Investing

Investing can be overwhelming and confusing. The truth is that it is neither and this article will show you just how simple investing can be…

“Money can buy many things, but nothing more valuable than your freedom…Stop thinking about what your money can buy. Start thinking about what your money can earn.”  –  “The Simple Path to Wealth: Your roadmap to financial independence and a rich, free life” by JL Collins

I just finished reading The Simple Path to Wealth by JL Collins after it was recommended by a number of other bloggers such as Mr. Money Mustache, Four Pillar Freedom, The Power of Thrift, and J. Money over at Budgets Are Sexy.

JL Collins (who also just happens to live in New Hampshire!) was first published in 2016 but is one of those books I wish had been published years ago. The Simple Path to Wealth outlines not only a clear outline for investing but also a thorough rationale for this simple approach.

First Step…Avoid Debt At All Costs!

JL has a number of hard-hitting and poignant lines from his book – some of which I will include below for more context. Quite frankly, he gets to the point much clearer and succinctly in the passages below and his book than I ever could!

The first step to investing and growing your wealth is to avoid debt at all costs! Here’s the simple formula: Spend less than you earn—invest the surplus—avoid debt”

Now, some may take issue on this point considering the fact that many people have debt in the form of a mortgage. I am not suggesting that you hold off investing in the stock market until you have your mortgage paid off. Instead, here is where I suggest following the 7 Baby Steps by Dave Ramsey.

Second Step…It Is Time To Do Some Investing!

In the spirit of the book, I will also keep this analysis of the book simple and straightforward. In short, JL Collins advocates investing in one simple broad-based index fund from Vanguard known as VTSAX. VTSAX is the Vanguard Total Stock Market Index Fund Admiral Shares. JL writes…“Put all your eggs in one basket and forget about it. The great irony of investing is that the more you watch and fiddle with your holdings the less well you are likely to do.”

It is worth noting that there are a couple of comparable exchange-traded funds that will perform almost exactly the same way. Here are some of the most common: VTI, ITOT, SCHB. Depending on where you do you investing each one might make more sense than the other. For example, VTI is a Vanguard Fund, ITOT is a iShares Fund (Ideal for Fidelity customers) and SCHB is a Charles Schwab Fund. So, if for example, you are a Fidelity customer you should probably go with ITOT because it is $0 to trade. One important thing to note is that just because you are a Fidelity customer (using this example) you are still able to purchase VTI and SCHB but Fidelity charges a one-time trading fee which also holds true for both Schwab and Vanguard.

Another option in place of a fund like VTSAX or ETFs like VTI, ITOT, and SCHB is to invest in the S&P 500. The S&P 500 makes up approximately 80% of the broad-based funds mentioned above. You can't go wrong either way. It may be worth going with an S&P 500 fund.

Why One Simple Fund?

It’s fairly simple. Here is JL in his own words…

I wanted to simplify

I wanted to be lazier

I wanted extremely low fees

I wanted to own everything and be completely diversified all at the same time

Said another way:

“Simple is good”

‘Simple is easier”

“Simple is more profitable”

“Avoid the trap of complexity”

An important statistic to keep in mind for those that embrace this one simple approach is that it will outperform 82% of actively engaged investors.

But What About International Diversification?

JL points out three important reasons to ignore going into additional international funds.

1. Added risk brought on by currency risk
2. Added expense in that internationals funds are – for the most part – twice as expensive as total stock market funds  
3. It’s already covered in that many of the 3,000 plus stocks contained within VTSAX (as well as the other ETF equivalents mentioned above) have operations and/or do business overseas. In fact, the largest 500 companies in the World that are held within the S&P 500. I have previously written about the four top reasons to invest in the S&P 500. One additional important point to make is that the S&P 500 consists of approximately 80% of the total stock market index funds such as VTSAX, VTI, ITOT, and SCHB. As you may have already guessed – the majority of these 500 companies have some level of international exposure. 

Do You Need A Financial Advisor?

In short, no! Thanks to technology it has never been easier or cheaper to invest in low cost broadly diversified index funds and exchange-traded funds. JL Writes…

“Be wary of anyone who makes their living making money managing your money. There is far more money in recommending complex investments, not simple low-cost ones. Advisors are not drawn to the best investments but those that give them the largest commission. You not only lose the money by giving a commission but the future opportunity that money could have compounded to work for you. Avoid annuities and whole life insurance. Advisors are only as good as the investments they recommend.  Since those are mostly actively managed funds as opposed to the passive low-cost index funds how often do those outperform? Very rarely! About 20% outperform in any given year and looking at a 30 year period that drops to less than 1%. So, you can learn to pick your advisor or learn to pick your investments. The latter is cheaper and will prove to be more beneficial. No one will care more about your money more than you.”

A Word On Dollar Cost Averaging

Dollar cost averaging is just a fancy way of investing over a period of time in small increments. It’s important to note that if you invest in a 401K or any other pre-tax retirement account each time you are paid you are using dollar cost averaging. The Simple Path To Wealth points out that statistically, the market goes up 77% of the time. Therefore, by engaging in dollar cost averaging outside of traditional individual retirement account investing where you have no other choice but to wait until you have the money and or are paid for your work you would be actively engaging in market timing which is a loser's game.

Final Thoughts

It can be easy to forget just how lucky we are for even having the opportunity to read this article on a computer, phone or tablet online. One of the sites that is mentioned in The Simple Path To Wealth can be found at the Global Rich List. I recommend taking a few minutes to visit this site by inputting your individual income and wealth levels. You might be surprised to see where you fall!

