"Mad Dogs" by Jack Vattriano
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FYI: The Managing Investments Can Be Easy post was originally created for people nearing or in retirement, so it's light on the basics of money management and investing, while still being very valuable for younger investors. |
Remember: The Step-by-Step Suggestions are meant to be digested over the course of a year, one month at a time. If you feel like you could use more information, here it is. And if you have questions, please post them in the comments below, and I'll answer them. |
Input received: "Your approach implies investing is very simple, but most financial advice I read implies that investing is complex. That sets your approach apart from many others I’ve seen."
Response: There are at least three reasons that financial advice can seem complicated.
Input received: "I understand your approach overall and it makes sense. But after reading it a few times I am confused by a single re-occurring point: I often don’t know what you want the reader to do because you sometimes make a statement with no defined suggestion, leaving the reader unsure of your ultimate point."
Response: If you work through the monthly step-by-step suggestions provided, what you should (or shouldn't) do will become more and more obvious each month. There are no action items related to anything except list making until Month 9. With that said, there are more specific recommendations below. Just remember, I'm not trying to live your best life, I'm trying to live my best life. So don't be afraid to adjust my recommendations to meet your needs.
Additional Recommendations
Month 1: Create a Simple List (additional recommendations)
Create your list in a spreadsheet if you're comfortable with spreadsheets. Otherwise, record the info somewhere else, like on paper or in an online document. I tried not to be specific about tools, because I'm not familiar with many of the new apps younger people use to track their finances.
Month 2: Add More Info to Your List (additional recommendations)
Pay close attention to the example provided. To complete this task, you'll probably need to log into your accounts and figure out which info to pull. Hopefully, the example will help you find your way around. If not, contact me, and I'll try to help you over the phone.
Month 4: Analyze Your Allocations (additional recommendations)
When I think back on my own investing in the early years, I paid no attention to this. It's not a big deal at the beginning. I think the most important thing is to pay off debt and save (i.e. live beneath your means which means spending less than you make). If the topic of allocations scares you, forget about it for now. Or, Google it. e.g. Here's what I get when I Google it.
Response: There are at least three reasons that financial advice can seem complicated.
- Financial advisors usually try to sell their services. They can make a lot of money, by convincing you that investing needs to be complicated. With that said, there are "fee only" Financial Advisors who charge a flat hourly rate, regardless of the value of your portfolio, and they can be a great resource if you'd like a second opinion about your plans. We use "fee only" advisors on occasion because having a professional answer our questions or just tell us our plans are sound helps us feel more confident about them.
- When people become enthused about any topic, they're often eager to share everything they know with others. When you take in too much info too fast, about any topic, it can seem more complicated than it is. Because many people don't start learning about investing when they're children, they need to start out learning about it as adults and need to move slowly at the start.
- Like most topics, investing can become as complicated or as simple as you make it. I've known people who have spent >$1,000 on a coffee maker and others who think that hiking is an expensive sport. Some people just love to make simple things complicated. AND ... there are complicated ways to invest; many people even seem to think that complicating investing will produce better results. The great thing about investing is that it usually works better when you keep it simple.
Input received: "I understand your approach overall and it makes sense. But after reading it a few times I am confused by a single re-occurring point: I often don’t know what you want the reader to do because you sometimes make a statement with no defined suggestion, leaving the reader unsure of your ultimate point."
Response: If you work through the monthly step-by-step suggestions provided, what you should (or shouldn't) do will become more and more obvious each month. There are no action items related to anything except list making until Month 9. With that said, there are more specific recommendations below. Just remember, I'm not trying to live your best life, I'm trying to live my best life. So don't be afraid to adjust my recommendations to meet your needs.
Additional Recommendations
Month 1: Create a Simple List (additional recommendations)
Create your list in a spreadsheet if you're comfortable with spreadsheets. Otherwise, record the info somewhere else, like on paper or in an online document. I tried not to be specific about tools, because I'm not familiar with many of the new apps younger people use to track their finances.
Month 2: Add More Info to Your List (additional recommendations)
Pay close attention to the example provided. To complete this task, you'll probably need to log into your accounts and figure out which info to pull. Hopefully, the example will help you find your way around. If not, contact me, and I'll try to help you over the phone.
Month 4: Analyze Your Allocations (additional recommendations)
When I think back on my own investing in the early years, I paid no attention to this. It's not a big deal at the beginning. I think the most important thing is to pay off debt and save (i.e. live beneath your means which means spending less than you make). If the topic of allocations scares you, forget about it for now. Or, Google it. e.g. Here's what I get when I Google it.
Month 10: Adjust Your Allocations, if needed
If I were a young investor, here's how I'd allocate my investments (i.e. stocks and bonds):
I'd keep my cash relatively low because it's always coming in. Since I'm cautious, I'd probably keep 6 months of living expenses in the highest rate CD or money market fund I could find. If I had a partner, I'd recognize that that chance of both people losing jobs at the same time is low, so the volume of cash needed is less. I always advise couples to work the same number of hours per week (within reason), but that's a whole 'nuther blog post: see Working Parent Stories: Compensation & Opportunity (especially The Real Cost of Part Time Employment).
Keeping cash in a checking account for convenience is a necessity for me, and Venmo is now a necessity for me too. There are all kinds of new fangled ways young people manage cash that are likely valid, but unfamiliar to me.
