Before I dive in I’d like to put the disclaimer out there that what works for me may not work for you when it comes to investing. I am not a financial advisor. The information I’m sharing below is from the research I’ve done as it pertains to my life circumstances. I am a 30-something year old with no children and very little student loan debt. I am striving for financial independence and therefore I’m focused on growth more than anything when it comes to my finances and I consider myself above average when it comes to risk tolerance. As always, please do the necessary research as it pertains to your needs and situation. Sidebar, this photo is of my adorable niece who has the cutest tuchus ever!
Now that that’s out of the way, let’s dive in, shall we? Investing is very daunting and overwhelming, especially when you’re just getting started. But first – I’d like to congratulate you for making it this far. You’re at least dipping your toes in the water and you’re interested in having your money work for you instead of the other way around. You’re already so far ahead of the curve because almost half of Americans aren’t investing and taking advantage of things like 401ks, Roth or Traditional IRAs, ETFs, stocks, bonds, mutual funds or real estate. Which means, those people are keeping their cash in a low yield savings or checking account and losing money to inflation. I would even bet there are some individuals out there who are still keeping their money under a mattress or in a cookie jar, which means you’re screwed if your house goes up in flames or someone robs you! But it gets worse. Around 21% of people don’t even save a penny of their income! That’s right, nothing. Zip. Nada. Zilch.
For Those Of You Not Investing – Read This!
I don’t want to berate the individuals who are struggling to keep their heads above their debt and can’t rub two nickels together. Can’t being the operative word. I know what this is like. I moved back home at the age of 27 to pay down my debts. It was either that or get a second job (and in hindsight, I should have done both and gotten through the burden that much quicker). I get it. there’s nothing glamorous about either of those situations, but
sometimes more often than not we have to put in the dirty work or do things we don’t like in order to pave the way for our future selves. I know it’s easier said than done, and I plan to dive further into this topic in a future post, but if you’re genuinely struggling to save a couple bucks each month, even after you’ve cut out the frivolous spending, then I highly encourage you to check out Dave Ramsey for some tips on paying down your debts or Millennial Money for side hustle opportunities and advice on how to negotiate a raise.
Don’t get overwhelmed by the success stories out there, let that fuel you and dream big. Understand how success might look for you. Or better yet, check out this ROI calculator to give you an idea what it might look like in 10, 20, or 30 years after you contribute X-amount of dollars toward investments. Maybe you land a side gig that brings in an extra $1,500 per month. What would it look like to invest all of that surplus for 25 years? Or you successfully negotiated a raise and invest 100% of the additional income? Or maybe both?! Play around with it to get an understanding for how adding just a few dollars onto your weekly or monthly investment changes your return after so many years. I’ve said it before and I’ll keep on saying it: compounding interest is your best friend! The real kicker is that your income will most likely go up as you get older and acquire more experience and skills so this is merely a jumping off point. You have the potential to earn more and invest more, ultimately propelling a cycle that feeds the other. This (along with expert tax accountants, but that’s neither here nor there), is why the rich get richer.
You need to be mindful of your money and how that impacts your future. There’s no lottery coming your way, no wealthy individual waiting to sweep you off your feet, no inheritance check, no one to throw you a life line. Whether or not those things may actually be true, you never know when either one might run out ::I’m looking at you, social security:: Don’t rely on somebody else to save your ass! You don’t need to understand the stock market at a level to hold conversations with Warren Buffett – you just need to understand that investing today is essential for your future. The rest will come together and I, along with some amazing other bloggers I’m going to mention, will help distill the information. Got it? Good.
Oh, and one more thing. To anyone that says they don’t trust the stock market or there’s going to be a catastrophic crash that our economy collapses, well then, we’re going to have bigger fish to fry than financial issues. But here’s a little reassurance. I love this chart that tracks the Dow Jones since 1896. It shows four big crashes our economy has endured over the last 120+ years. And guess what? Since the 1930’s crash, we recovered each consecutive crash in less time than the previous one. We’re robust. Holistically, the market continues to go up despite these set backs. So forget about this doubt or fear you may have. Dips in the market are inevitable. You’ll experience it in your lifetime. But you’re no different than anyone else’s time in the market. You’ll recover and regain your upwards trajectory. And if not? Well, like I said, we’re going to have much bigger issues to deal with.
