Simplifying Investing - Actionables
Now that you’ve learned all about accounts and holdings, we need to discuss how to actually get your dollars working for you. This article will cover how to invest for long term success while keeping things simple.
Open the account
The first step to starting investing is to actually open your account. If you’re employed, and your employer offers a 401k match, contact your HR department to take advantage of this immediately. They can usually instruct you on how to defer a % of your paychecks toward your 401k and show you where to select your holdings. We recommend selecting a low-cost index fund or a target date retirement index fund.
If you’re opening a Roth IRA or a brokerage account, we recommend going to one of the big holding companies like Vanguard or Fidelity. These brokers have easy to use websites that will walk you through opening different types of accounts.
Automation
We recommend investing frequently, usually bi-weekly or monthly, without worrying about the share cost at the time. Just set a recurring automatic draft to invest once or twice per month.
This automatically has you practicing what is called dollar-cost-averaging. This means that you are always buying into the market at whatever price a stock or fund is at. There are some interesting studies on dollar-cost-averaging vs lump-sum investing, and dollar-cost-averaging is not only the simpler path, it is almost always the best path mathematically.
Automating your deposits also helps to ensure that the investments are made and takes the decision-making out of the equation.
*pro-tip: make sure to select the option to reinvest dividends when setting up your account and recurring investments.
Buy and hold
Buy and hold is the concept of buying funds, but not selling. People trying to make quick money in the stock market will buy shares at what they perceive as a low price with the intent of selling them as soon as the stock price goes up. For most people, this is a great way to lose money because prices of individual stocks are very complex and can be quite volatile. We recommend buying with the intent of owning until retirement. You’ll never “lose” money because you aren’t selling. You don’t need to be concerned with market volatility when investing for the long haul.
Set it and forget it
Set it and forget it. You do not need to check your accounts regularly to see how they’re doing. You really only need to check these accounts once or twice per year, when updating your net worth statement (more on this in a future article).
Because we aren’t going to be dollar-cost-averaging we don’t need to be concerned about share prices. Because we’re practicing buy and hold, we don’t need to be concerned about market volatility in the short term.
If you already have an employer sponsored retirement plan like a 401k, you have probably already been practicing these things. Your employer automatically takes the money out of your pay check on a regular basis. That money is being invested at whatever frequency you are paid. And your account is growing in the background, usually without you putting much thought toward it. You can do this with other investment accounts like a Roth IRA, HSA, or brokerage account as well!
How much to invest
There is a wide range of advice on the topic of how much money you should be investing for the future. Those in the FIRE (Financial Independence, Retire Early) community recommend upwards of 50% of one’s income for retirement. They are on the fast-track to retirement, often sacrificing today for freedom tomorrow. Some of the old-school advice from the days of pensions and when Social Security was all but guaranteed would advise a much lower investment rate of just 10%. Since most people don’t have pensions and we don’t know what will happen with Social Security in the future, many financial advisors and pundits today recommend between 15 and 25% investment rates, and we feel this is a good target for most people.
There are some simple formulas you can use to determine how much you should invest, but there are some big unknowns that make it difficult to be completely accurate. Our advice is to work toward investing 15 – 25% of your gross income. If this feels like a stretch, start at the lower end and work your way toward the 25% mark as you increase your debt or grow your income over the years.
We hope you found this article insightful. Thank you for reading.