters degree, do a fellowship, or do JPME I and/or II.

“The Navy values competitive scholarships and fellowships, examples of which include: Olmsted Scholar, Marshall Scholar, Rhodes Scholar, White House Fellowship, SECDEF Corporate Fellowship, and Federal Executive Fellowships (e.g., Politico-Military and Cyber).”

ACTION ITEM: Consider applying for one of these scholarships or fellowships.

“Duty or service in combined or other staff positions at the senior levels of government should also be considered favorably.”

ACTION ITEM: Don’t be afraid to take positions in senior levels of government organizations when they are available.

“You shall give consideration to an officer’s clinical and scientific proficiency as a health professional to at least as great an extent as you give to that officer’s administrative and management skills.  Strong consideration should be given to board certification when a board certification exists for the specialty.”

ACTION ITEM: Get and stay board certified.

FY17 CAPT Promotion Opportunity 70%!!!

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Here are the convening order and the membership for the O6 boards that just concluded. Of note in the convening order:

-The promotion opportunity was 70%, which is WAY BETTER than last year when it was 50%! This is the highest it has been since FY12 when it was 80%.

-As expected, the order directed the board to equally consider above-zone and in-zone officers.

-The “board shall identify exceptional officers from below the zone and consider selecting them…” We’ll have to wait and see if any below-zone were selected, but this is why it always pays to have a board-ready record. The below-zone selection number was not to exceed 10% of the selections.

5 Tips for Physicians to Achieve Financial Freedom

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Here is a great article by the author of The White Coat Investor, probably the best financial planning site for physicians on the web:

5 Tips for Physicians to Achieve Financial Freedom

Navy Maternity Leave Shortened from 18 to 12 Weeks

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Here is an article that summarizes the changes that are coming to Navy maternity leave, which is being shortened from 18 to 12 weeks, and other related issues: