The Only Investment Advice You’ll Need In Less Than an Hour
Why is it that even the majority of who we consider to be the brightest minds in the world of finance continue to get beaten by the benchmark S&P 500 Index year after year? I’ll give you two reasons. Number one: they’re human beings. And human beings since the beginning of time and throughout our existence are always going to seek an edge or a way to make things easier to be successful. I mean why was the wheel invented? It was so we didn’t have to drag our lazy asses from A to B with too much effort. So where’d we put our effort? Into making some concoction that could help speed up the process. Number two: They don’t care about beating the index. What? Really? Yes, really. Do you really believe that a hedge fund that’s charging you 2% of your hard-earned money JUST to invest with them and 20% of your profits cares whether or not they beat the S&P 500? Neither would I if I were getting that amount of money. Do you really think a mutual fund that’s taking over 1% of your money cares about beating the S&P 500? Nope. And how about that financial advisor who you trust with your life who makes money only based on the amount of shares you buy? Does he or she care about beating the S&P 500? Right again. Nope. So who actually DOES care about beating the S&P 500? You do. Individuals do. People who want to make a ton of money do. People who invest their money do. It’s just too bad they’re looking for other people to put in the effort for them. To that I say “shame on you.” You should know better.
Because of that thirst. …Because of that need to win, to acquire, to accumulate, we invest in places that promise to beat the market. But here’s the thing. We’re greedy. It’s that simple. We are greedy human beings. The ironic thing is that all of us can be “rich” or “comfortable, “financially free” or whatever word you want to use, with a little bit of discipline, and a lot of time.
So stop trying to beat the market and take this free advice which will take you under an hour to read.
Part I – Types of Investing, a little Education, Advice
The Truth About Warren Buffett
I haven’t even mentioned Warren Buffett yet and he’s in the title of this article! Yes, let’s discuss Warren Buffett and then barely even mention him again for the rest of this text. For those of you out there who get a chance, please read his biography entitled Snowball. It’s a great read. Granted it’s over 800 pages but it’s pretty excellent if you ever truly want to find out about his life and how he invests. But for the purposes of this piece we need to focus on why you’ll never be like Warren Buffett and how not even Warren Buffett is like the man he’s portrayed as. Let’s run over a few misconceptions about Warren Buffett so that you’ll better be able to understand him.
The Oracle of Omaha is portrayed as a Buy and Hold man
You see, the public for the most part knows Warren Buffett as this old school wonder kid investor who magically invested in the right ideas and over time made his billions through the power of compounding interest and dividends. In other words, people think of Mr. Buffett as one of the pioneers and biggest advocates of the “buy and hold” strategy whereby someone invests in a rock solid company who pays dividends. Said person never sells the company and reinvests the dividends and over time their investments makes them a ton of money. While Buffett definitely believes in this strategy for the right companies, by no means would Buffett hold on to a company if he didn’t think it was valuable anymore. However, if Buffett felt the fundamentals and underlying business were still strong even if the stock went up or down, chances are he wouldn’t sell. In fact if the price went down he’d probably buy more. However, I think it’s important to note that Buffett’s primary strategy before being known as this guy who invests in boring companies and holds them forever, was to trade. That’s right. Buffett was primarily a trader in his early days. And much of his success and earnings didn’t come from buying, holding, and building dividend earnings, it came from managing other people’s money. That’s where Buffett accumulated the wealth in order to use this so-called “buy and hold” strategy we think he employs. So let’s dive into Buffett’s earlier days and you’ll see what I’m talking about.
Warren Buffett practically invented the hedge fund business by managing other people’s money and by being a trader, not investor
The difference between Warren Buffett being a billionaire and being a multi-millionaire is actually quite simple. Had he not accumulated the fees from managing other people’s money from virtually the beginning, then he wouldn’t have had nearly enough to invest that would compound into the billions he has today. There’s no doubt that Buffett was always gifted with business. I mean the man had his first business at 9 years old and by 14 already owned a farm that employed someone. However, Buffett always had a penchant for numbers and with his persistence he eventually wound up working for the famous Benjamin Graham, his mentor at Columbia business school. But quickly into his tenure with Graham’s company Buffett utilized his own investing style that differed greatly from Graham’s. Graham diversified his holdings into a number of stocks – usually well over 20. However, Buffett used his own style often putting the majority of his money into one idea. Buffett did this with companies like GEICO and American Express (among many other that you’ve never heard of). In fact, often times Buffett held as much as 75% of his net worth into one stock. This is highly contradictory to what people think about Buffett and what his portfolio looks like now. When Benjamin Graham decided to shut down his firm, Buffett decided that in order to accumulate the wealth he wanted, he had to do it by managing other people’s money. It was then that Buffett set out on a mission to raise capital and perform for his investors. With the recommendation of Graham, Buffett got a few wealthy clients and as his biography states, everything “snowballed.” Over a 10 year span, Buffett averaged a 31% return for his investors and when all was said and done had 11 different partnerships where he managed money before he finally decided to shut his partnership down. However, had Buffett not managed other people’s money his net worth in the early 70s would have been less than half of what it was. And for that he wouldn’t have been able to acquire the majority of Berkshire Hathaway which is the company he owns today. Buffett didn’t have the greedy deal that most hedge funds have today. Today, hedge funds charge a 2% fee just to get in the door and then they take 20% of their client’s profits. Buffett’s fees were way cheaper but because of his performance he still managed to generate a ton of wealth. This is the wealth he used to accumulate his billions. Chances are Buffett would have been a multi multi millionaire on his own but managing other people’s money helped him accumulate more money much much faster.
Warren Buffett is one of only a handful of stock pickers who consistently beat the S&P 500
What always boggles my mind is that the standard at which money managers are judged is their performance relative to the S&P 500. The question investors always want to know is “did they outperform the S&P 500? Statistically speaking, the majority of money managers today (and always) have not been able to beat this benchmark. And even though this information is 100% cut and dry, plain as English, trillions of dollars are spent on fees, research, and commissions solely trying to beat this index that is practically unbeatable. Only few people in history have been known to beat this ever so important benchmark. Buffet’s mentor Benjamin Graham beat the S&P 500 by 2.5% in his career and he’s considered one of the best investors of all time. Buffett too has consistently beaten the S&P 500 with his picks. However, again, he’s one of literally a handful of individuals who was able to do this throughout his career. And yet with all of this information out there, people are still day trading, still picking stocks, and still trying to have an edge on what historically has been a consistent 8-10% return since the duration of the stock market. If you were smart enough to invest in the S&P in the last three years you would be the proud owner of a fund that has averaged over a 20% return in those three years. I mean how greedy can people get? Shouldn’t you be happy with those numbers?
Buffett was just as ruthless as any other money manager, just more honest
Buffett himself admitted that as he looks back on Berkshire Hathaway he wishes he’d never heard of it. Did you know that Berkshire Hathaway was originally a textile mill that Buffett bought as an undervalued stock? If you did know that you might also know that he practically bought the company out of spite. It became his obsession to buy more and more of the company stock simply because he wanted control of the company. And if you’ll read into Buffett’s past you might also know that he had done this multiple times in his career. Buffett was also one of the most honest money managers ever. He was straight up with his investors and told them that they’d have no idea where he was investing their money. And when all was said and done he had over 300 investors forking over their money. Buffett was greedy. Buffett used the same tactics as the most greedy of business owners. The reason we all like him is because deep down he’s a nice man who cares what the public thinks about him.
As if we don’t have enough proof, even Warren Buffett doesn’t want you to pick stocks!
I like how arguably the best stock picker of all time feels this way about retirement. When asked what his trustees should do with their inheritance money this is what he said only a couple days ago.
“My advice to the trustee could not be more simple: Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)”
I’m no millionaire. I’ve read at least 100 books on finance and have lost money. There are 2 rules. Never be in debt and position yourself to make as much passive or almost passive income as you can.
Retirement is a bad word, Income is a better one
If there’s one word that I think should be erased from existence, it’s retirement. Retirement as defined in the dictionary is “the act of ending your working or professional career: the act of retiring.” The word “ending” simply doesn’t sit well with me nor does this perception of our entire careers and investments being based on that crucial retirement age. You must save X for your retirement. You have to do this that in the other in order to have a comfortable retirement. The truth is, if I were to retire in the traditional sense of the word AKA not have anything to do anymore, I would probably lose my mind. But maybe that’s just me. Warren Buffett “retired” before the age of 40. But did he really retire? Of course not. He simply closed down his partnerships to focus on working for himself and his own interests. But Buffett never stopped doing what he loved and chances are he never will. There’s a reason the man’s in his 80s, stick kicking, and still doing what he does best. Buffett’s career gave him purpose, direction, and fulfillment. Why take that away? The better words for retirement should be “the option not to work anymore.” Isn’t that more fitting? It takes a whole heap of pressure off the notion that there’s this inevitable day when work ends and you have to have the financial means to survive until you are dead. Sounds pretty morbid to me. I’d rather have a life doing something that makes me happy until the day I die. So when you’re out there making money and thinking of your future, do NOT think of retirement. Think of things that you might actually LIKE doing!
Stop thinking about retirement and start thinking about INCOME
What’s the best hedge against losing a job? Money right? Of course. If you somehow lost your career you need to have enough funds to cover yourself while you find another job to pay the bills. But what if the entire time you’ve been working (from a very young age) you were in the mindset that every single dollar you put away could lead to an increase in your monthly income? In fact so much so that after enough time you could earn more per month that your current job pays you? The problem with many folks is that they’re in the mentality of having to save up this huge sum so they can live off said sum for the rest of their lives. If you simply shift that mindset to “income” you’re going to be way better off.
