Can You Outperform the Market?

Can You Outperform the Market?

One company seems to think so…

98% of active managers can’t outperform the market. Perhaps you’ve heard this.

I’ve always told clients not to try and outperform the market because they will almost always end up failing.

But my thinking was challenged.

A few colleagues and I attended the Foundations Conference in Austin, TX in June 2018 to learn about how this company has been trying to outperform the market for 30+ years.

From their website:

“Dimensional Investing is about implementing the great ideas in finance for our clients. We aim to beat the market, not outguess it.”

I’m not recommending Dimensional Fund Advisors. I simply want to present a few things I learned. This post won’t appeal to a majority of my readers but I if you’re in finance or have thought you could outperform the market, it may be applicable.

What is Dimensional Fund Advisors?

Their focus is the wisdom of academics over the experience of active fund managers. The DFA philosophy boils down to using academically sound research to consistently outperform the market. Here are a few things I picked up on while I was there that makes them different.

Value Stocks

1. History shows that some riskier stocks — those of small companies and those considered undervalued — produce higher returns on average over time than other types of stocks. 

“But on average doesn’t mean every year,” says David Booth, CEO of Dimensional.

DFA employs what’s considered value-based investing. You have two types of stocks. Growth stocks (overvalued in price) and value stocks (undervalued in price). DFA screens out many growth stocks and underweights them so they have more exposure to value stocks that are underpriced.

Small-Cap Stocks

2. They also overweight small-cap stocks. A small-cap stock is a company with a market capitalization (shares outstanding x price per share) of less than $1 billion.

Small-cap stocks are riskier and because of that, you would expect to earn a higher rate of return by investing in small-cap stocks over a long period of time and underweighting large-cap and mid-cap stocks.

Momentum

3. Dimensional employs what they call momentum. When they see momentum in the market they take advantage of it, even on a daily basis. If they see movement in certain sectors of the market they will buy and sell to profit from the momentum.

DFA illustrated how they make small trades on a daily basis instead of one big trade every quarter which is what most index and mutual funds do.

High Profitability

4. The other dimension that they try to focus on is finding high profitability stocks. Companies that are generating a lot of cash will potentially have a higher return versus accompany that may be slowing down in their earnings.

When you combine all of these factors to your investments, theoretically what should be able to outperform the market. If you’re investing in value stocks, buying a good price, finding the momentum, and focusing on high-profitability, based on history you should have a higher return than the market.

Index Investing on Steroids

They preach active management can’t outperform the market. They say they’re not active managers, but they are.

We went to dinner one night with Dimensional Fund Advisors and I asked them, “with all of your research and scientific strategies, how do you keep yourself from becoming active investors?” They said, “David Booth, DFA CEO considers them active managers.”

Anytime you deviate from passively investing in a market index by definition you are an active investor.

Conclusion

Learning about DFA’s investing approach challenged my thinking. But I’m not sure I 100% buy into it. Their fees are still a little too high and at the end of the day, it’s really hard to consistently outperform the market.

They have received some heat for the past few years because they haven’t been able to outperform the market here in the U.S. But they’re sticking with their philosophy and only time will tell if they can deliver what they preach in the future.

Investing Mistakes I Made with a Roth IRA

Investing Mistakes I Made with a Roth IRA

I’ve made plenty of investing mistakes. Were you told investing was important when you were younger but didn’t have the slightest clue how to do it?

I know I did.

When I was a teenager, I wanted to get started but had no idea how. This led to many investing mistakes that I’m sharing with you below.

I picked bad investments

I started by putting money in a CD, buying silver coins, or letting it build up in my savings account.

Turns out, these weren’t the best investments and I wish I could have started with something different.

Waited too long

I would love to go back to when I first started making money at 12 and open a Roth IRA. 

Roth IRAs are powerful and I didn’t realize how powerful until the age of 22. 

That’s when I decided to start one. 

I was banking with USAA and I spoke with a financial representative. I told him I would like to open a Roth IRA which required a minimum of $500 to fund and an automatic monthly contribution of at least $50.

Took someone else’s advice

I decided to go ahead with it. Trusting what the guy on the phone said, not really knowing what I was doing, I was just glad I had started one. 

I diligently maxed out my Roth IRA of $5,500 for a few years (2019 you can contribute $6,000) but I had no idea what I was invested in. 

Didn’t know what I was invested in 

Being aggressive was important to me because I was young. I went with the most aggressive 100% equity fund (so I thought), which was called the USAA Cornerstone Aggressive Retail (UCGAX).

It was made up of large-cap and blended funds and has a Morningstar rating of below average

I tracked my returns over those few years and wanted to understand how it all worked but it somehow always ended up being quite a bit lower than benchmarks such as the S&P 500 or Russell 2000.

At least I got started and was putting money into it every month, right? 

Didn’t pay attention to fees

However, I started learning about fees and the impact they can have on a portfolio over an investing lifetime. I dug into the fine print and figured out how much I was paying in fees. It was something we didn’t discuss on the phone, I just took his word for it.

Turns out I had a hard time finding out how much I was paying in fees and so I called and spoke to someone else on the phone about a year later. 

