There’s a lot to learn about investing. It’s also a very tough area to get experience in since experience means having money and putting it on the line in the form of an investment. There’s the stock market, 401ks, Roth IRAs many other confusing terms which can muddy the waters, when all you want to do is grow the money you’re earning.
This series aims to be a guide for how to navigate those terms and give experience without the risk of failure. Over the next few weeks, I’ll be going over a bunch of topics, including:
- Choosing An Account Type 401k, Roth IRA, Brokerage, etc.
- Asset Allocation within this account, what do you invest in, and why?
- Keeping Costs and Fees in Mind and making sure you’re overpaying.
- Monitoring and Tracking your Portfolio
- How Much Do you Need to accomplish your goal?
- Rebalancing a Portfolio and when you should change tactics.
Some of these will be based on very widely held beliefs, and others will be my strong personal opinion on the subject. Much of these posts will be expanding on specific areas from my Investment Literacy post, which touches on some of these topics at a high level. In this series, we’ll go deep into each.
For today though, we’ll start easy — why are you investing? Knowing this will help influence many of the later decisions.
Why Are You Writing About This?
I am not a financial expert, a tax expert, or a fiduciary. I’m someone who has been investing my own money for the last 12 years or so since I graduated college and got my first job.
That same year, my mom passed away. In addition to the house I grew up in, she left me roughly $100,000. As a 24-year-old, I did my best to learn fast and not squander the opportunity that she left me. Over the next decade, I would build off of that by selling the house I grew up in, constantly saving, and being lucky enough to work at Code School when we were acquired by Pluralsight, resulting in an additional windfall.
The road to getting great financial advice, especially from people who could potentially be making money off of me, was rocky, and I made a number of missteps. In the same way that people rarely talk about times they’ve been scammed, people rarely talk about times financial advisors took advantage of them. I’ll be diving into some times I feel that I was taken advantage of as well.
Through these experiences, reading many books on investing, using financial advisors, day trading, buying and holding stocks and just constantly monitoring, tweaking and improving my systems I’ve gotten to a point where I’m more confident in my abilities for targeting my personal goals than any financial advisor or roboadvisor could.
The trick I’ve found is that my goals are relatively basic, so my approach can also be basic. It’s not the sexiest system, but the sexier the system, the more you’ll likely pay.
Reasons for Investing
Ok, so you want to get started investing. Let’s figure out what your goals are by breaking things down into a bunch of different modalities.
Do you want Growth?
I’m going to assume that one of the reasons you want to invest is because you want to grow your funds. If you didn’t want to do this, you could safely plant up to $250,000 in a FDIC insured bank account, or purchase a certificate of deposit. Neither of these will likely grow much, and will likely lose value comparably due to inflation. The solution is to switch to investing.
The only way to save money and beat inflation is to invest it.
What is your Timeframe?
This is likely the most important to consider. Each of these could impact which type of account works best.
- Retirement (10 years +)
- Education (1–18 years)
- Nearing retirement (<10 years)
- Down payment on a house/car (<10 years)
- Travel / gift / consumable item (< 3 years)
What will this money be spent on?
Each of these will impact what type of investment account will work best for you.
- General personal expenses (home, food, living)
- Medical expenses
- Child care / people care
- Home expenses
- Start/expand a Business
- Rainy-day fund
Who will this money be spent on?
Based on the recipient of the money, there may be advantages to handling finances differently.
- Yourself and family
What is the withdrawal period?
In other words, are you planning to take all of the funds out at once? Or continually draw from them over time. In the case of a retirement fund, you’ll likely be taking small amounts out during the year, but for a home purchase, you could be liquidating the account.
How much do you need?
This question will be explored more in its own post. If you’re saving with a specific purchase in mind, then that makes this easy.
For the retirement, a general rule of thumb is to multiply your current spending by somewhere between 25 or 33 in order to generate a ballpark figure of how much you could need. I’d go with 33 to be conservative. More on how to get to this figure is discussed in the How Much Money Do You Need? section of the following post.
There’s a lot more to this though, as expenses could be drastically different in retirement — more health care costs being a large unknown in the US right now.
Save Your Answers
These questions will have a strong impact on the next post — Choosing An Account Type. For this series, I’m going to be primarily focused on the following, but will mention asides for other reasons listed above when it makes sense.
Timeframe: Retirement (3–15+ years)
Spent on: General personal expenses
Spent by: Myself/family
Withdrawal Period: 30+ years
How Much: $2.5m (which would be ~$75k/year household spending).
Check back next week for the next in post in this series.