A Very Brief Overview on Investment Strategies
When it comes to investing everybody out there is selling essentially the same product, a piece of the economy. Think of the economy like the pool at your local water park. Some people are drowning in the deep end because they’re trying to beat the market and failing to do so. Some are splashing around, making a fuss but not really sure what to do. They move around with no sense of direction. Others aren’t even in the pool, just chillin’ by the side, too afraid to get in and getting sunburnt. And then there’s you – floatin’ around with your shades on, soaking in all the sun and chill vibes you can. Getting in the pool doesn’t have to be a scary thing and you can definitely do it with some assistance, or floaties, that let you calmly wade through the waters.
You can gain access to this pool through various types of financial institutions, which I’ll explain in a bit. But first, I think it’s imperative to have a general overview of the two different theories to investing: passive vs. active and some of the different ways you can invest. Keep in mind this is a very brief overview and I plan to uncover details later on in future posts but this should hopefully give you a solid start for understanding investing 101.
Most financial advisors with expensive brokerage firms will sell you on active investing. They believe in selecting specific stocks, bonds and mutual funds that will “beat the market”. Yes, air quotes, because you cannot “beat the market”. This is unlikely, and if you achieve it – it’s either because of pure dumb luck, illegal activity like insider trading, or you’re Warren-f*cking-Buffett. There’s no evidence that anyone can beat the market. These are the kids drowning in the deep end. Nonetheless, this active investing usually costs you, the investor, more in advisor and transaction fees. Even if your advisor can keep up with, not beat, the market, the fees will drain your earnings. Avoid active investing.
The second theory when it comes to investing is passive investing. It’s how Buffett instructed the trustee of his estate to invest 90% of his money for his wife after he dies and a concept that led him to win a half a million dollar wager that proved passive investing out performs actively selected stocks and assets managed by hedge fund investors. Even Buffett is humble enough to know that attempting to beat the market is a fool’s errand. Passive investing, on the other hand, means trying to match the market’s performance by selecting funds (a collection of stocks, bonds and assets) that track indexes like the S&P 500. It’s how I invest my money and plan to do so for the foreseeable future.
What Type of Investments Will Benefit You?
There’s dozens of ways to invest, such as cash equivalents, bonds, stocks, mutual funds, ETFs, real estate, commodities, REITS, etc… There’s some overlap amongst these different types of investment classes but don’t worry about getting bogged down in the details right now. Just focus on the key concepts of these investment types and how they can benefit you.
Cash equivalents are things like high yield savings accounts, money market accounts, or CDs. I wouldn’t really call this a type of investing. It’s low to zero risk in that you can’t really lose money, but you won’t really make money either. I personally use a money market account for my emergency savings so I can keep up with inflation but have immediate access to cash flow if needed. I have about six months of expenses saved up and sitting in my Vanguard Prime Money Market Fund (VMMXX). This is definitely a key step to financial independence or short term savings goal like purchasing a home. Head to this post for a list of money market accounts and just be sure they are backed by the FDIC.
Bonds are essentially a loan to a borrower that’s paid back with interest. As the investor you loan out your money to companies or the government, like in the case of Treasury bonds, and those companies pay you back with interest set to various timelines with various rates depending on the bond. In general, bonds are safe bet with very low risk and can help smooth out the market fluctuations that come with owning stocks. Personally, I am not invested in any bonds. Aside from my cash flow and emergency savings, I’m invested in 100% stocks because I like to jump from the high dive and live life on the edge! No, it’s because I’m in a position where I’m focused on wealth accumulation and I have time to recover from market dips. I also have low expenses and a fairly steady stream of income. My stocks are not individually picked, but rather, made up of an index fund that tracks the total US stock market. More on this later. But if you’re looking to balance your portfolio with bonds I’d recommend anywhere from 10-25% depending on risk tolerance and what your financial goals are. When I am ready to diversify a bit more I will be looking to Vanguard’s Total Bond Market Index Fund (VBTLX). One of my favorite Financial Independence guru’s, JL Collins, talks more about his spread between stocks and bonds here. Worth a read if you’re interested in this route.
