Money Management: How to Start Investing
Without ever having looked into investing, it is an overwhelming prospect. Endless jargon and strategies. Everyone has their opinion. Online courses teach you how to turn your $1,500 into $10,000 in just 30 DAYS! Ride the r/wallstreetbets GME (GameStop Corp.) train to the moon! I digress. Before starting anesthesia school, I was researching proven medical school study techniques. Medical students needed to cover a wide breadth of information over a 4-year period. They must know something about effective learning that will get me through anesthesia school.
In the months leading up to the start of school and the first didactic semester, I tested my ability to learn. I applied the half dozen medical school strategies to finance because like anesthesia, it was interesting, and I didn’t know anything about it. I found great success with audiobooks turned up to 1.5x or 2x playback speed. Using this approach, I could cover hundreds of pages per day with little effort. Driving to work, audiobook. Cardio time, audiobook. Just bored, audiobook. This application of learning allowed me to consistently cover a book in 2 days. I probably “read” 15 books on investing in just a couple weeks. Another aspect of this study technique was to take notes on the content AFTER the reading or lecture. Be present for the content then review the content and check comprehension via written notes.
As you can imagine, I had quite the stack of investing sticky notes. Themes began to emerge. One book summarized everything -- John C. Bogle’s The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. This book guides my personal investing strategy as well as much of the content on The Financial Cocktail.
Buying low-cost passively managed total stock market index funds held over the long term will outperform nearly all else. What are index funds? Index funds are a basket of stocks that mirror a certain group or sector of the market. A total stock market fund includes all stocks. An S&P 500 index will contain only the stocks within the S&P 500. In essence, an index fund mirrors the returns of whatever sector is represents. What about the “low-cost passively managed” part? Every fund has an “expense ratio.” That basically means fees for a broker or brokerage to manage, balance, and update the fund. Keep the expense ratio less than 0.2 or 0.2%. This is a flat fee based on the size of your portfolio that the brokerage keeps this fee regardless of performance.
Dave Ramsey is a mutual fund advocate and says you should look for one with a 10 year track record that regularly outperforms the market. I am a big Ramsey supporter, but he misses the mark by saying it is easy to find these funds. Bogle discovered that only 2 of 355 fund managers outperformed the market after accounting for fees and expense ratios. And the 2 that outperformed the market did it by a narrow margin. A typical expense ratio of a mutual fund is 0.5 and 1.5, so the fees are notable over time. A 0.1 or 1% expense ratio means the fund manager will charge $10,000 annually to manage a $1M portfolio. Bogle created Vanguard which specializes in low-cost funds with expense ratios commonly between 0.03 and 0.09. With what you keep at the end of the day, don’t go searching for this rare species of fund manager. A mutual fund will not ruin you, but it may take a few hundred thousand of compounding gains off the top over 40 years. Fund managers have dedicated a career to understanding investing and yet rarely manage to keep pace with the broad market.
Back to the “passively managed” part. Funds can be passively or actively managed. A passive fund rarely changes its holding. An active fund buys and sells much more regularly. Mutual funds often times charge for each of these transactions. It adds up. Vanguard funds rebalance maybe once per year. The brokers don’t do anything all year long, which is why they don’t charge much. There are metrics for the amount of buying and selling that occurs within a fund, but that not relevant in this discussion. More on the nuances of different fund types in the future.
The buy and hold approach removes emotion from the investing process. Do not focus on the short-term volatility, but rather the earnings growth and dividends over the long term. Bogle notes that actively traded funds that did well in a certain period, say the dot com bubble, did not do well in the years follow. As an investor, you will not know when a fund’s time is up. Consistent growth produces the most yield.
Because this is my blog, I can interject with my experiences at any time. So here I go. I love me some good ETFs (exchange traded funds) held through a personal brokerage. After looking at the 10-year performance of many funds, I have a variety of low-cost ETFs, which are basically index funds for different sectors. I have no affiliation with Vanguard what so every, but I use Vanguard as my personal broker. I did not choose them because Bogle, the founder of Vanguard, wrote the aforementioned book, but rather because the brokerage is free to set up, intuitive, and has EXTREMELY low fees when buying their funds. Vanguard caters to boring old rich people. I am bringing down the average age and manifesting my future all at once. But really, any brokerage will do, just watch the fees. I would be happy to break down the entirety of my investment portfolio if there is interest.
If you want to invest in other stocks, funds, real estate, venture capital, or any other endeavors, please do. This post is an overview to find the investment starting line. As a side note, many company sponsored retirement accounts use “target date funds.” These basically invest heavily in index and mutual funds when retirement is decades away and slowly add more bonds as the retirement date nears. These are fine and work similarly to the strategy above. I think the expense ratio on both of my target date retirement accounts hangs around 0.5, which is acceptable for what the fund is trying to accomplish.