Put it this way. If you knew that 50K a year would suffice in retirement and your mentality was such that you did everything possible to earn that 50K “passively,” by the time you were earning that 50K your principal would be well into the millions (assuming you were earning that 50K from investments and not a side job or real estate venture or book deal, etc etc).
And you can also get super conservative with this. Personally I assume a 3% rate on my money. So I know that every single time I’m able to put away around $4,000 I get an extra $10 a month in income. It makes my goals easier to attain. I’m always in the mindset of “4 Grand, 4 Grand, 4 Grand.” Each time I put that away I’m making another $10 a month. That may sound like a little but I do that 5 times and I pay for my gym membership. I do that 10 times? Then we’re talking a phone bill. $20 times? Utilities. And so on and so forth. So each milestone you hit, all of a sudden you’re paying off expenses that you’ll never have to pay for again. Bottom line? Get in the income mentality, not the “I need a huge principle to live off of” mentality.
Try every investment strategy for yourself
The best investing lesson I ever learned was putting 30 grand into an idea had absolutely nothing to do with. It was back in the early 2000’s and a buddy of mine knew the famous Jim Kramer. Mr. Kramer was extremely bullish on the New York Stock Exchange as a buy. I did NO research whatsoever and simply bought as much as I could afford. Less than 3 months later I lost 10K on the investment and sold. Classic rookie mistake and clearly a stupid thing to do but in hindsight I’m extremely happy that it happened. Up until that point I was doing my own research, learning about valuating companies, and finding out what kind of investor I truly was. If I had only listened to my instincts and style all along I’d have been fine. But instead, I did what most of us do when it comes to investing: hope considerably more than actually applying knowledge to make sensible decisions.
The funny thing is that prior to this “trade” I was learning a fair amount about valuing stocks, looking for long-term investments rather than trades. In hindsight I’m kind of upset that I missed out on the gains I could have had with some fun companies back then. I had bought Cedar Fair, Buckle, Pfizer, and some other solid dividend stocks. Just when I was beginning to know myself and my investment style I wind up blowing my savings on an idea that wasn’t even mine.
But looking back it was a great lesson to have learned. And frankly it too me a very long time to get over it. It wasn’t until literally around 10 years later that I finally become comfortable investing and holding my money in places that I chose (namely dividend stocks and listening to a style I was starting to adopt nearly a decade prior).
The point in telling you all of this is that if I hadn’t gone through losses and tried out certain things that made me comfortable then I never, ever would have had the guts to see through to investing the way I truly want to. And during that decade I tried things like Peer to Peer Lending, looked into real estate, stashed money in cash, in money markets, you name it. But I’d like to share with you what I’ve learned along the way. There are some rules and explanations that might help you formulate your own investment style, whether it’s conservative (like me) or risky.
The main point to get across if you haven’t seen it already is that you need to do what you need to do. Do not, I repeat, do NOT listen to anyone else.
Never Be in Bad Debt, Just Don’t
I almost want to say to many of you “you know what bad debt is and we’ll just leave it at that.” Because frankly I slap myself on the head every single time I see a story of someone who has racked up their credit card bill on completely unnecessary purchases. But for simplicity sake, let’s define what bad debt is. Bad debt, to me, is owing money anywhere you really shouldn’t have to. It can be a very gray area but let’s use an example. Many people would consider having a mortgage as being “good debt.” I would agree but I’d also only agree if said mortgage was affordable. If you’re carrying a mortgage that’s taking on way too much of a monthly bill and you’re pulling your hair out because you don’t know if you’ll be able to pay it each month, then yeah, it’s bad debt. Any time you can’t pay your credit card in full each month? That’s bad debt. Buying ANYTHING that’s well above your means that you can’t pay for in cash and feel comfortable about? Yup, bad debt. Do you see my theme here? Am I saying to never take a risk in your life? Not at all. I’m just saying don’t do something stupid. If you’re someone buying things left and right that you can’t afford and you’re actually comfortable with it? Then yeah, you need to reassess your life because I am definitely calling you stupid.
I guess the most difficult part in all of this is truly being able to assess good debt and bad debt in the context of what your investment objectives are, but for simplicity sake, come on folks. I think you can decipher between what you know you can spend and what you really shouldn’t. And if you’re ever questioning yourself then the answer is simple. Do NOT spend. You can never make a mistake if you don’t spend. Some people may say because you didn’t take a risk or make a calculated bet that you made an error that could have paid off. Let me tell you something. Sleeping at night and not being anxious about money is a way better feeling than regretting that you passed up an opportunity. There will always be opportunities you can create for yourself.