Bought actively managed funds

I discovered I was invested entirely in an actively managed mutual fund and I was paying 1.2% in fees!

These are high fees and I didn’t even have access to a financial advisor. And the fees could have been even higher when you factor in trading costs, cash drag, etc. 

The person on the phone told me, “don’t worry so much about fees because what you’re paying for is someone to actively manage your investment instead of just letting it sit in some boring old index fund.” I thought, “what’s an index fund?”

Here’s what’s funny, I actually believed him. I thought, “of course, if you pay more in fees you’re going to get a higher rate of return, right?” Turns out most of the time that’s false. 

Left too much in cash

When I first started transferring money from my bank account to my Roth IRA, I was making the mistake of thinking that was all I had to do. After some time, I realized the cash I transferred was sitting in a money market account which is basically the same thing as a savings account. I didn’t realize I had to actually go in and invest the funds myself. 

When I started deploying the cash, I thought I was in a 100% equity fund. But their most aggressive option was between 70% – 80% equities and 20% – 30% fixed income. This money was going to be invested for 40 years and I was sitting on nearly 30% bonds in my early twenties!

Compared my results with benchmarks

Comparing my results was one of the investing mistakes because it caused unnecessary stress. But in the end, it was good because I compared my return against the S&P 500 and was underperforming quite a bit ( I should say A LOT). I didn’t get it because it was “actively managed.”

During my first year, my investment earned 5.65% gross of fees. So my net return was 4.45%.  That same year the market as a whole earned a rate of return of 21.31%!

Only one year did the fund perform better than the market because it lost less money. 

What changed?

For those that aren’t sure of what a Roth IRA is and why you would want to open one, I will share a few things. If you already know the benefits of a Roth IRA go ahead and skip to the next section. 

A Roth IRA is simply a retirement savings account that anyone with earned income can start. “Roth” is the last name of the person who came up with the idea and “IRA” stands for “Individual Retirement Account.” 

The money you deposit has already been taxed. So when you go to withdraw the funds at age 59½ or for qualifying reasons before age 59½, you don’t have to pay taxes on what you withdraw. 

How are you taxed?

Imagine you’re a wheat farmer. You plant seeds and harvest the wheat. Would you rather pay taxes on the seed or the harvest? Your decision is solely based on whether you think taxes will be more in the future. You’ll pay tax on the seed now if you think taxes will be higher in the future or pay taxes on the harvest if you think taxes will be lower in the future.

I’m a big fan of the Roth IRA, especially if you’re young, even if your employer offers a 401(k). You should definitely take advantage of the match if it’s available.

However, if you also open a Roth IRA, instead of contributing more to your 401(k) above and beyond the employer match, you could put that extra money in a Roth IRA. Why would you want to do that?

Can you access the funds?

You can take money out of a Roth IRA anytime you want. You may withdraw your contributions penalty-free at any time for any reason, but you’ll be penalized for withdrawing any investment earnings before age 59 ½, unless it’s for a qualifying reason such as purchasing a house or education.

Age 60 may sound like an eternity and who knows what’s going to happen between now and then. Wouldn’t it be nice to be able to access your funds if you really needed them?

I wouldn’t take money out but isn’t it nice to have options? If you have all of your money tied up in a Traditional IRA or 401(k), the only way you can access any funds before age 59 ½ is paying a 10% penalty or taking out a loan against it. 

Jumped on the Vanguard bandwagon

After learning about fees, asset allocation, and risk tolerance, I sought out the best investment for myself. I stuck with USAA for a few months and decided to start looking at Exchange Traded Funds (ETFs).

Fees are lower, I could have my target asset allocation, and they’re more tax efficient. But even the funds I was finding had an expense ratio of ~0.30%. So after exhausting my options, I decided to jump ship and transferred my Roth IRA to Vanguard

Vanguard was started by a man named John Bogle in 1975 with the goal of bringing to the individual investor the option to invest in broad-based low-cost index funds. And as the name implies the company has been a vanguard in the financial services industry. Their average net expense ratio is 0.10% (U.S. asset-weighted fund expenses as a percentage of 2018 average net assets).

Their core purpose is, “To take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.”

I’m a big fan of Vanguard and when you combine it with the benefits of a Roth IRA, the chances of investment success start to look really nice. 

I invested the majority of my funds in the US stock market with a little exposure to the rest of the world. Now I wake up every morning knowing every person in America goes to work to make me rich. By owning the entire stock market, I own a small share of every publicly traded company in the U.S.

So I ended up investing in ETFs such as the Vanguard Total Stock Market Index Fund ETF (VTI) which had an expense ratio of 0.04% and is now 0.03% and the Vanguard Total World Fund ETF (VT) which has an expense ratio of 0.09% (Average expense ratio of similar funds is 1.11%).

Here’s what would have happened if I wouldn’t have fixed my errors. 

If I maxed out my Roth IRA every year for 40 years while it was invested in UCGAX my expected return would be about 4.8% after fees. This would hypothetically leave me with $632,850 when I retire. Not Bad.