Moving onto stocks. Stocks let you own a piece of a company where you can earn money in two ways: through profits that come from selling the stocks you own after they’ve gone up in value or through dividend payouts, which comes from the company’s revenue and is paid to its shareholders, a.k.a. you. (Not all companies do this.) Stocks have the most potential for return but also carry the biggest risk. Many naive investors, on both the amateur and professional level, believe they can pick and sell individual stocks timed perfectly with the market so they profit. These are the same kids drowning in. the deep end. Get this idea out of your ahead. It doesn’t work and it’s not worth your time or your money. A monkey has a better chance of picking wining stocks.
So if you’re not picking individual stocks and bonds don’t give you enough return for financial freedom, then how do you invest your money? That brings me to mutual funds. You may already be familiar with the terms mutual funds, index funds and ETF (exchange traded funds) but don’t really know the difference between them because many people tend to use these terms interchangeably, when they are, in fact, different.
Think of mutual funds as the umbrella term, while index funds are a subset of mutual funds and ETFs are a subset of index funds. Mutual funds are a collection of stocks, bonds and other types of assets, which are actively managed by an investment company for you, like I mentioned earlier. They are traded once a day, after the market closes. The advisor may even hand pick the stocks and bonds and sell them to you as a proprietary fund, which is exclusive to that particular investment firm. But make no mistake, they’re basically expensive trash that the advisor wrapped up in a fancy box with a pretty bow and presented it to you because they make more money from it. Sounds like a conflict of interest if you ask me. I’ll dig more into this in another post, but bottom line, avoid proprietary funds if you decide to go the actively managed fund route, which you shouldn’t. Mutual funds will cost you more money due to advisor fees and transaction fees. There, you’ve been warned.
Index funds (which are going to be your second BFF, next to compounding interest) are a type of mutual fund. But instead of a random collection of stocks and bonds they track a particular index like the S&P 500, the Wilshire 5000, or in my case Vanguard’s Total US Stock Market (VTSAX). The goal is to replicate the performance of that particular market. You’re not trying to beat it, you’re just keeping up with it. It’s also significantly cheaper to run these funds because they buy and hold instead of engaging in frequent trading, meaning you don’t need to pay an analyst to research the companies you’re buying into. Also meaning, index funds are passively managed. This is my bread and butter; where I invest 100% of my money, aside from cash flow and savings.
So that leaves us with ETFs. Remember I said with index funds you buy and hold? Well, ETFs give you the option to buy and sell throughout the day on the stock exchange but they can still track the same indexes like the S&P 500. So it’s essentially still an actively managed fund. Why do it? Because there can be some tax benefits, but not enough to outweigh the time and energy needed for me to understand the ins and outs of this, which is why I don’t participate in ETFs. My advice: unless you’re a day trader or take pure enjoyment out of this process, then there’s no need to get involved with ETFs.
There are other ways to invest, as I mentioned, real estate, commodities, REITs being a few of them. However, these areas are a blog topic for another blogger. As of now, I do not have experience with these investment strategies to discuss them at length.
So now that you have a general overview of the different investment strategies, passive vs. active, and the different ways you can invest your money based on your needs such as bonds, stocks or mutual funds – where do you go to invest? How do you get into the pool?
Personal Financial Advisor, Discount Broker or Robo-Advisor?
I hope you know this by now – you don’t need a personal financial advisor from a big fancy brand name firm. They will, no doubt, be the most expensive with their advisor, commission and transaction fees. So that leaves us with discount brokers and robo-advisors. Don’t let the names fool you. While one sounds like a used car salesman and the other sounds like it will harass you with computerized pre-recorded voice messages – I promise you they are neither sleazy nor out to scam you. So which one is right for you?
