Investing Basics
This is not professional financial advice. I’m just a girl who like to listen to podcasts that has achieved some exciting financial goals and wants to help you to do the same!
Investing 101
Investing can feel intimidating and scary. At least, that’s how I used to feel about it. I didn’t understand it, and I thought that it cost a lot of money to pay someone who did. It felt like gambling to me - high risk and based on luck. That may be true for single-stock investing (I’ll get to that later), but there are many ways to approach investing, and it’s relatively reliable over the long run. The S&P 500 has returned an average of over 10% over the past 100 years.
If you do not have your budget, debt, emergency fund, and other elements of a basic financial foundation in order, I recommend that you start here.
Once you have your foundation in place, it’s time to level up and start making your money work for you.
Do’s
Boring is better
Don’t get caught up in the world of crypto bros and Roaring Kitty meme stocks. These may make for flashy headlines, but they are a distraction from a solid long-term plan. The best investment strategy is a boring one. Invest in a diversified portfolio of index funds, ETFs, and bonds. Here is a great explanation of why investing in Index Funds and ETFs is the way to go for the everyday investor.
Utilize a low-cost robo-advisor to do this for you. Many of these services onboard you with a questionnaire to determine your timeline and risk tolerance, then do the rest for you. Getting started can really be as simple as a few clicks. NerdWallet is a great resource for comparing the top robo-advisors on the market.
Dollar cost averaging
Set up recurring transfers on a regular cadence (i.e. monthly or biweekly), if you can. This is called “dollar cost averaging.” By nature, the market ebbs and flows a lot, and dollar cost averaging is a much more reliable way to give yourself the best odds than trying to time the market, which is something that most professionals cannot do. It is extremely rare to significantly beat the market, even for people who do it as their full-time job.
Max out Roth IRA, 401(k), HSA
There is a reason there are contribution limits and qualifications for certain types of retirement accounts. They have significant tax (and other) benefits. And God forbid we have too much of a good thing.
401(k) - If your employer offers a 401(k) with an employer match, that’s basically free money! They are giving you more money than your salary as an incentive for you to invest in retirement. Don’t miss out on that. Traditional 401(k) contributions are also a great way to lower your current taxable income.
Roth IRA - Your investments grow tax-free, and the money you withdraw in retirement is tax-free. You can also take out the money you’ve contributed (not the gains) without penalty before you hit retirement age, which gives you increased flexibility if you really need the cash. You can also set up an individual Roth IRA on your own without any connection to your employer.
HSA - You have to have a qualifying health insurance plan to have access to an HSA, but if you do, it’s a win-win-win. Your contributions are tax-deductible, the growth is tax-free, and withdrawals used for medical expenses are tax-free. If there is still money in your account after you hit the age of 65, it becomes a regular retirement fund that you can use for anything, not just medical expenses.
Working with a financial advisor can be helpful when determining your overall investment strategy and how to maximize the different types of accounts while also not locking up too much of your money until retirement age.
Taxable Brokerage
A taxable brokerage is a much more flexible investing account that you can contribute to and withdraw from without much limitation. Of course, as you may have guessed based on the name, there are no fancy tax advantages. However, capital gains are taxed at a lower rate than income, so yay Capitalism!
The great thing about a taxable brokerage, especially if you are far from retirement age, is that you can take the money out whenever you want. You can use this to save up for a long-term goal and benefit from greater returns than a savings account or to work towards an early retirement (more on that below!)
This is something you can set up yourself fairly easily with a robo-advisor, or you can consult a financial advisor.
Don’ts
Don’t get scammed by a shady financial advisor
As mentioned above, there may (and probably will) come a time when it makes sense to bring in a professional. If you’re early in your personal finance journey, utilize low-cost robo-advisors and free educational resources for as long as you can. As you progress, you may get to a place where things start to feel a little more complicated than you’re confident with handling on your own. Bringing in a pro can pay for itself if you approach it in the right way.
Unfortunately, as a young couple that started a business and went from broke to highly paid in a short amount of time, we went to financial advisors and eagerly told them that we were making a lot of money and had no idea what to do with it. This is a great way to invite scammers into your life. Do not do that! At least pretend you know what you’re talking about so they don’t realize they can easily pull the wool over your eyes.
A couple of things to watch out for:
Paying 1% (or more!) AUM commission to a financial advisor.
This is actually pretty standard, which is frustrating. It makes it easy for run-of-the-mill financial advisors associated with well-known brands to take advantage of everyday people.
You may hear the argument that a percentage-based commission incentivizes the advisor because they make more money when you do. It also incentivizes them to only recommend investing more money into the accounts they manage - even if paying off debt, investing in a business venture, etc. would actually be a better choice for your situation and your family.
If you have $1,000,000 invested over 10 years, you will experience over $175,000 in lost returns due to a 1% commission. Compare that to paying a flat $3,000 annual fee over that same time frame, and you’ve only paid $30,000 total.