But, because I no longer hold bonds, my expected return currently is 9.97% (10% expected VTI return  – 0.03% expense ratio). I would expect to have $2,414,490 by the time I retire! 

The same amount of money was invested in both cases but the returns, asset allocation and fees are way different. 

I can’t say this will be 100% accurate but this is no small number guys! It’s worth it to learn about investing and make sure you don’t make the same investing mistakes I did.

Conclusion

I made a lot of mistakes: 

  • I waited too long
  • I made bad investments
  • I took someone else’s word for it
  • I didn’t know what I was invested in 
  • I didn’t pay attention to fees
  • I left too much in cash
  • I bought actively managed funds
  • I constantly measured my results

You don’t have to make the same investing mistakes that I did. Take the investing mistakes I’ve made and learn vicariously through me so you can get started. It’s never too late to get started. And it’s never too late to change things. 

If you’d like to get a better grip on your finances and avoid making investing mistakes, sign up for my Free 7-Day Transform Your Finances email course here.

Disclaimer:

This information has been presented as general education purposes. I am not an investment advisor and have not taken your specific situation into account so please don’t take any of the information presented today as investment advice. Consult with an investment professional if you’d like to learn more about investing for your future. 

5 Tips for Investing in IPOs

5 Tips for Investing in IPOs

Last week was a busy week as far as new companies going public. 

What is an Initial Public Offering (IPO)?

When a privately held company starts selling stock to outside investors, making it a public company.

As small companies start to gain traction, they may need outside financing to continue growing, and decide to go public.

It can be a long and complicated process transitioning from a private to a public company. To name a few reasons: the company now has investors that can vote on the direction of the business, it’s now regulated by the Securities and Exchanges Commission (SEC) and has to follow more strict accounting procedures under Generally Accepted Accounting Principles (GAAP) . 

So what does this mean for individual investors like you and I?

This means that investments in companies which had previously been unavailable are now able to be purchased. But is it smart to invest in IPOs? We’ll get to that in a minute. 

Which companies have recently gone public? 

Snap – I wanted to highlight Snap first because I know a lot of millennials who thought this was going to be the best investment ever. You know, the company behind SnapChat? On the first day, in March 2017, it jumped from $20 to $30 and everyone wanted in on it. But since then the stock price has consistently fallen to a price of now $11.48 as of writing. That means you would have now lost 61% of your investment if you bought snap on the first day and still owned it.

Spotify – Spotify is another example of a company going public that hasn’t worked out too well. They have lost nearly 17% since going public last year in April 2018. 

Lyft – Lyft just recently went public on March 29th, 2019 and is another example of why investing in IPOs can be really risky. Lyft started selling at a price of $87.24 and it’s now at $59.39. That’s a 32% loss if you had invested money on the first day. It’s still too early to tell what will happen to the price of Lyft, but I’m predicting the price will continue to go down because is all Uber has to do is set their price lower and everyone will start flocking to Uber. 

Uber – Uber has not officially became a public company yet but it’s right around the corner. Analysts are predicting the share price to be lower than Lyft’s but may be the biggest one of 2019.

Pinterest – Pinterest went public last week and I’m sure you’ve heard of them. Their share price was listed on the New York Stock Exchange on April 18th at $23.75 and has gone up 3%. It’s still too early to tell what it will do.

Zoom – Lastly, Zoom is a video conferencing platform that also went public last week and saw some growth on the first day. Both Pinterest and Zoom went public on Thursday and since Friday was a holiday have only had one day of trading. This week should be interesting to see what happens. 

Should you invest in IPOs?

Though IPOs can be good for the companies behind them, they’re not always great for investors — especially the inexperienced kind. 

I’m not going to say that IPOs are always a bad investment, especially if it’s a company that you know, like and trust. 

But I have to give a word of caution and say most of the time they’re just too risky and you’re better of investing in index funds.

I’m going to give you five things to consider when it comes to investing in IPOs.

5 Things to Consider

1. Don’t just follow the crowd

Going back to our Snap example, this is a good example of avoiding the herd mentality. Just because everyone is buying the stock does not make it a good investment. 

2. Avoid them for the most part

Investing in individual stocks requires a lot of work and may not yield the best results. No one really knows what the share price of a company is going to do after an IPO and you’re safer avoiding them all together. 

3. Pay attention to the financials

If you are going to invest in an IPO make sure to do your research and don’t just do it because it’s a cool company and your friends are doing it. Read over the prospectus which you can find on the SEC’s website. You should be able to explain your reasoning if you do buy a new company’s stock.  

4. Be ready to lose money

Be ready to lose the money that you invest in an IPO. If you can’t afford to lose it then you shouldn’t consider investing in new companies. You’d be better off keeping the money in savings or paying off debt. 

5. Consider investing in index funds

It’s hard predicting when to buy a new company’s shares and what’s even harder is knowing when to sell. Because of the added and unnecessary stress, it’s best to stick to a strategy that will allow you to sleep better at night and will most likely be more successful in the long run.

And that’s investing in thousands of companies at once. Take the S&P 500 for example. This is a benchmark made up of the 500 biggest US companies based on market capitalization. So if a new company has a market cap big enough to be in the top 500, one of the companies falls off and the new company is added in. So if you own a similar index fund you may be investing in the new company just with less exposure allowing you to avoid unsystematic risk. 