If you are interested in reading more I encourage you to visit JL Collins website. In particular, the stock series.  Another helpful article is “Outperform 99% of Your Neighbors”  

 

A reminder about the importance of diversification. This chart shows how the different major asset classes can yield a new and different return on investment each year. Once again, as the saying goes…the only free lunch when it comes to investing is diversification.

As someone who is just starting out blogging, I think it is important to highlight the personal finance bloggers that I look forward to reading as soon as they post new content!

In no particular order here are my favorite personal finance bloggers…

Sam over at Financial Samurai is a great writer who writes primarily about investing and wealth building. Sam is able to make the highly complex simple for the average reader interested in how best to build long-term wealth. Hint: Make sure you sign up for his email newsletter. There are topics and articles that he writes about that don’t get placed on the website.

Ben Carlson over at A Wealth Of Common Sense is similar to Sam in that his writing style makes it easy to understand what quite often aren’t fundamental personal finance topics. As good as the content on the blog is I would say his weekly Animal Spirits Podcast that he hosts with Michael Batnick is even better!

Andrew and Tom host the Listen Money Matters Podcast together where you can not only learn about some new beers you can try out but also various topics pertaining to personal finance. The content layout and design of Listen Money Matters is well worth a look!  

Mike Piper over at Oblivious Investor was the first personal finance blogger I discovered. Mike’s Made Simple series of books is a wonderful series showcasing the most important topics of personal finance in a digestible format that readers can easily understand.

Grant over at Millennial Money has done an amazing job putting together a number of resources for his readers. His Podcast covers a new topic in 5 minutes or less! Remember…simplicity is essential!    

The Penny Hoarder is an absolute machine when it comes to putting out new content. They have a wealth of content that covers a number of personal finance topics. The content is generally short and easy to quickly read.

Pete is Mr. Money Mustache and came onto the scene with his first post all the way back on April 6, 2011. Mr. Money Mustache writes incredibly well and has an in-depth style in his writing for readers looking for lengthy writing descriptions. For example, one of my favorite posts is “The Practical Benefits of Outrageous Optimism” is one of those posts that really makes you think and I find it especially beneficial for those with a high analytical way of thinking.

Zach over at Four Pillar Freedom does a great job putting out new great content on a consistent basis! While you are there check out his brand new monthly spending app!

If I get to meet all of these bloggers at FinCon18 in Orlando in September I would be thrilled! If not, at least I know I will get the chance to meet a number of other great bloggers from the Rockstar Finance community!

Who are your favorite personal finance bloggers? Leave a comment below or feel free to contact me with any others I should have mentioned here!

 

I recently came across the 2014 Fidelity study which showed that the people who were the best investors were the ones that completely forgot that they had an account. Knowing this – we can be our own worst enemies when it comes to investing for the future. It is human instinct to believe that we can invest in a better way or are smarter than everyone else…

Here is the bitter truth…it is impossible to know what the stock market will do in the next minute, the next hour, the next day or the next week! In fact, pick any future time period. It is impossible!

So why would you invest in anything on the stock market that is anything other than the 500 largest companies in the United States? In fact, just by owning these 500 largest companies in the United States you would also – by extension – have exposure to the rest of the World given the fact that the majority of these companies do a significant amount of business overseas.

So, why bother with an expensive money manager, financial advisor, and the expensive products that come with them? It’s because despite you now knowing it’s impossible to predict the future you still believe that you can…

So say it 3 times out loud…I can’t beat the market…I can’t beat the market…I can’t beat the market!  

Why The S&P 500?

In the great book by Burton Malkiel “A Random Walk Down Wall Street” he writes, “Stock investors can do no better than simply buying and holding an index fund that owns a portfolio consisting of all the stocks in the market.” The S&P 500 represents the 500 largest and most profitable companies in the U.S. These 500 companies make up anywhere between 78% – 80% of the total U.S. stock market. There are certainly other viable potential portfolios you can select but there is something to be said for simplicity. 

As someone who believes in the power of technology and the impact that fintech startups can have on personal finance, it can be easy to make things complicated. Instead, I try to always make sure that whatever effort I am putting forward in new technology that serves a specific purpose. The S&P 500 is as simple, straightforward and as easy as it gets!

• Warren Buffett proved it works and wants his loved ones to do the same!
• It is close to the cheapest option to own with the largest S&P 500 exchange traded funds carrying very low expense ratios.
• Diversification – The S&P 500 contains companies from all of the major sectors of the economy.
• I am a long-term investor which has its benefits vs. being a short-term investor.

If you watch the following great talk by JLCollins at Google and fast forward to the 45:50 mark you will see just why the S&P500 is a great option. By the way, VTSAX which JLCollins also recommends and invests in is also a good solution for certain investors.

How Did I Figure Out Which S&P 500 Fund Was Best For Me?

The 3 top ETFs according to Investopedia are SPY, IVV, and VOO. I took a screenshot of these 3 using the Fidelity compare tool where I am an investor. IVV is offered free to trade and is tied for the lowest expense ratio at 0.04% with VOO. So for me…IVV was the choice! It's important to note that VOO is commission free if you are a Vanguard customer buying it through Vanguard's website. The chart below is a Fidelity chart. Therefore, it only shows IVV as commission free. Thank you to sa_node on Reddit for pointing out this important distinction and fact. Investing does not need to be complicated!

The blog Monevator recently shared the following video which helps to clarify the point of this article.

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