If you are doing it right, investing should be very simple.
You’ve just discovered this thing called FIRE… Financial Independence/Retire Early. It’s new, it’s exciting, it’s very promising…
…but you’re scared.
You don’t know anything about investing! Learning about investing and money seems daunting and about as much fun as watching paint dry!
If this describes you, there is hope.
This series aims to help you tackle the fear of investing, move past it, and take action to start your FIRE journey in as little as two weeks!
It’s not difficult, I promise.
[Note: This post is the 5th and final post in the series. If you have not yet read the first four posts… now would be a great time… we’ll wait patiently here… take your time… this is important!]
- In the 1st post (Intro: What Is FIRE?), we discussed what FIRE is and the benefits it brings long before you ever reach your FIRE number.
- In the 2nd post (Step 1: Think), we took time to think about and evaluate your personal relationship to money and to set a few money goals
- In the 3rd post (Step 2: Learn), we learned the quickest, easiest way to get a basic primer on investing
- In the 4th post (Step 3: Track), we learned the importance of tracking your money, your expenses, and your net worth
Now, in this final post, we will get to the most important part… investing.
Without further ado… let’s jump right in…
Step 4: Invest
- Objective: Get your investment journey started
- Time: This step should only take about 30 minutes
THIS IS THE MOST IMPORT STEP. Take Action. All of this means nothing if you don’t do something. Remember: Time in the market is the second most important determinant of long-term financial success. Can you guess the first? No, it’s not how well the market does. It is how much you contribute!
Once you have paid off your high-interest debt, created a sufficient emergency fund, and confirmed that your take-home pay is consistently higher than your expenses, then you are ready to invest.
Follow these steps to set up and automate your investment strategy:
- Go to Vanguard’s ‘How To Buy an ETF‘ Page
- Choose your account type
- For this purpose, I suggest a simple “Individual, General Investing Account”
- Open a brokerage account online
- Takes about 10 minutes and you will need some basic information including your Social Security Number
- Add money to your settlement account
- This is an account at Vanguard that will hold your money until you are ready to invest it; you typically transfer money from your banks checking account to the Vanguard settlement account
- Choose your investment product
- This is the ETF or fund you want to invest in; I suggest VTI (see “What Should I Invest In” below
- Purchase your investment
- Use the funds in your settlement account to purchase a share(s) of the VTI EFT (or whichever product you choose)
- Designate beneficiaries
- If something were to happen to you, this is the person/people who would inherit the money in your account if you don’t have a will or estate plan; if you are married, you might designate your spouse; or your children
- Automate your investment
- Very important! Setup both automatic funding of your settlement account (that is, push money from your bank’s checking account to the Vanguard settlement account) and automatic investment of your settlement money (use the money in the settlement account to purchase shares)
Answer: Because low fees.
Even fees that seem tiny make a huge difference over a long time period. Over a 40-year investing period, a 2% fee can cost you 50% of the value of your investments! After plowing your hard-earned money into your investments, after 40 years would you be happy with $1.5M when you could have had $3.0M if you had clicked the other option?!! Jeremy over at Personal Finance Club has a great illustration of this called “Sin #5: Paying High Fees”
Vanguard wrote the book on low-fee investing
Jack Bogle, the founder and CEO of Vanguard, both invented the index fund and popularized it as an almost fool-proof, low-cost investment method. Yes, you can find other low-cost products on other platforms, for example, Fidelity, but you still have to dig through all their high-cost shit to find the needle in the haystack! With Vanguard, all their products were designed from the ground up to be ultra-low-cost. In other words, you can’t go wrong with Vanguard.
Ultra-low fees are the only thing that matters when you are choosing what to invest in.
- Account type (like IRA, Roth IRA, Brokerage)
- Platform (what company you invest through like Vanguard, Fidelity, Betterment)
- Product class (like ETF’s, index funds, stocks, bonds, equities)
- Product (like VTSAX or VTI)
How Much Should I Invest?
Answer: As much as possible… slowly ramp up your contribution rate until it hurts!
99.9% of you should be able to invest something on a consistent basis. If you really feel that you currently have no gap between your income and your expenses, then start very small. Commit to contributing $10 or $20 per week. For the rest of you, contribute at least 15% (savings rate) and slowly increase the amount at regular intervals. Ideally, you eventually get to a point where you are contributing 20, 30% or more. Before I retired, I was saving close to 60%. But I had made conscious choices to live “a simple life”. You can choose to calculate this based on your total earnings (before tax) or your take-home pay (after tax), whichever you prefer. Remember, the greater your savings rate, the faster you will reach Financial Independence. For additional thoughts, see “Never Invest Money You Can’t Afford to Lose” below.