You have a lot to consider when investing in IPOs and nobody likes FOMO. Do your homework and decide if investing in individual stocks aligns with your goals. 

Should I Be Worried About the Market Volatility?

Should I Be Worried About the Market Volatility?

Unless you’ve been living under a rock, you’ve probably heard about the ups and downs in the stock market that’s been going on the past couple of months.

Should you be worried about it?

It’s a hard question to answer but today I’m going to try and dispel some common beliefs and help you understand that it doesn’t matter. In only a few circumstances should you be worried. 

What is market volatility?

Volatility is the opposite of stable, it means there is a lot of change taking place. Almost all assets see volatility at some point in time. From real estate to bonds, commodities to the stock market. Volatility is the most famous in the stock market. 

These day-to-day and sometimes month-to-month fluctuations in the market are normal occurrences. 

If you have an investing strategy, the ups and downs of the market should not phase you. It shouldn’t even be worth bringing it up in conversations because you have the confidence that if you stick with your plan for the long run, you’re going to be better off.

Investors get hurt when they start trying to time the market. 

“It’s not about timing the market that matters, it’s about time in the market.”

Some people may be successful in predicting market changes but it’s very unlikely because they have to be right twice. When they sell and when they buy. 

This is nothing new. Market corrections are as predictable as the rising of the sun. 

Warren Buffett once said that as an investor, it is wise to be “Fearful when others are greedy and greedy when others are fearful.”

So why all of the ups and downs?

Volatility can start to creep in when investors start to feel uncertain about the future when it comes to things like interest rate risks, trade wars, company leadership changes, political changes, etc. Each of these are going to happen at different points in time. Sometimes they can seem a little scarier than other times. 

How does it affect young people?

If you’re young, the markets dropping could be the best thing for you. You may have just started investing some savings and you’re worried because it seems to keep dropping.

The reason that this could be a good thing if you’re young is that you are buying stocks at a discount. For example, if you just put money in an investment and you see it drop 3% it may hurt because it appears 3% of your money is now gone. But if you’re putting money into an investment every month, the next month, the same investment is now 3% cheaper. One successful approach many young people take is investing a set number, for example, $150 a month, no matter what, even if the markets are up or down. This takes the stress out of it because you’re sticking to a long-term plan. 

How does it affect old people?

If you’re old, the markets dropping could be the worst thing for you. The reason most financial advisors suggest that people approaching retirement start transitioning their investments into a more conservative investment with bonds is because bonds are less risky. You’re less likely to have your money grow fast but you also won’t lose money as fast if you just invested in 100% stocks.

A stock market crash could be devastating for someone getting close to retirement because they don’t have time to recover and the money they currently have saved for retirement won’t be able to sustain their living expenses. This is exactly what happened in 2008 when the market crashed. A lot of older people had to keep working because they lost such a large percentage of their portfolio. 

Why you shouldn’t care

The bottom line: Such reactions (or overreactions) are not unusual. Day-to-day market volatility is part of the normal market cycle. Not getting caught up in the day to day churning of the market is actually one of the best things you can do as an investor. 

Despite such big occasional falls, stocks historically have risen significantly over the long run. So your best bet is to stick with them and give your portfolio a chance to recover.

This is not specific investment advice. I have not assessed your personal situation. Please consult with your financial advisor for specific recommendations. 

Should I Set Up a 529 College Savings Plan for My Child?

Should I Set Up a 529 College Savings Plan for My Child?

It was early on a Tuesday morning. June 21st. My birthday.

My wife had a gift for me and told me I had to open it before I went to work. I told her it’s ok, I’ll just open it with the other gifts after I get home from work. She looked at me and said, “no Scott, open this gift now!” So I said ok. As I opened the gift it appeared to be a gym shirt inside but as I pulled it out it was a long sleeve shirt for a little baby.

This was how my wife let me know last year that she was pregnant!

I was so excited but completely freaked out at the same time. 

When I found out my wife was pregnant, I decided I was going to work an extra 3 hours a week until my son was born so I could put money towards his future education. By the time he was born, we had about $1,200 saved up. 

I opened an investment account with Wealthsimple and the funds were invested in a low-cost index fund. I wanted to keep it in an account where I could access the money because I didn’t know if my son was going to want to go to college. What if he says no to college and just wants to be an entrepreneur? I didn’t want all my money tied up in a 529 college savings because I had heard once you put the money in you can’t take it out unless it’s for that child’s qualified higher education expenses.

This is probably the biggest reason most parents don’t start a college fund for their kids. Because the future is unpredictable. 

The Benefits of a Tax-Advantaged 529 College Savings Plan

As I started looking deeper into the benefits of a 529 College Savings Plan a few months ago, I realized it’s an excellent option for parents to save for their child’s education. So I decided to create an account and transfer the funds, here’s why:

  • The money that you contribute grows tax-free. So you can contribute money to the fund before you pay taxes on it. 
  • When you use those funds to pay for qualified higher education expenses you can withdraw all funds tax-free. Higher education expenses include things like tuition, books and supplies, room and board, and even things like a laptop computer.
  • You get double tax savings!
  • Most plans allow you to ‘set it and forget it’ with automatic investments that link to your bank account or payroll deduction plans.
  • 529 plans have no income limits, age limits or annual contribution limits.