Discount brokers are like traditional firms that offer you access to essentially the same tools they have but are much cheaper in terms of fees and operating costs. The catch? You’re responsible for your own investments. It requires a little more hands on work but saves you the most in the long run. This doesn’t necessarily mean you’re actively managing your investments, unless you choose to do so. It just means that you need to understand the funds your choosing to invest in based on what’s best for your portfolio, your current financial status and your future retirement needs. It requires a little legwork up front and maybe the occasional portfolio re-balancing once a year. Fidelity, Vanguard, Charles Schwab, and E-trade are a few of the heavy hitters.
I spent about two months researching discount brokers, investment strategies, and how to go about investing with financial independence, my age, and lifestyle in mind. Then I came across JL Collin’s blog and book, A Simple Path to Wealth, and it clicked. All the boxes were ticked, I knew that investing 90% of my net worth into Vanguard’s VTSAX was the right choice for me. While the process was a little intimidating and the online interface was not totally user-friendly, Vanguard’s team reassured me every step of the way with a quick phone call (I never had to wait to speak with a live human being). Not only that but they were beyond patient with me, and I asked A LOT of stupid questions. Not to mention, I’ve since cleared the $50,000* minimum to access a financial advisor for personal advice. Most discount brokers will offer a similar service once you hit a certain threshold.
But what if figuring out which index funds to invest in or what combination of stocks and bonds you need is far beyond your level of comfort or simply put – you just don’t have the time or desire to do your homework? Well, my first piece of advice would be to go ahead and invest in VTSAX with Vanguard anyway. Depending on your age and other investments, put anywhere from 75-100% of your investments in there. It’s that simple. Wallstreet over complicates this process to the masses because they make money off you being confused. But if you don’t feel comfortable taking mine or JL Collin’s advice (don’t worry, I’m not offended), then you can certainly turn to a robo-advisor. They use a series of questions and surveys to collect information about your financial goals paired with algorithms to invest your money based on your financial needs. There is little to no human contact but most people are okay with that as their platforms tend to be very user focus and intuitive. Costs are low (depending on how much you invest they can be comparable with discount brokers) and they require almost nothing to start investing.
These platforms are generally a set-it-and-forget-it mentality as automatic rebalancing, tax loss harvesting, and roth conversion ladders are taken care of for you through companies like Betterment. Some other well known robo-advisors include Wealthfront and Acorn. Robo-advisors are definitely a viable option, one that well-known F.I. bloggers such as Mr. Money Mustache and Mad Fientist turn to for their financial management. It’s certainly something worth looking into as your finances grow and/or become more intricate to handle.
*This is not the minimum requirement to invest with Vanguard, it is the minimum requirement to obtain professional advice from a Vanguard financial advisor. Most index funds require a minimum purchase between $3,000-$10,000 per fund.
Remember to K.I.S.S. When It Comes to Your Money
Keep It Simple, Stupid. You don’t need to be invested in dozens of different funds, spread across several institutions. I’m currently spread across two financial institutions. First, is Chase Bank. They are simply a vessel for money in and money out. I use them to receive my paycheck from my US-based employer and convenience of their travel credit card that let’s me spend money while living abroad without any foreign transaction fees. Other than month to month cash flow, I don’t store any cash with Chase. The remainder of my money is with Vanguard as I mentioned earlier. I’m invested 100% in an an index fund, VTSAX, while my savings is in a money market fund, VMMXX. Any 401k or IRA accounts I had with previous employers have since been transferred to Vanguard and invested in VTSAX while still maintaining their tax benefits.
That’s it. Super Simple. However, there’s nothing wrong with getting your hands in a few more honey pots or tinkering with your investments from time to time to diversify if you know what you’re doing but, personally, I want financial freedom not just in retirement but in the ease and low hassle of getting there. Investing is not my full time job and I don’t want to spend eight hours a day learning how to swim. I want to be educated and involved up to a certain point and then I want to put my floaties on and drift off while my money works for me. I’m guessing if you’re reading this, you probably feel the same way.
Whether you go with a discount broker like Vanguard or a robo-advisor like Betterment you can’t go wrong because you’re taking care of your future self. Be mindful of your money and understand the benefits of having it work for you instead of having to work for it your whole life. Do your homework now and don’t waste anymore time out of the market. Put your floaties on, hop in that pool, and start investing!