It may feel easier to have the payment be “out of sight, out of mind” with a commission-based advisor, but a flat fee will save you thousands or hundreds of thousands in the long run.
We use Facet, which is a flat fee advisory that uses only CFP® professionals who are fiduciaries.
Speaking of fiduciaries, make sure your financial advisor is one! Fiduciaries are legally required to act in your best interest and have to be able to document that they’re doing so. A Certified Financial Planner® (CFP) is the gold standard of fiduciary financial advisors.
Whole life insurance
One of my biggest regrets is letting a financial advisor convince my husband and me to purchase Variable Universal Life Insurance policies at a young age (this is a form of whole life insurance) and make that our primary investment vehicle for several years in our twenties.
These types of policies provide huge commission incentives (sometimes more than 100% of the first year’s premiums), and they are at the bottom of the totem pole when it comes to useful places to put your money. We were encouraged to invest in this policy over any of the types of accounts listed above, and the return was terrible, especially in the beginning, when almost all of our contributions were eaten up by fees. The opportunity cost of putting our money there vs. other investment options is astounding.
Moral of the story - do a little independent research, ask for a second opinion, and do not blindly trust a professional just because they call themself a financial advisor.
Don’t try to become a day-trader
Don’t day trade or buy single stocks.
This is equivalent to gambling, in my mind. You can either take your money to the casino or try to day trade. If you want to do it for fun, that’s fine. But consider it part of your entertainment budget rather than your investment strategy. I consider cryptocurrency to be in the same category.
Don’t panic sell or try to time the market.
Don’t try to time the market. Even professionals can’t do it. Look up the statistics on how many “professionally managed” funds beat the market. It’s not many. The best investment strategy is dollar cost averaging, as mentioned above.
Dollar cost averaging does take some discipline. Don’t panic sell when you see the market going down, or hold onto your money while you wait for it to go up. As an amateur young investor, I remember reaching out to our financial advisor when the market started nose-diving at the beginning of the COVID-19 pandemic. “Should we sell!?” Of course, he recommended riding it out because the market would rebound, which it did. If we had sold while the market was down, we would have lost a lot of the money that has been benefiting from compound interest in the years since.
Don’t get taken advantage of or leave money on the table because you’re not educating yourself!
The bottom line is that the more you educate yourself, the less likely it is that you are to be taken advantage of. You start to learn about common practice, typical pitfalls, and things to consider or look out for. The more that you bring those to the table, the less likely it is for someone to think they can mislead you because they know you won’t fall for it. The sad reality is that most people know nothing about personal finance, which is why it’s very easy for some of these predatory practices to continue on.
Investing 102: Financial Independence
Once you get a little further into your personal finance journey and find yourself ticking off the basics (follow a budget, save up an emergency fund, pay off debt, buy a home, and so forth), you may be wondering…what’s next? The great thing about financial momentum is that once you get in the habit of managing your money well and accomplishing goals, you are unlikely to decide to start spending frivolously.
Keep that momentum and set the next goal. Here is a little teaser of a popular next step - working towards some variety of FI/RE (Financial Independence/Retire Early).
There are many different types of Financial Independence, spanning from simply having less reliance on trading time for money, all the way to fully living off of your investments long before you hit the age of 60.
Here are some great graphics, courtesy of The Personal Finance Club, that illustrate some of the many different types of FI/RE. There is some comic relief sprinkled in at the end, but the point is that there are many ways to approach FI, and you have to determine your own values and goals to find what works best for you.
A key element of the FI/RE movement is the 4% rule, which was popularized by Bill Bengen. This rule says that if you withdraw 4% of your investments per year, your money will last you at least 30 years. This means that you will want to accumulate 25x your annual living expenses in investments to achieve FI.
A newer financial philosophy that is gaining popularity is based on the book Die With Zero by Bill Perkins. As you may guess, the idea is that you want to spend all of your money before you die rather than spending your life toiling away to accumulate money that you’ll never enjoy. Under the right conditions, the 4% will allow you to maintain your nest egg at the initial amount, considering the benchmarks of an average 10% stock market return and 3% annual inflation. This means that unless there is a significant downturn in the market, you are likely to die with millions of dollars. It may be important to you to pass down that type of wealth, but Die With Zero argues that you shouldn’t work any more than you need to. Life is meant to be lived. It is easy to get “addicted” to financial goals once you’ve started experiencing the high of early wins. Just don’t let your desire to retire early overtake your ability to enjoy your life today, especially since it’s unlikely that you won’t earn money in any capacity after the age of 40.
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These are some of the “finfluencer” voices that I follow and have learned a lot from.
Ramit Sethi of I Will Teach You To Be Rich
Nick Maguilli from Of Dollars and Data and author of The Wealth Ladder