How Can I Predict the Future?

What if your kid doesn’t want to go to college? This is a perfectly normal concern for a lot of parents. Here are a few options:

  • Transfer the money to another child. Any funds that go unused for your first kid can be used for the next child
  • You could transfer those funds to another relative. Even a grandkid in the far-out future
  • You could use the funds for yourself if you ever decided to continue your education
  • Lastly, (this is the one that changed my mind) if you decide not to use the funds for education you can withdraw your original contributions at any time for any reason. But, if you withdraw investment gains then you would be subject to a 10% penalty. For example, if I contribute $5,000 and it grows to $7,000 over 18 years, I can withdraw the $5,000 for any reason that I want but the $2,000 I would have to pay a penalty on. 

How To Apply: 

Look into what your state has to offer but keep in mind that you’re not just limited to your state. 

I did some research into the best state tax-advantaged 529 college savings plans and learned that my home state has one of the best in the country with the lowest fees. Even though I live in Texas now I decided to open up mine through the state of Utah. 

One of the other reasons I decided to open up a 529 plan through my home state is I discovered that the funds can be invested in a Vanguard low-cost index fund. So for me, tax advantages and super low costs of investments makes it worth it for me and my kids financial future. 

Have you decided to start a 529 plan for your child’s future? Why or why not?

I Don’t Know How to Invest and I’m Scared I’ll Make a Mistake

I Don’t Know How to Invest and I’m Scared I’ll Make a Mistake

If you’re just starting out, investing can be frightening and intimidating.

One of the intake survey questions I ask when I meet with someone is, “have you ever calculated or spoke with someone about retirement?” Nearly 90% of the people I meet with say no. Retirement has never really crossed their mind especially when it seems so far away. After sitting with them and discussing the benefits of investing I can see their physiology change when they see how simple it is to start. 

When I say retirement I don’t mean stop working, stare at a wall and die. I mean, is your stash of money large enough that you will be able to live off the interest, forever. This will allow you to quit your 9 – 5 job, get off the hamster wheel and do the things that you are passionate about. The ultimate goal when investing should not be to save until you’re 65 and then start enjoying life — but to get there as soon as you can. This is Financial Independence. You no longer live paycheck to paycheck. You no longer have a boss telling to stay until 6:00 pm. You live life on your own terms not worrying about money. 

Planning for the future can be a daunting, unfamiliar and boring path. There are so many paths, so many so-called experts and a lot of ways to screw things up. Most know they will eventually start investing but they get stuck in analysis paralysis. The path of least resistance is to do nothing. They keep telling themselves that they will get started one day, later to find themselves in a situation where they wish they would have started earlier. I am yet to meet someone that hasn’t said they wish they would have started earlier after they found out how simple it is. 

70% of Americans fear running out of money in retirement more than death itself. Humans have a 100% mortality rate but whether or not your money lasts is a concern. The earlier you get started the better off you will be due to compound interest. 

It is my goal, no matter what stage of life you’re in, to get started. I want to simplify investing so you can start today instead of waiting for “someday.” If I can make investing simple, you have a much better shot at getting started.

Financial Independence is defined as 25x your annual expenses. If you spend $40,000 a year, once you reach $1 million in investments, you can comfortably spend $40,000 a year with a safe withdrawal rate of 4%. 

When I ask someone, “How much do you need to fund your dreams?” I get numbers all over the place. $100 million, $1 billion, $10 million. They’re actually surprised when they find out they don’t need that much. After your debts are paid off you really don’t need to spend that much money each year.

So before we get into the nuts and bolts I want to share with you a few retirement myths. As a disclaimer, this article is not about real estate investing. This article is aimed at everyone who’s staring at their 401k or Roth IRA in confusion, wondering what the heck they’re supposed to be doing. Unfortunately, most of us don’t learn about investing in school.

7 Retirement Myths

1. You need a lot of money to get started. You may think you need $1,000 or $10,000 to get started investing. This not true. You can get started with as little as $1.00. Before you start, I recommend you do three things first. Have a budget, have some sort of “Oh crap” money in the bank, and all of your high-interest debt paid off. Once you have done those three things, you can start slowly easing your way into an investment until you become more and more comfortable with the idea. Leaving your money in a savings account actually depletes due to inflation. The earlier you get your dollars working for you the better. 

2. You’re too young to get started. Are you kidding me? You are never too young to get started. The best time to get started was yesterday. If you’re younger than 30, there is no reason you couldn’t become a millionaire in your lifetime. That is not to say if you’re older than 30 you can’t as well. It’s also never too late to get started. 

Someone who invests $25,000 by age 25, with a 12% rate of return, will have more than $2 million by age 65—even if he or she doesn’t add another dollar after age 25. Conversely, if that same person waits until age 30, he or she will have to contribute more than three times as much to achieve the same outcome. The lesson? Compound interest is the best way to grow your money over the long haul—so start while you’re young.