True Passive Income and Almost Passive Income
I think there’s a big misconception out there when it comes to passive income. People seem to think things like owning real estate is considered passive income. Do you really think that being a landlord is passive? Having to do maintenance on the property you own or dealing with high maintenance tenants is passive? I’ve heard stories of people who took on properties that were absolute horror stories. And often times that amount of work and time put into these ventures equaled or exceeded their full-time jobs. You think making money online is passive? Come on people. Don’t be that naïve. But I will say these. If you truly want to be comfortable financially then it goes without question that you’ll have to in some way create a stream of either truly passive income or almost passive income. Let’s define both and explain how you can make money at each.
Truly Passive Income
So how do we define truly passive income? I would say that truly passive income is the kind of income where you literally do nothing after your investment is made. I’m talking sit around twiddle your thumbs nothing. In reality there aren’t too many true passive income streams out there. And within the realm of truly passive income I think there are two subcategories we can drop it into. The first is truly passive income where you really do nothing except make the investment. And the second is truly passive income where upfront work is required. Let’s go over which forms of passive income actually do exist and then we’ll define them as the kinds that you either have to put in the initial work or if there’s virtually no work required.
Dividends – stocks, insurance
One of the purest and best forms of truly passive income is the dividend. Whether it’s an annuity you bought, or more commonly, a stock, dividends are a companies’ way of saying “thank you” for investing in them. A dividend is a tiny piece of income that’s distributed (usually quarterly) to a shareholder or policy holder for doing nothing. Yes, nothing. So if you own a few shares of X stock at 30 dollars a share and they are paying a 10% dividend ($3), then four times a year you’ll get 75 cents for every single share that you own. You truly don’t have to do anything to receive dividends. The only work required for dividends is doing your research beforehand on the dividend stocks you select as well as monitoring these stocks in case you feel you ever need to sell them. Personally I think dividends are probably the best form of true passive income out there. It’s the only type of income where little to no work is required. You can technically skip ALL the research part of things and simply invest in an S&P Index Fund from the likes of Vanguard and never have to look at your portfolio again.
Interest
Interest is something that’s very similar to dividends. In fact some people would almost find them identical. But for simplicity sake let’s actually define it:
- a charge for borrowed money generally a percentage of the amount borrowed
- the profit in goods or money that is made on invested capital savings account, bonds, peer to peer lending
I would put interest in the “truly passive income” category because actually doing something to actually obtain the interest usually requires little to no work. If you invest in a CD at a set rate there’s nothing to really do other than wait on your interest. If you invest in a bond, same thing. You wait until the bod matures and it accumulates interest. There might be some up front research on finding out which bonds or financial products to buy, but the money accumulated from interest is truly hands off.
Almost Passive Income
So with almost passive income we have a larger “up front” component. With this scenario you’re doing some heavy lifting to get your passive income stream started and a little bit of maintenance once it’s been established. But in this case how hard you work and for how long and how consistently definitely comes into play.
So what might be a few examples of business that would be considered almost passive income? I think the most common would be something where you’d be receiving residual income. That could mean a number of businesses. Let’s say you landed a role in a commercial and you received royalties for a set amount of time after the commercial aired. Those royalties are almost like little dividend checks and you’re doing absolutely nothing to receive them. The only work you put in was the initial work of filming the commercial. Here’s another practical example. Let’s say you write an eBook and it somehow takes off on its own on a site like Amazon. The real work involved was actually writing the book. Now, you can still market the book (which isn’t quite as passive) but technically if the book creates a following there’s a chance you’ll receive money on it for a long period of time. That is what I’d considered almost passive income. In fact it eventually becomes true passive income if you play your cards right.
Then there are the types of businesses that are a bit more active but you can turn them into almost passive income streams. A great example would be any business that you own that is mostly hands off. Here’s an example. Let’s say you start a website and it takes about 6 months to a year to really get it off the ground. You work hard, make the necessary amount of posts and ample content on your site. The site actually starts earning money. You then get to a point where you realize that all the work you are doing can be done by someone else. You post an ad, hire someone to take care of your responsibilities and then all of a sudden the hours you were putting in aren’t necessary. You simply have to watch the person working for you and make sure your business was doing exactly what it was doing when you were actively running it. Now your job takes considerably less time but you’re still making money. That’s an example of an active business turned practically all passive.
Other examples? Owning real estate and having a management company manage your property where you’re as hands of as possible. Owning a franchise where it takes a few years to ramp up the business and you eventually farm out the work to other people. Are you getting the trend here? The more you can have other people doing your job, the less work you’ll have to do.
All the investment advice you need is free, stop spending money
Here’s a true story. My father has been a psychotherapist for the past 30 years. Yup, 30 years. We just recently had a conversation about his finances and he’s extremely worried that he doesn’t have enough to retire on. Sound familiar? Of course it does. While I have to praise my dad for making wise choices in regards to real estate, his investment choices as well as money managing skills leave a great deal to be desired. Honestly if all he ever did was a little reading early on he’d be in much better shape. But what did he do with all of his investments? He left them to advisors and he of course got crushed during a couple of bubbles and financial crises. Now he’s left in a position where he’ll pretty much have to continue working in some way, shape or form for the rest of his life. Not that it’s a bad thing because he loves what he does but imagine how many Americans out there are in the same position only they don’t want to work into their 80s. Like I said before in this article, retirement is a bad word but all of us, every single one of us should at least have the option not to work as early in our lives as possible. The only way this is going to happen is by saving and investing properly. But to get out there and leave your money in someone else’s hands or spend tons of your own money to learn how to trade or “invest like the pros” is flat out naïve not to mention completely unnecessary.