Put the money into a separate account that you have tagged for investment money, or better yet, put it straight into your settlement account at Vanguard. Set up an automatic contribution on a weekly basis. Tell Vanguard to pull your specified amount from, say, your checking account, into your settlement fund at Vanguard. The Settlement Fund is just a holding account where your money goes before it can be invested. If you do this and enable automatic “sweep” then as soon as you have enough to purchase another share, that will happen automatically.
When Should I Invest?
Answer: Right now and at regular, automated intervals (I suggest weekly)
I suggest you begin investing as soon as possible. Don’t delay getting started because it is not the right time, or you have bills coming up, or the market is high or low. Do it now. Getting started early allows you to take advantage of compounding interest… not only will your contributions grow over time, but you will be earning additional money on your returns. You will want to re-invest your returns as opposed to taking a distribution to receive the money.
What Should I Invest In?
Answer: A low-cost, broad-market, index fund or ETF like Vanguard’s VTI or VTSAX.
Why? Because there are only ever two things you care about when evaluating an investment product. They are:
- Net Expense Ratio – this is the fee you pay for the product; you want one as low as possible; ideally, 0.04% or less
- Broad Market Index – you want to invest in the entire market for diversification, not try to choose which individual companies, which industries or which company sizes or types (Value, Growth, MidCap, SmallCap) will do better in the future. No one can predict the future. Not the best Financial advisor, not Warren Buffet. No one.
All other stats, metrics, and information are pretty much irrelevant. Maybe interesting, but irrelevant to your fund/ETF decision.
Never, ever, ever, ever buy an investment based on performance or returns! Don’t even look at returns or performance! That performance is in the past. It is irrelevant. It is a very poor indicator of the future. Ignore the urge to buy a fund or ETF that is doing well! If it is doing well now, then the odds are you’ve missed the growth. It is statistically more likely to drop in value in the near future than it is to increase in value.
Watch out for Fees at Multiple Levels
Fees come from many sources. They might seem tiny (like 0.6%), but when you add the fees from all the sources and carry them out over decades of investing, you could easily reduce the value of your investments by 50% from fees alone!
Fees can come from your investment platform (the company, website or app you use like Vanguard, Schwab, eTrade, Betterment, Robinhood, etc.) and from the actual product (ticker symbol) you invest in like VTI or VTSAX. If you are investing in a 401k through your employer, then the management company who is hosting (like ADP or Prudential) is also charging a fee. Now you’re up to three fees on top of each other! Yikes!
You’re best chance of long term investing success is (1) Ulta-low-fees and (2) Buying the whole stock market!
This is why I highly recommend VTI (Vanguard Total Stock Market ETF) from Vanguard. This product has an ultra-low Net Expense Ratios and invests in virtually the entire U.S. Stock Market, so it meets the most important criteria.
Ignore individual stocks (like Tesla, Google, Amazon). Ignore commodities, ignore currencies like Cryptocurrency, ignore International stocks, I even ignore bonds. They are the shiny bling that will make your hard-earned cash go up in smoke. If you can’t ignore the lure, then invest a tiny portion (like 5%) of your entire portfolio and go play… get it out of your system. When you’ve lost that money you can thank me. 😉
I am suggesting an ETF rather than a traditional index fund because with ETF’s you can purchase a single share at a time. Most funds have a minimum initial investment of $3,000, $5,000 or even $10,000. If you are just starting out, you don’t want that minimum to be a hurdle. Start with ETF’s and you can always graduate to funds later if you choose. Again, the idea is to get started as soon as possible. A single share of VTI is currently priced at around $150 (at the time of publication). If $150 seems overwhelming, start small by putting $20 per week into your Vanguard settlement account and when you’ve reached $150, you can buy your first share!
Never Invest Money You Can’t Afford to Lose
Don’t invest if you have debt especially high-interest debt like credit cards, consumer loans, store cards, etc. Acceptable exceptions are a primary mortgage, loans for investment properties that are sustainable and maybe an auto loan if you have an extremely low-interest rate and you are not ‘upside down’.