3. You need to know a lot about stock picking. If you think investing is only for the experts who have fancy software, charts and insider information, you’re wrong. These experts might be able to perform decently picking stocks, but you and I both don’t have the time to scrutinize every company’s financials in order to make a decision whether or not to invest. I typically am a DIY kind of guy and I do have some money that I like to play around with picking individual stocks but when it comes to my main source of investing I use online tools created by reputable companies that have made investing simpler. It takes the emotions out of investing. I set it and leave it. Which has been more successful than stock picking and will continue to perform better. If stock picking was the answer I would tell you to learn how. But it’s not the answer. I’ll explain why.

4. Investing is too risky. Not investing is even riskier. When your bank pays you 0.00000025% in interest and inflation is 2% you are losing purchasing power over a long period of time. $100 today will not buy you $100 worth of goods in the future. Take more risk while you’re young, but not any more than you have to.

You may be thinking, “What if I put a bunch of my hard-earned money into an investment and we have another recession?” This is a legit concern seeing how at the time of this post the markets are the highest they’ve ever been. But if the market does crash while you’re young and you keep funneling money into it, you are buying investments at a discount and this will be the best thing to ever happen for you long term. Don’t get caught up in timing the market. No one can predict what’s going to happen. There will be ups and downs but if you leave your money invested for the long haul you will be way better off.  Even throughout the great recession of 2008, the market has averaged a rate of return of 12% annually. 

5. Fees are a small price to pay. Nothing will erode your investment account faster than fees. You may think, “Oh it’s only 1.5% in fees. That’s so tiny I’m not going to notice.” But when you consider the compounding effect of fees, a 1% difference in fees could mean a triple-digit difference over a 30 year period. It could be the difference between $250k and $1 million. 

6. You need to pay an active investment manager. Investing, simply put feels too complicated for the majority of Americans. They prefer not to have to worry about it and would rather pay someone else to do it for them. Many successful hedge fund managers are able to outperform the market in the short term, but most of them don’t outperform the market as a whole in the long term (over a 10 year period).  And if they do, you won’t be able to afford to work with them.

When you pay an active investor to invest your money, you are paying them a fee to buy and sell stocks based on their knowledge and research. Each time they make a trade they charge a commission. Anyone that tells you they can outperform the market, or knows who the next Amazon is or has the most sophisticated software for stock picking — run. Most people will trust their hard-earned money to a guy down the street instead of doing what works. Don’t listen to them.

Maybe you’re not concerned about beating the market per say, you just want your money to safely grow. You can do this with low-cost index funds and not have to pay huge amounts of fees. Not only will the guy down the street never beat the market, but fees will also eat away at your investments and you could be missing out on a ton of money. You don’t need to pay someone to actively manage your money. It is better to align yourself with the market through broad-based low fee index funds.

“It’s not about timing the market, it’s about time in the market.”

7. You can only retire at age 65. Why is it that most people work 40 to 50 years and then wait until they’re 65 in order to stop working and finally start “enjoying” life. Even worse, 60% of retirees don’t have enough money to last them 30 years after they retire. They spend their entire lives chasing a big pile of money, only to find out that a large chunk of it is gone to fees and taxes. When they go to retire they stop working, and when people stop working they tend to die. It always makes me sad to hear about someone that is not able to retire because they didn’t prepare in advance and they have to rely on the help of loved ones financially.

Why not reach Financial Independence in your 30’s, 40’s or 50’s? Why wait until the end of your life after living paycheck to paycheck? How you can create an income that will last forever? It’s called perpetuity. When your investments get to a certain point, lets say $850,000 growing 8% annually, you can comfortably withdraw 4-6% annually. That’s $34,000 – $51,000 and the principle will never lose its value. You can live off of it forever. This is the point when you no longer have to work for money because your money is working harder than you. Some people might ask, won’t you get bored not working? Reaching financial independence will allow you to focus on the things that you enjoy. Most people who reach financial independence find a way to do things they love and may end up making money in the process. 

6 Savings Strategies

1. Pay Yourself First. Nothing will allow you to save more money to invest than paying yourself first. Most people I meet with pay themselves last. They save money after they pay the government, the landlord, the credit card company and the person behind the latte counter. You will not save consistently if you try and save what’s left after you spend. 

2. Savings rate. In order to invest successfully and build up a sizable perpetual money making machine, it comes down to savings rate. How much of your income are you saving? according to a Yahoo Finance article published today the average saving rate in America is at a 10 year low. 2.4%.  How are going to get anywhere saving 2.4 pennies of every dollar? If you can start early and find a way to save 30 – 50% of your income, you’re going to be leaps and bounds ahead of your peers. Too many people are looking for the next get rich quick thing. You will not get rich by winning the lottery or picking one stock. You get there by consistently saving a percentage of your income every time it hits your bank account over many years. It’s better to get rich slowly. If you want to reach financial independence, increase your savings rate—it’s that simple.