I’m not even going to recommend any books because you don’t need books. You just need to have your eyes and ears open. Want some advice? Take a look at the Yahoo! Finance section once a day and just read articles. That’s it. I swear to you that’s all you need to do. If you really want to read books, etc etc you can but it’s simply not necessary. Also check out Fool.com which is another solid website that tends to be on the more conservative side. Seekingalpha.com is another good website. Nerdwallet.com is another good one. I could go on and on and on. The point is this: you should be educating yourself and not wasting a ton of money on said education. It’s all out there for you to get your hands on.
OK, now that we’ve established a reasonable base for you to educate yourself, let’s get into some investing options. Honestly you really don’t need most of not all of these but it’s a good idea to at least go over them.
Part II – How should you be investing?
Before even reading this section remember a few things that you need to have in line with your finances before even spending a cent on an investment like a bond, stock, or real estate. You must not be in ANY kind of debt with the exception of your mortgage. Also, you must have an emergency fund lined up. Preferably at least a year’s worth of expenses. You can read 100 articles about how much should be in your emergency fund. I suggest a year because all of us should have the smarts to figure out how to make some income in a year should your situation become one where you are stuck without a check each month. If you’re in any kind of credit card debt or debts outside of your monthly expenses then you really shouldn’t be investing at all. Ideally the only “debt” you should have are things like food, car payments, a mortgage, utilities bills, phone bills. Most times experts don’t even consider this debt but I do. Again, I’m super conservative. You have to pretty much know you can pay all your expenses, have zero bad debt, and have money already put away before you can risk investing it. I hope this point has hit home. Let’s move on to actual investments now.
The only stock strategy you’ll ever need. Ever. Seriously.
Want to just skip the whole research thing? Here are a few funds and strategies you can use to simply set it and forget it. Make sure you have at least a 10 year time horizon (preferably 20 to 30. Here are a five different kinds of portfolios you can use that you simply have to invest in each month for the duration of the investment and I guarantee you’ll do better than 90% of money managers out there. Not to mention build yourself a nice little nest egg in the process.
The Most Aggressive Portfolio I would be in – just buy the strongest component of the stock market.
The reason I said most aggressive portfolio I would be in is because there are far riskier portfolios than this. In fact, you could go crazy with all the products out there like commodities, junk bonds, foreign equities, etc etc. But this article is not meant for any of that and you shouldn’t even bother. This advice is meant for simplicity and it doesn’t get more simple than buying one, yes one fund….with a twist. It’s a fund that has 500 holdings.
Buy any S&P index Fund or ETF and that’s it. Yes, that is all. You’ll be invested in the stock markets 500 strongest stocks and receive dividends of over 2% for the rest of your life. You have absolutely nothing to do but put your money in as often as you can and reinvest the dividends. You’ll never lose to the market and you’ll never beat the market (which over 90% of people don’t do anyway). However I strongly suggest if you’re going to use this strategy that you. Here are two funds that employ this strategy.
VFINX – Vanguard S&P 500 Index Fund
SPY – Vanguard S&P Index ETF
These funds have tiny expense ratios so you’re not paying much for anyone to manage them. If you’ve got 20 years to spare and you’re looking to keep exact pace with the market, you really can’t go wrong here.
The Warren Buffet Portfolio
The smartest guys in the world can’t beat the market, why even try? Warren Buffet himself, the man everyone looks to for financial advice and forecasting said that if he were to give advice to anyone managing his fortune i.e. his heirs that this is what he’d do.
What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit…My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors
So in other words put 90% of your money in VFINX or SPY and the other 10% in VBISX. It’s pretty tough to argue against a guy who has beaten the market nearly every year since 1965. When a man like that who is as active an investor as any is essentially telling you that you really don’t need to do anything at all, you should probably listen to the guy, park your money in these funds and get out and enjoy life instead of worrying about how you’re going to pay for your retirement.
A Four Fund Portfolio that allocates risk across a number of sectors
I wouldn’t be doing my job if I didn’t at least give you some options. Chances are you read the first two portfolios and thought to yourself: this is it? This is all I have to do? The truth is that the answer is a simple “yes” if your investment timeline is great enough (and more than likely true even if it isn’t). However, here’s another option for those wish for a bit more diversity in their portfolio.