If any of the following are true, do not invest (at this time):
- You have high-interest debt (like credit cards)
- You do not have a significant emergency fund
- You spend more than you earn
Never Time the Market
Do not, ever, ever, ever, not invest or contribute because the market is high or the market is low. Invest often, invest regularly, invest as much as you can and sign up for automatic contributions. If watching market swings gives you anxiety… stop looking at the market!
Never Sell… Until you Retire and Need the Income
If the market crashes, do not sell. That is the worst time to sell. Despite how it feels, you haven’t lost any real money. It is only a loss on paper. If you sell, then you have locked in your loss… that is the worst thing to do! If the market crashes, that is the time to buy more shares (as many as you can) at a discount! Selling shares should be your very last option only if you are forced and have no other options.
If the market booms, do not sell. Keep buying. As you were. Resist the urge to sell high and buy something else that is priced low. See ‘Never Time the Market’ above. You DO NOT want to get in a cycle of trying to sell high and buy low. That is a loser’s game! Do not do it!
If the market does nothing, do not sell. If you’re buying your first home, or your car dies, or you have a new baby, do not sell. This money is for your retirement, not to get you through life’s challenges. That is what your Emergency Fund is for.
Back in the day, we called it ‘Buy and Hold’. The most successful investor is the investor who is either dead or forgot they had the account… because they didn’t muck around changing strategies, buying and selling, timing the market, etc.
Investing as a Foreigner
Non-US citizens… you are NOT off the hook!
Even if you are not a US citizen you can still invest in many US-based stocks including Vanguard funds. For foreign (non-US) investors, check out Vanguard’s Global Portal. Another low-cost broker option for international individual investors is Interactive Brokers. They offer the VTI ETF, you can sign up for a free trial, their costs are low and, for “IBKR Lite” customers, they offer commission-free U.S. exchange-listed ETF’s, a minimum balance of $0 and no maintenance fees. Or, contact a local brokerage to find out which low-cost, broad-market, index funds and ETF’s may be available to you… whether they are Vanguard products or not.
Almost all of the FI resources are written by Americans, for Americans so they discuss US-based products. Of course, if you wanted, you could invest in similar non-US products. And if you don’t know what an ETF or a brokerage is, see Step 2: Learn. 😉
For more detailed information on investing as a foreigner, JL Collins has an excellent post (as part of his famous Stock Series) titled, “Stocks – Part XVII: What if you can’t buy VTSAX? Or Even Vanguard?”
Additional Notes on Investing:
- I don’t want to downplay the importance of debt elimination, getting your spending under control or saving an emergency fund, however, these are significant topics in their own right. For resources on these important topics, please see the Summary of FI Resources at the bottom of this post
- For simplicity, I have ignored the age-old question of How to Prioritize your Contribution Dollars. Here we are discussing a simple brokerage account, but if you have a workplace 401(k) plan available to you, then that is the best place to start. Another type of investment account that should take precedence over funding a brokerage is an IRA or Roth IRA account. If after funding both a 401(k) and a Roth/IRA you have money left to invest, then a brokerage is a good choice. If you have neither a 401(k) or Roth/IRA available, fund a brokerage account.
- Continue Reading this blog series with the next post titled, Start Your FIRE Journey – The 10 Stages of Financial Independence
Summary of FI Resources:
- Think: Your Money or Your Life, Vicki Robin
- Invest: Vanguard
- Debt: How to Get Out of Debt, Get Rich Slowly
- Budgeting/Spending/Emergency Fund:
- Podcasts & Blogs:
There you have it… Financial Independence: 4 Steps to Start Your FIRE Journey.
Now you have all the tools you need to get started investing.
In less than two weeks, you could be on your journey to Financial Independence… an hour to contemplate your relationship with money, a few days to read “The Simple Path to Wealth”, a week or two to track your expenses, and less than an hour to set up your taxable brokerage account.
Questions, Comments, Feedback…
- Leave your questions and comments in the Comments section
- I am not an expert or a financial advisor but I’ve made enough mistakes over my decades of investing to know the basics of what to do and what not to do
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- Getting Started Investing
- Financial Independence
- Retire Early, or
- Living Abroad
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Thanks for reading. If you haven’t already done so, commit to an investment strategy today! And please reach out if you need any help.
P.S.: I have no affiliation with Personal Capital or Vanguard and do not make money from this referral; I am just another long-time, happy customer.