I recently got off of a long talk with my friend Katie Riley. We talked a long time about how easy (but scary) it is to fly anywhere for free, how to get a cheap masters degree (it involves an extended stay in Europe) and the set it and forget it way to invest in real estate. Afterwards it got me thinking, and I decided to skip a few steps and just tell you about the set it and forget it way to invest in stocks.
So a bit more of a pre-amble.
- This is about investing. You and I can not time the market. We can not win trying to buy low and sell high. This will crush us every time. We are looking for long term gains (at least 5 years out and more likely 10 years out).
- There is another crash coming. The market will tank again. We know this. If you’re going to invest, you have to be comfortable with this, knowing that the market always has recovered and soared to even higher heights. This is the nature of stocks.
- You need to do your own investing. Advisers don’t work for you. They work for their company. This means their interest and your interest are not always aligned. If you do get an adviser, they should be a fiduciary. Most of that is too complicated for us. Besides most advisers do not out perform the market over time, which means if you just do what the market does, overtime you will outproduce most advisers-hence you don’t need them.
- You need to use Vanguard. Hands down they have the lowest fees for investing. Low fees means you have more money in your accounts, due to the magic of compound interest adds up to a lot of money over time.
To invest you only need four tools.
- VTSAX- this is Vangaurd’s Total Stock Market Fund. This is probably the most powerful tool in your passive income portfolio. Because stocks are so powerful this will give you the most bang for your buck with the least amount of risk. the big thing to remember, of course, is that we are investing. That means looking for long term gains through the magic of compounding. there will certainly be crashes and bubbles bursting, but over time this will give us the strongest return on our investment.
- VBMFX- So, say you don’t want to invest all your money in one fund, despite that fact that the larger the fund the more security we have. Or say you simply want to smooth out the ride that stocks can be, then you’re going to want bonds. In fact, some studies show that a 10-25% allocation of bonds (can’t believe I just said that, I sound like one of those investment people now) actually outperforms an all stock portfolio, but only slightly. If you just want the stability that bonds produce, and the added bump in income then you’ll want to invest 10% of your portfolio in Vangaurd’s Total Bond Market Fund.
- VTIBX (Vangaurd’s Total International Bond Fund) and VTIAX (Vangaurd’s Total International Stock Fund). If you want to invest internationally, well all you need is VTSAX! Yes, it is the US fund, but most US companies are international companies, which is part of what makes VTSAX so stable, as far as investing goes. Think about it companies like Google and Apple have HUGE international markets. However, if you just want to increase added security look at Vangaurds Total International Stock Market Fund Ex-US. if You’d like to add security to this security you can add Vangaurd’s Total International Bond Market Fund.
The major downside of these international funds, to my view, are the increased amount of money spent on fees. The US based VTSAX has an expense ratio currently of 0.04%. The international stock fund VTIAX has an expense ratio of 0.11%. nearly triple. However these small expenses mean a lot of money is because compound interest. However, it’s still a LOT better than most other companies. This is also why you want Vanguard funds, they are by far the cheapest. Other companies can charge you up to 1% in expenses. This is enormous! But they know most people don’t understand compound interest and and terrified of investing good thing you’re not one of those people anymore.
That’s it. This is the simple path to wealth. It will take time. Investing even a small amount and letting it grow will have exponential effects on your retirement accounts. Investing 50 or more of your income every year will allow you to become financially independent in 16 years or less.
Jordan Harris just passed his PhD defense and is waiting for conferral in august of 2017 (YAY). He is a Licensed Marriage and Family Therapist and a Licensed Professional Counselor. He has over 5 years of experience counseling individuals, couples, and families from a wide diversity of backgrounds. He sees clients both in his office and consults online. You can contact him at 318-238-0586 with him online or connect with him through email at email@example.com or follow him on twitter @changeencounter. Also, he is not your financial adviser and information provided should be used at your discretion