VWELX – 40%
The investment seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks. The fund employs an indexing investment approach designed to track the performance of the Standard & Poor's 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. It attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
VEURX – 20%
The investment seeks the performance of a broad, market-weighted bond index. The fund employs an indexing investment approach designed to track the performance of the Barclays U.S. Aggregate Float Adjusted Index. This Index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States-including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities-all with maturities of more than 1 year. All of the fund’s investments will be selected through the sampling process, and at least 80% of the fund’s assets will be invested in bonds held in the index.
VEIEX – 20%
The investment seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in emerging market countries. The fund employs an indexing investment approach by investing substantially all (approximately 95%) of its assets in the common stocks included in the FTSE Emerging Index, while employing a form of sampling intended to reduce risk. The FTSE Emerging Index includes approximately 851 common stocks of companies located in emerging markets around the world.
VNQ or VGSIX – 20%
The investment seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in developed and emerging markets, excluding the United States. The fund employs an indexing investment approach designed to track the performance of the FTSE Global All Cap ex US Index, a free-float-adjusted market-capitalization-weighted index designed to measure equity market performance of companies located in developed and emerging markets, excluding the United States. The index includes more than 5,330 stocks of companies located in 45 countries.
Also keep in mind the percentages here. People always talk about the rules of investing and how you should have more money in stocks at a younger age, less in bonds, etc etc. While there’s some merit to this please don’t take it as an absolute. The only absolute is your ability to tolerate risk. If you can’t stand sleeping even with a 20% allocation in stocks then don’t own stocks. While I don’t necessarily advocate this strategy and think owning stocks is wise, it’s not as important as your mental well-being. And you’d be surprised that the more comfortable you are in your own life then you just might ease up on investing in stocks.
*If you want to stash your cash in a place that’s a bit riskier so you’re not earning under 1% in an ING I would recommend the Vanguard Short Term Investment Grade index. Very few fluctuations and it’ll get you nearly 2%.
*I personally have 100% of my money in VWELX because it pretty much covers everything.
What if you’re close to “retirement age?”
If you don’t have 20 or more years to invest, put a little more into bonds, cash, or investments where you don’t lose money. Depending on your age these may be the years where preserving your capital is way more important than risking it to make more money. So in this case you might want to check your allocations and put a bit more into your bond holdings. The percentage is really up to you. Don’t listen to “experts.” Listen to what lets you sleep at night.
There’s no need for Target Retirement Funds
Normally I’m an advocated of just about anything Vanguard offers because their funds are by far the most economical. However, rather than rely on someone to manage your portfolio allocation as you get older, do it yourself. Here’s Vanguards pitch
Get a complete portfolio in a single fund
Vanguard Target Retirement Funds give you a straightforward approach to a sophisticated problem: how to invest successfully for retirement.
Each fund is designed to help manage risk while trying to grow your retirement savings.
Less risk through broader diversification
Each of the Target Retirement Funds invests in Vanguard’s broadest index funds, giving you access to thousands of U.S. and international stocks and bonds, including exposure to the major market sectors and segments.
A professionally managed asset mix
The funds’ managers gradually shift each fund’s asset allocation—to fewer stocks and more bonds—making the fund more conservative the closer you get to retirement.
Automatic rebalancing
The managers then maintain the current target mix, freeing you from the hassle of ongoing rebalancing.
Low costs
On average, Vanguard Target Retirement Fund expense ratios are about one-sixth the cost of their peers—that’s a savings of nearly 84%!*
When you’re paying less for your funds, more money stays in your account working for you.
While this all sounds well and good, the fact is that Target retirement funds generally cost you way more because of management fees. The fact is, you can build the same exactly portfolio yourself and for nearly 10 times less the cost. Continue using the right index funds on your own and shift the allocations yourself. It’s really not hard. We’re talking 10-15 minutes a year to rebalance your holdings. If you don’t have that kind of time then I really can’t be of any service to you. That you and really need to rethink your priorities.
Investment advice on all the other stuff that you don’t really need to worry about
Asset Allocation
Definition
An investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.
The three main asset classes – equities, fixed-income, and cash and equivalents – have different levels of risk and return, so each will behave differently over time.
Why you shouldn’t worry about it – it’s all about risk tolerance. Would you rather earn 500K a year knowing that every single day of your life will be like a roller coaster or would you rather have a low risk, less stressed life with 300K per year in earnings where you’re pretty much guaranteed that money? Your answer is very telling of your investment philosophy. If you’re willing to take risks and can handle the stress that comes along with it, then allocating most of your money to stocks is completely fine. And remember, some stocks are riskier than others (then again, there’s zero reason to invest in individual stocks since you more than likely can’t beat the market on your own).
When it makes sense – that doesn’t mean that asset allocation isn’t necessary. It’s necessary once you fully accept and understand your risk tolerance. Granted there’s merit to knowing you can take more risk when you’re younger and you should probably take less risk when you’re older, but more important than simply age is again, your tolerance. When you know your tolerance that’s when you can figure out where asset allocation comes into play. So in general the less risk you can handle, the more “having less of a chance to lose your money” strategies you need to employ (more bonds, cash, less stocks, etc etc).