According to the ASPPA, the largest indicator of retiring with wealth is not your financial philosophy; it’s not your suit-n-tie, slick-talking broker; it’s not even your rate of return—the primary indicator of having money when you retire is your savings rate. That’s right: putting money away—starting today—is the best route to financial freedom during retirement.

3. Round-ups. This is one tactic that proves to be successful for a lot of people because it takes the behavior out of trying to invest. A round-up is when a percentage of your purchase is automatically rounded up to the nearest whole dollar and invested. For example. let’s say you buy your favorite Jamba Juice and it costs you $3.50. An investing app is going to round that to $4.00 and invest the other $0.50 in an index fund. Most people are pleasantly surprised to see their account after a little amount of time. My favorite app for round-ups is Acorns

4. Employer Contributions. If you work for an employer with a retirement plan that matches a percentage of your contributions, you better find a way to get the full match! If you don’t, you’re leaving free money on the table. The most common 401(k) employer matching contribution is 50 cents for each dollar the employee contributes, up to 6 percent of their pay. 

5. Max out accounts. I mentioned the 401(k) but there are other retirement vehicles. The four most common are a Traditional 401(k), Roth 401(k), Traditional IRA, and a Roth IRA. Don’t get confused with the names of these accounts. 401(k) simply comes from a section of the tax code and that is where it gets its name. IRA simply stands for Individual Retirement Account. Roth simply is the last name of the person who invented the concept. If you work for an employer full time you will most likely qualify for a 401(k). In 2018 you are allowed to contribute $18,500 per year not including employer matching. An IRA is what you would open if you don’t have a 401(k) available. The amount you’re allowed to contribute to an IRA in 2018 is $5,500.

The two most common accounts you will see are a Traditional 401(k) which simply means that you are putting money into this account taxed-deferred, meaning you don’t have to pay taxes on it until you go to pull the money out of it at age 59.5 (don’t ask me why its half a year). The other most common vehicle is a Roth IRA. Roth meaning you’re putting money in that you’ve already paid taxes on. Therefore you can pull out your contributions tax and penalty free anytime you want. You just can’t pull out any gains without paying taxes on them. Whichever investment account you have, make it a goal to find a way to max it out each year. 

Think of the Roth IRA and the 401(k) as two buckets. They in and of themselves are not investments. It’s what you put in those buckets that will determine how you invest your money. You can put mutual funds into your buckets which are simply a mixture of stocks and bonds or you could put in index funds which are simply a mixture of stocks that mimic one part of the market like Technology, or Financial Services, or the market as a whole. If you want to get the most bang for your buck, I would go with low-cost index funds or ETFs that mimic the market. For example, if you were to purchase a Vanguard index fund which mimics the entire US stock market, you are buying a percentage of every company in America. You now own a small percentage of each public company. You can find investments with an expense ratio of 0.04%. Significantly less than what some actively managed mutual funds charge of anywhere from 1 – 3%. As you saw above, fees have a huge impact on your investments. When you buy an index fund that tracks the entire US stock market you can think of everyone in America waking up early to go to work to make you rich. If you are broadly diversified as the US economy grows so do your investments. 

6. Online Investment Tools. How do you get started? I will share with you some of the most common ways to start putting your money to work. Online investment tools are changing the way the next generations invests. You no longer need to find someone on Wall Street with a fancy office and a big cigar to start investing. You can start here. 

Vanguard seems to be one of the most common places to start. Jack Bogle, the founder of Vanguard first introduced the concept of index funds nearly 30 years ago. Since then the company has grown to over $2 Trillion (yes that’s a T), under management. Two other companies that I am a fan of are Charles Schwab and Fidelity who can provide some of the same services and options at a low cost as well. 

If you’re younger and you’re looking to get started with a small amount of money you might look into other apps that have a simple easy to use interface, educational content directed toward millennials, and a simple way to automate your investing. 

Betterment is one that has gained a lot of popularity recently because of how simple it is to get started. The fees are low and changing your portfolio based on your risk tolerance is easy.

Acorns has really caught on with the millennial generation. This app was one of the first to introduce the idea of Round-ups. Started by a father and his son to try and get younger people to start investing earlier. You can get started with $1.00 and it’s free if you’re a college student and then just $1.00 a month after that until you reach a balance of $5,000 then they charge 0.25%. The nice thing about Acorns is you can select your risk level and they invest your money in a Vanguard index fund based on how much risk you want to take. Stocks are riskier. Bonds are less risky.

Stockpile is new and up and coming. Not a lot of people know about this one but you can actually buy fractional shares of companies. For example, if you would like to own a share of Amazon but it is worth $1,299.32 and you can’t afford to pay for the entire stock you can purchase 5 or 10% of it. You can also set up a custodial account for kids that are under 18 if you would like to help them get started investing at a young age and they want to buy a little bit of Disney. Individual stocks aren’t the only thing you can buy. You can also buy index funds. You pay $0.99 each time you make a trade which is way less than what other companies will charge you of $6.95+. 

