I was unsure if I needed to write this article. After all, a ton of really smart people have written wonderful articles on this topic. The truth is most people don’t even know the basics of investing. This year alone I helped three of my colleagues pick funds in their 401k. They had no idea they could choose different funds or what the default fund their money was in.
Where Do I Put My Money?
I don’t spend a lot of time on social media. A ton of people do though and there is a lot of “financial advice” on it. My daughter sent me a tik Tok that had information about something called “anchor protocol” a while back. The person was touting how he is earring 20% interest on a crypto he has in the protocol. At the time a high yield savings account was under 1%. (It’s now much higher check out Betterment to see what their current rate is.) Seems too good to be true? It was. The crypto coin that ran on this protocol crashed. I know someone who lost almost $200,000. It was a really brutal event from many people.
The moral of the story is if it sounds too good to be true it probably is.
This leads to my next point. There is no get rich quick method! Yes there have been people who have made an obscene amount of money on trading stocks and crypto. There has also been people who have made a ton of money playing the lottery.
I remember my first experience buying stocks. I opened a broker account and by searching on the internet found a few companies to “invest” in. I was told by the article that they were going to “explode”. So I put $3000 in a few stocks. Within 2 hours I was already up $500! “Damn, this is easy! I’m going to keep doing it until I get rich!”. I sold and locked in that $500 profit. I did some more internet research and found some other “tips”. I bought the stocks and the next day was down $1000. I thought “It will go back up again. I’ll just wait for that.”
It never went back up and I ended up selling losing $2,000. That was of course after checking to see how the stock was moving 5000 times a day. It was ridiculously stressful!!
Can’t I Just Put All My Money In a Stock Like Apple??
Google. Apple. Amazon. Tesla. Take your pick. If you would have put $5000 in any of these companies 10 years ago you would have been certainly happy with the returns. So why not just put your money in one of these stocks? Honestly, you might be just fine doing this. These are huge companies that have great followings. On the flip side no company is guaranteed to be on top forever. Look at blockbuster.
BlockBuster was once a thriving company. I remember as a kid renting video games from them. They would always sell out of the top new movies. Netflix came out in 1999 and had a disruptive idea. Send the movies directly to the customer. When BlockBuster’s stock fell in 2003 maybe you would have sold or maybe you would have bought more. Thinking a company as big as blockbuster, one that has been in the video industry for years would catch up with the industry and beat out these new players. They didn’t obviously. At some point you would have sold. the stock, probably at a loss. Now what? Now you have to pick another company you think will succeed. Like Netflix…..Oh wait, that chart looks terrible now too.
The lesson here is hindsight is 20/20. It’s very difficult to predict what’s ultimately going to happen to a company. It is very risky to put all your money in just a single stock.
The answer to this is diversification.
Diversification is taking your whole sum of money and dividing it amongst more than one stock. This is better than owning one stock but it does mean you have to keep up with the goings ons of all the companies you choose to invest in. You don’t want to keep a stock like blockbuster in your portfolio, it would just drag down your return. So you have to sell the ones that our performing poorly and buy more to compensate for that.
I don’t know about you but I already have a job. This whole blog is about living life more fully. In my humble opinion money should be a background thing that we use to help maintain our life. Not something we obsess over and spend hours managing.
So We Should Hire Someone To Do It For Us, Right??
Well, kind of. What if I told you there is an investment vehicle that you can invest in 500 or more stocks? You never have to do anything to manage these stocks. If there is an underperforming company, it will get weeded out. Because you are investing in so many stocks you never feel the full brunt of a collapse of one stock. Enter the Index Fund.
Index Funds Are Awesome!
An index fund tracks a financial market like the S&P 500 or the NASDAQ. The S&P500 has 500 big companies (Large market cap) in it. So you have exposure to popular stocks like Apple and a whole host of other companies that you can see here.
Some stocks pay out a dividend to their shareholders. A dividend is a portion of profits that a company makes and it typically is paid quarterly to the shareholders. These dividends are important in long term investing because you are able to reinvest them to buy more shares of the index fund of your choice.
As you can see over the long term returns are much higher when you reinvest dividends.$100 would have grown to $5000 from 1980-2019. By contrast without them reinvested it doesn’t even make it to $2000. That’s a $3000 difference. This is called compounding and Warren Buffett called it the 8th wonder of the world.
How Do I invest in this?
There’s a few easy ways to invest in index funds. One is to sign up for a brokerage account through a company like Vanguard. I focus putting most of my money into an index fund called Vanguard Total Stock Market Index Fund ETF (VTI). VTI is a passive index that tracks the total US stock market. This fund has large, medium and small companies in it. It actually has over 3900 stocks in the fund. Vanguard only charges a fee of 0.04%. By contrast a financial advisor can charge 1-2%!
Another easy option is to use a roboadvisor like Betterment. I use a couple of Betterments products. Their high yield savings account is currently at 3% (this is variable so you’ll have to check to see what current rates are). It is FDIC insured which means your money is safe if anything should ever happen to betterment.
Another product I have used is their investment vehicles. Thankfully Betterments portfolios consist of various index funds. I have invested in a 90% stock 10% bond portfolio. Betterment will invest in about 10 index funds which takes the guess work out of what to invest in. They now have interest focused portfolios you can choose from. Like their “climate impact” portfolio that is designed for the climate-conscious investor or the “innovative technology” portfolio that is geared towards the tech geek.
One of the big advantages of using a service like Betterment is when they tax loss harvest. When you invest there is a chance that you will start losing on your investment. As I write this article the stock market has slumped 20%. This is not something to be worried about if you are a long term investor but there is a way to benefit from it in the short term. Tax Loss Harvesting. Betterment will sell off the stocks that are losing and buy into a similar fund. This triggers a loss to the IRS and you’ll be able to offset capital gains you have made in the year or decrease your tax burden from your income (up to $1500/year single or $3000 married).
It is possible to do this on your own. Just be sure you’re doing it within the laws of the IRS. If not you might trigger a wash sale and not benefit from the “loss” at all. However, I do think there is value in having someone else worry about it while you live your life.
Betterment doesn’t manage your portfolio for free of course. They charge 0.25% or $2.50/year per every $1000 you invest. Much cheaper than the 1% of a traditional financial advisor but something to consider.
How Much do I Invest?
So you have paid off your debt, have some money for the unexpected and have opened up a brokerage account. The next step is determining how much to invest. Whether you have a chunk of money or will have an excess in your budget each month, you may want to use the Dollar Cost Average (DCA) method of investing. DCA is just investing money over time. It takes the guess work out of when to invest. Again as I write this the market is down quite a bit. If you would have invested a large sum of money all at once in the SP500 last year you would be 20% down on that investment. Instead, if you divided that large sum and invested over time you would be investing when the market was up and down. Don’t be afraid of putting money into a stock market that seems to be crashing if you are investing for the long term. Those times may be the best times to buy because you are buying shares for a cheaper price! Another great benefit of the DCA method is you can set an automatic investment with most brokers. Making investing completely hands off!
If you have any questions or have a suggestion on how this advice could be better please leave a comment below. Thanks for reading!