Another time where asset allocation is necessary is when you need to divide up your risk and rebalance your portfolio (which shouldn’t be more than once or twice a year). Then is when your holdings become a little out of whack because of a rise or decline in prices. So let’s say you have 5 funds and the percentage of a fund that began the year at 10% of your holdings becomes 15%. To keep it at 10% you’ll either have to buy more of your other funds to make that percentage smaller again, or you’ll have to sell some of that holding to accomplish the same thing. One strategy in portfolio management I do advocate is balancing your portfolio which takes all of 15 minutes a year.
Again though, this is really if you own more than one stock or fund. Which as I’ve told you isn’t really necessary. Then again I wouldn’t be doing my job if I didn’t go over all options for you.
Annuities
Definition – A financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years.
Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives.
Annuities can be structured to provide fixed periodic payments to the annuitant or variable payments. The intent of variable annuities is to allow the annuitant to receive greater payments if investments of the annuity fund do well and smaller payments if its investments do poorly. This provides for a less stable cash flow than a fixed annuity, but allows the annuitant to reap the benefits of strong returns from their fund’s investments.
The different ways in which annuities can be structured provide individuals seeking annuities the flexibility to construct an annuity contract that will best meet their needs.
Why You Shouldn’t Worry About Them
The financial advice in this article is creating your own “annuity” for you. If you have enough of a timeline on your investing you should never need an annuity. Your income stream should be big enough where this kind of financial product isn’t necessary.
When it makes sense– If you’re much older and have done zero retirement planning then you might consider an annuity an option.
Whole Life Insurance
Definition
Here’s Met Life’s Definition of Whole Life Insurance
A form of permanent life insurance, whole life insurance features guaranteed premiums, death benefits, and cash value. Whole life insurance policies also give you the potential to receive dividends, which can increase the value of the policy when the insured is living or provide an increased death benefit for your beneficiaries.
You may want to purchase a whole life insurance policy if you want:
- Protection for life1
- Payments that stay the same each year
- To be able to put additional money into the policy on a tax-favored basis
- Cash value you can use while you are living2
Whole life insurance offers confidence through the guarantees it provides:
Guaranteed level premiums. The premiums you pay are guaranteed to remain the same for the life of the policy, regardless of age or health.
Guaranteed death benefits. Beneficiaries will receive at least the face amount of the policy upon the death of the insured, assuming you do not have outstanding policy loans and that the policy premiums are paid on time.
Guaranteed cash value. Your cash value will grow each year, tax-deferred, until it matches the face value of your policy. When you need it most, you’ll have access to your cash through loan and withdrawal options.2
Why you shouldn’t worry about it – unless your time horizon on the “investment” is at least 15-20 years then you should pretty much never have whole life insurance when you can get a term life insurance policy for a considerably cheaper rate not to mention a much more lucrative policy. Also, unless you start a whole life policy at a relatively young age (before 40) then I simply don’t think the high cost of premiums is worth it.
When it makes sense – if you’re young enough, paying a small enough premium, and have the time, it’s a solid way to earn income while eventually being able to stop making premium payments after 12-15 years. Again, if you have the funds and time frame, it’s not a horrible investment idea. Think helping pay for kids’ colleges while also being insured. Other than that, I don’t see much of a reason for whole life insurance. I personally have whole life but started my policy at the age of 30 and pay less than 400 a month for my premiums.
Rebalancing
Definition
The process of realigning the weightings of one’s portfolio of assets. Rebalancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation.
For example, say your original target asset allocation was 50% stocks and 50% bonds. If your stocks performed well during the period, it could have increased the stock weighting of your portfolio to 70%. You may then decide to sell some of your stocks and buy bonds to get it back to your original target allocation of 50/50.
Why you shouldn’t worry about it
If you have an extremely simple portfolio (which you should) then there’s practically zero effort involved at all. Let’s say the only thing you own is VWELX. That fund already has an allocation of 70% equities and 30% bonds. The managers of that fund rebalance it every single year so you really don’t need to do anything. If we use another simple example, if you have Warren Buffet’s plan which is 90% S&P and 10% bonds you really only need to rebalance once a year. When do you do this? Let’s say your S&P fund has a great year and winds up turning your allocation into 92% equities and 8% bonds. In this case you’d either sell off some S&P 500 stock or buy more of the bond funds to get your allocation back to 90/10.
When it makes sense
If you’ve listened to nothing I have said and decided to be a cowboy and go off on your own buying multiple securities then you’re going to have be more proactive about rebalancing. I would say twice a year you’ll have to look at your portfolio and make sure your percentages stay consistent. If any one security outweighs the rest then you’ll again either have to sell some off or buy more of another security to get your allocations correct.