Robinhood is 100% free and one of my personal favorites. I like to have fun with this by trading stocks. About 10% of my investable money is in individual stocks that I believe in. The nice thing about Robinhood is you pay absolutely zero fees of any kind. You can buy and sell as much as you want and you never have to pay anything for it. You can also buy index funds at no cost. The Investor Junkie, who has a huge audience, recently said that after 30 years of being with TD Ameritrade has decided to switch over to Robinhood simply because of the fees. Like mentioned earlier the most successful way of investing over the long run is low-cost index funds. But if you want to have a little fun buying individual stocks of companies you like I would recommend using no more than 10% of your investable assets. 

There other apps that are similar out there of which I am a little less familiar such as Wealthfront, Wealthsimple and others that may be worth checking into. 

6 Watch Outs

1. Cryptocurrencies. This is the hot topic of 2018. It is the wild wild west of investing. Cryptocurrencies such as Bitcoin, Ethereum, Litecoin, Ripple, etc. are digital currencies that exist on the blockchain. I am a big fan of blockchain technology and it will do for the entire world and the financial services. You may have heard of people who have made millions of dollars with Bitcoin. I would not invest in cryptocurrencies because all it is is pure speculation. However, if you are in a comfortable position and can stomach the risk, have a little fun. Don’t overextend yourself and be aware that you could lose all of your money in one hour. I would not speculate more than 10% of what you have to invest. Put in $100 or so so you don’t suffer from the pains of FOMO. Don’t invest, but have some fun.

If you’re broke and don’t have enough money to even get started in index funds and you’re hoping to strike it big, do NOT invest in cryptocurrencies. The most common and widely used place to buy cryptocurrencies is with Coinbase. As of three days ago, Robinhood announced it will begin offering a wide range of cyrptocurrencies with zero fees. Again, I can’t stress this enough, if you haven’t created a budget, paid off any high-interest debt, started an emergency fund and started a personal retirement account, don’t put your money into cryptocurrencies. 

2. Annuities. Many people can get great value out of annuities or else they wouldn’t exist. But too often are they loaded with fees and you would be better off investing your money in other places. Annuities can have a bad rap because they often benefit the person selling them more than the person they are for. Be careful with these. 

3. Whole Life or Cash Value Life Insurance. Again, these exist because some people find value and its something that works for them. But, simply because of fees you’re usually better off investing in the market. Whole Life Insurance can provide a lot of peace of mind for some people but don’t forget what you are using it for, life insurance. To provide the means necessary for someone in the event of your death. Paying for term insurance and investing the difference statistically speaking will benefit you more in the long run. You may know some people who own whole life insurance policies and may feel like you’re missing out. They’re only very common because financial salesman love to sell these. They’re able to make a lot of money. 

4. Individual Stocks. It’s ok if you want to purchase individual stocks (it’s what one of the most successful investors Warren Buffett does). But, do so understanding the increased risks. If you have all of your eggs in one basket because you KNOW they’re going to be the next Apple and other’s swear it’s going to be the best thing since sliced bread, I’d be careful. Because if the company doesn’t perform, well now you’re in a pickle.

5. CDs. Certificates of Depression, I mean Deposit. These typically don’t pay enough in interest to beat inflation and you should just simply avoid them (things could change in the future). 

6. Commodities. Gold, silver and other commodities are worth watching out for. You may believe that a zombie apocalypse is coming and that an Electromagnetic Pulse is going to wipe out the entire internet. I’m not saying it couldn’t happen but the chances are unlikely. I once had someone tell me that the only thing they would invest in is water. That it’s the only constant that will be worth more than money when things get bad. At the same time, he has missed out on one of the best bull markets in history. If you bought $17 worth of silver 10 years ago, guess what, it’s still worth $17 today. I would watch out for these. Silver and gold to tend to be countercyclical with the market. So if the market is doing really bad, you may benefit by hedging your portfolio with commodities.  

Invest in yourself. 3 tips to get started

1. Educate yourself. Nothing will bring greater ROI (Return on Investment) than taking the time to educate yourself on investing and personal finance. Warren Buffett told a 25-year old that he would give up all of his wealth if he could trade places with the young man. There is so much to learn and ultimately it comes down to doing what works for you. 

2. Automate everything. David Bach in his book, “Automatic Millionaire” says, “if you simply automate your investing over a 30 year period you are virtually guaranteed to become a millionaire.” When you automate you take the behavior out of it. If you never looked at your investments your entire life and you kept socking money away when you go to retire and finally look at your investments you better have a cardiologist next to you because you are going to have a heart attack. 

3. Tune out the noise. Avoid bad news and people shouting buy this and sell that! All it is is noise and will get you nowhere. There are plenty of experts on the CNN telling you which stocks to buy that will make you rich. But no one is talking about the most successful way of investing. Slow, boring, set it and leave it investing. Get rich slowly and tune out the news. Have patience and work hard and you will be glad you did. 

Conclusion: Best financial advice

There is no single best way to invest. This article is not advice on how to invest because I have not considered your personal situation, it is simply a roadmap to help you work towards financial independence and a secure financial future. 

If you take away only one thing from this article, I hope it’s this: start today. Don’t let your crastination turn pro.

I hope that after you have read this you will have some clarity and direction that will allow you to act. I wish you the best of luck on your journey!

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