Target Date Funds can be helpful if you're still nervous. They cost more than low-cost funds, but aren't as much as paying someone 1% of your portfolio. I think.
If I were a young investor, here's how I'd allocate my investments (i.e. stocks and bonds):
- 67% in an S&P 500 (stock) Index Fund
- 13% in an International Stock Fund
- 20% in a US Bond Index Fund
I'd keep my cash relatively low because it's always coming in. Since I'm cautious, I'd probably keep 6 months of living expenses in the highest rate CD or money market fund I could find. If I had a partner, I'd recognize that that chance of both people losing jobs at the same time is low, so the volume of cash needed is less. I always advise couples to work the same number of hours per week (within reason), but that's a whole 'nuther blog post: see Working Parent Stories: Compensation & Opportunity (especially The Real Cost of Part Time Employment).
Keeping cash in a checking account for convenience is a necessity for me, and Venmo is now a necessity for me too. There are all kinds of new fangled ways young people manage cash that are likely valid, but unfamiliar to me.
Target Date Funds can be helpful if you're still nervous. They cost more than low-cost funds, but aren't as much as paying someone 1% of your portfolio. I think.
Month 5: Analyze Your Stock Holdings (additional recommendations)
There are only two reasons I can think of to buy an individual stock:
There are only two reasons I can think of to buy an individual stock:
- If someone gave me some stock for free as an incentive to buy more. e.g. An employer's stock purchase program.
- If I bought it for entertainment. e.g. It's fun to own stock for a company you want to learn more about. I own Tesla. Trust me when I say it's been a roller coaster ride, and I'm still kicking myself for not selling when it was up by 45% at the end of me owning it for four weeks. Thankfully, Jim convinced me to buy less than I suggested.
In Conclusion
Personally, I learn by doing. When it comes to investing, the more attention you pay to your investments, the better you'll probably do with them. Getting started is the hardest part, so that's why I documented the Step-by-Step Suggestions. I knew next to nothing about investing until I was 30 and then learned very slowly. At 62, I'm financially content, so don't worry that you're behind. Just get started. I'm 100% sure we didn't manage our investments well early on, but we did save and invest, even if we didn't do it perfectly. That's key.
Money saved and invested when you're young pays huge dividends when you retire because of the concept of "compounding"*. Never plan to "catch up" later. That's hard. Start out by developing sound money management skills and they'll pay off, and improve, for the rest of your life.
* Please watch the first 90 seconds of this video!
Here are things that worked great for us. Maybe you'll like some of these ideas too.
Personally, I learn by doing. When it comes to investing, the more attention you pay to your investments, the better you'll probably do with them. Getting started is the hardest part, so that's why I documented the Step-by-Step Suggestions. I knew next to nothing about investing until I was 30 and then learned very slowly. At 62, I'm financially content, so don't worry that you're behind. Just get started. I'm 100% sure we didn't manage our investments well early on, but we did save and invest, even if we didn't do it perfectly. That's key.
Money saved and invested when you're young pays huge dividends when you retire because of the concept of "compounding"*. Never plan to "catch up" later. That's hard. Start out by developing sound money management skills and they'll pay off, and improve, for the rest of your life.
* Please watch the first 90 seconds of this video!
Here are things that worked great for us. Maybe you'll like some of these ideas too.
- Learn to live off a little less money than you make. Then, each time you get a raise, increase your spending by a fraction of the raise. e.g. If your raise results in an extra $100/month, only let yourself spend $50/month more and invest the rest. It's a win-win.
- If you get a bonus, invest all or most of it. We did this because we feared that neither of us were going to keep our "good" jobs to retirement age, and we didn't want to move to chase income. In the end, we were able to keep those jobs and use the extra investment money to retire early (ages 54 and 55) and increase our standard of living in retirement, compared to when we were working.
- While these strategies have worked well for us, it would have been the wrong strategy if we'd have been run over by a bus at age 50. That's the thing about saving and investing, you never really know what the future holds.
- In the end, you have to pick a scenario and plan for it. (We'd also planned to purchase a vacation home as we neared retirement, so had that money set aside. As of today, one of us thinks this is a bad idea and one of us still thinks it would be fun. For now, the funds are in reserve :)
The Cost of Paying a Financial Advisor 1% of the Value of Your Investment Portfolio (starting at age 30)
Assumptions:
-- Starting salary $50K/year at age 24 (and you work until age 65)
-- Annual salary increases: 3%
-- 401(k) contributions: 10% of your salary/year
-- Company match for 401(k): 2%
-- Stock market return rate: 8%/year
-- Financial Advisor hired at age: 30
COST = $560,000
Value of Investments at age 65 if you pay 1% to a Financial Advisor: $2.065M
Value of Investments at age 65 if you do NOT pay 1% to a Financial Advisor: $2.625M
Assumptions:
-- Starting salary $50K/year at age 24 (and you work until age 65)
-- Annual salary increases: 3%
-- 401(k) contributions: 10% of your salary/year
-- Company match for 401(k): 2%
-- Stock market return rate: 8%/year
-- Financial Advisor hired at age: 30
COST = $560,000
Value of Investments at age 65 if you pay 1% to a Financial Advisor: $2.065M
Value of Investments at age 65 if you do NOT pay 1% to a Financial Advisor: $2.625M