Real Estate for Income
Real estate is still perceived by many as being one of the best investments in the world. Despite numerous reports recently stating the complete opposite, many Americans are still under the illusion that they can buy this property, rent it out, have their mortgage paid for them, and then reap a huge benefit years down the road when a house appreciates and they can sell it for twice what they paid for it. Sounds amazing right? Wrong. Anyone who believe this scenario is a realistic one is 100% delusional and needs to understand that like any other career or job, physical real estate investing takes a ton of work, patience, failure, and maintenance. It’s a very far cry from being anything passive which is always our goal here.
Be prepared for a ton of work
While you can certainly hit a home run and make a very wise real estate investment choice I don’t advise it. Not only are we talking about dealing with a TON of paperwork but we’re also talking about the maintaining of a property. Unexpected repairs, leaks, bad tenants, you name it. And you might think the answer to all of this is hiring a management company. Sure, if you want to decrease your ROI substantially. What we’re talking about here is another job essentially. And what have I been trying to convey this entire time? We want to do as little work as possible (unless you’re really passionate about real estate investing and property management).
Why you really don’t need physical real estate at all
Do you really want to invest in Real Estate? Fine, that’s great! Then just invest in a REIT Index Fund. This is a batch of investments that solely invest in companies that do one thing: Professionally invest in real estate. Only here you don’t have to maintain any properties and do ANY of the physical and paper work involved in real estate investments.
What is a REIT Exactly?
A REIT, or Real Estate Investment Trust, is a type of real estate company modeled after mutual funds. REITs were created by Congress in 1960 to give all Americans – not just the affluent – the opportunity to invest in income-producing real estate in a manner similar to how many Americans invest in stocks and bonds through mutual funds. Income-producing real estate refers to land and the improvements on it – such as apartments, offices or hotels. REITs may invest in the properties themselves, generating income through the collection of rent, or they may invest in mortgages or mortgage securities tied to the properties, helping to finance the properties and generating interest income.
REITs allow anyone to invest in portfolios of large-scale properties the same way they invest in other industries – through the purchase of stock. In the same way shareholders benefit by owning stocks in other corporations, the stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy or finance property.
Should you invest in individual REITs?
REITS are exactly like stocks in that there are individual REITs that make investments in particular sectors. For example there are healthcare REITs that only buy properties like hospitals, clinics, healthcare facilities etc etc. There are other REITs that only focus on commercial business properties, etc etc. So the quick answer (if you don’t want to do a lot of work and not have to compete against the market which we advise) is a big NO. Why? Because it’s picking stocks which I’ve been steering you away from this entire time. Instead of investing in individual REITs you can buy the REIT index. One example would be VNQ which sports a hefty yield and more importantly, zero headaches that come along with managing property. Essentially you’ll perform how the general real estate market performs without the hassle of physical property ownership and maintenance.
An emergency fund
There are so many debates out there about emergency funds. How much savings should you have? A month? 3 months? 6 months? Three years? Given how many answers out there it’s clear there is no one answer. But I’ll give the same answer that I always do: whatever makes you sleep at night. One caveat though. I think if you have a month’s worth of savings you’re not being practical or safe. You may have all the confidence in the world that if things got really bad it would only take you a month to get out of a financial jam but that’s just not being smart. I personal think 6 months of expenses is the absolute minimum you should have in this account. I personally prefer to have a couple of year’s worth because you just never know. And another note. Before you start planning on putting away money for an emergency fund, please make sure all your debts are paid off FIRST. One more thing. An emergency fund should be as liquid as possible which means either in a savings account, checking account, or a money market account like Capital One/ING.
Fees do play a part here so they’re definitely worth a mention
I don’t want to get into crazy mathematical scenarios here because you really don’t need to hear about them. You’ve probably gotten them ad nauseum from anything you’ve read and I’m not going to harp on the benefits of investing in vehicles with lower expense ratios. I’ll say this and I’ll let you make your own decision on what you want to do. If you’re paying a firm or fund over 2% of your money to generate a higher return over 20 years than the S&P 500 will get you then you’re taking a very very big gamble given that nearly all firms funds lose out to the S&P 500 over time. When you can pay a paltry .12% to an index fund it’s really no comparison. Depending on how much you’re investing we’re talking savings of multi thousands to potentially millions of dollars in fees. I HIGHLY advise against paying anything more than a 1% expense ratio on anything. Honestly more like .50%. That’s all I have to say about that, period.
Oh and yes, get a Roth IRA.
I’d say good luck but you don’t need luck
Final Words? Seriously. What final words do you really need? Get out there, get out of debt, start saving, invest your money in the simplest way possible (an index fund covering the entire market or S&P 500, keep reinvesting dividends and watch your money grow) and stop trying to over analyze things. Saving, reinvesting, and NOT changing your course for the long term is all you need to worry about. Easier said than done but DO IT.
