I’m no investing genius though I used to think of investing as a hobby of mine. I read prospectuses (boring documents mutual fund companies prepare) and researched companies to invest in. I purchased individual stocks and was giddy when they went up and sad when they went down.
I bought Costco before it was Costco (remember Price Club?) and I bought Exxon before oil got really expensive. I sold Costco before it was Costco . . . at a loss. I watched Exxon go up and now down. Oh and don’t ask me about Good Times Burgers or Boston Chicken.
I’m reading a fabulous book by Jim Collins right now, The Simple Path to Wealth. You can get it on Amazon – it’s a quick and interesting read. He states it really well – if you aren’t Warren Buffet (a successful investor and one of the world’s richest people), you have no business investing in individual stocks. I wish I’d heard this advice in my twenties, I would have saved time, angst and money.
The less time I spend researching and worrying about investments, the better my returns are.
I didn’t need individual stocks or complicated investments (what is a bitcoin anyway???) in order to achieve financial independence. I only needed low cost index funds.
Vanguard funds are the best because Vanguard is owned by its customers. This ownership structure aligns Vanguard’s interest with mine. Vanguard doesn’t want to make any money and I want my fund expenses to be as low as possible. Fidelity and Charles Schwab are also good and I’ve used them in the past.
Almost 60% of my non-cash, invested assets are in index funds or exchange traded funds that act like index funds. I would move my other investments to index funds if I could do it without paying taxes on my gains.
Here’s Jim’s advice on investing. He recommends one bank account, one Vanguard bond index fund and one Vanguard stock index fund. What could be easier than that? The percent invested in each depends upon your time horizon and comfort with risk.
Before you invest, I suggest you also read his post “The Market Always Goes Up”. Only you know yourself–if you are going to sell your investments when they go down, you are going to lock in your losses and are likely to miss the gains that will come when the market goes back up.
Your best plan is to set it and forget it – invest the money and don’t touch it other than to rebalance annually back to your target percentages for each fund.
Compounding earnings is magical.
When you invest, you earn money on what you invested plus you earn money on the money you earned on what you invested. This is called compound interest or earnings.
I recently looked at how much money I put into each of my accounts compared to the current balances (because this is what geeks do when they retire). As an example, I rolled over my 401(k) from a job I had in the 90’s to an IRA. I worked there six years and put in about $30,000, my employer matched my contributions with about $7,000 (free money!!). So $37,000 went in and the balance at the end of last year was $191,000. I made over $150,000 doing nothing!
We’ve already established that I’m not an investing genius. Anyone could have had this same result–my average annual increase was 8.4%. The average S&P 500 return for this time period was 9.1%.
Here’s one of my favorite quotes, it comes from getrichslowly.com:
“If saving is the key to wealth, then time is the hand that turns the key to unlock the door. There is no reliable method to quick riches. There are, however, proven methods to get rich slowly. If you are patient, and if you are disciplined, you can produce a golden nest egg that will hatch later in life.”
Investing can be simple–you’ve already done the difficult part by saving.
I welcome your comments and suggestions.