Can investing be simple? Absolutely, yes! It isn’t made out to be as I experienced and so many others experience in their lives.  It can be though!

I remember when I started my first job and was given a packet of information.  In the packet, I needed to pick the funds I wanted to invest in.  Needless to say, I had no idea what I was doing and was curious what others were doing.  My second job the same thing happened.  With the second job I was not receiving a match at my employer’s work so I knew I needed to do something else and that is when we visited our local Edward Jones advisor.  He wanted us to invest a lump sum with him and he explained that the cost was 5.75% in addition to the fund cost.  We were a little thrown back by 5.75% because that seemed like a lot so we decided to think it over and we are so glad that we did.

A couple of days later we heard about these FREE classes being offered at our local University in Cedar Falls, IA.  You can find more information here about the classes and the person that teaches them.  We learned that the 5.75% is also known as a Class A front-end load which means that every time you invest money 5.75% of that is gone right away.  You have to earn 6.11% just to get back to the break-even point! We learned much more through the classes and through many books and are now ready to help out others!

 

Investing – What Did I Learn?

 

We learned to invest in no-load, low-cost index mutual funds that diversify you all over the world into thousands of stocks and bonds.  This will ensure that you keep more of your hard earned money instead of paying loads and high fees with active management.  Here you can find a picture of a graph (towards the bottom of the page) and use a calculator that can help explain the impact of costs on your money.  Many people are paying 2-3% per year in yearly cost and don’t even know it.  Our family portfolio costs are 0.07%.  Those numbers may not seem like a lot but over decades that can add up to some pretty big numbers.

First thing is to look for the word index. Look at the expense ratio.   A good index fund should be 0.20 or below for an expense ratio.  Generally, if they are higher than 0.20 that is not a good sign.  At the very least I would recommend investing in your work at least up to the employer’s match if there is one (that is free money).  Even if you have debt I would invest at least up to the employer match.  When you have debt and wondering to invest or not always look at opportunity cost.

 

Investing – What if my work doesn’t offer a retirement option or a match, or there are no index options?

 

Then invest at a place like Vanguard in a Roth or Traditional IRA depending on your yearly income.  Generally, if you are below the 22% tax bracket you do the Roth and if you are in and above the 22% tax bracket you go traditional.  Consider doing a backdoor Roth IRA if you have a high income as well. There are other places to invest as well but Vanguard doesn’t pressure you and doesn’t advertise like many of the other investment companies will do.  I recommend Vanguard because they are a non-profit organization and is owned by its shareholders (aka investors).  The more money that goes into Vanguard the lower their fund’s cost.

I do not have any affiliation with Vanguard other than that is where I choose to invest my money.  Vanguard does not pay me anything.  They have many good options but just because it says it’s a Vanguard fund doesn’t automatically make it a great fund in the same manner that not all index funds are the same.  You may notice for example at your work that you have index funds but what is the expense ratio? Is there revenue sharing?  Administrative fees?

 

Investing – What funds to select?

 

A good place to start is a Total Stock Market Index. A second stock fund you may look to consider is a Total International Stock Market Index.  (Which is comprised of two index mutual funds including Emerging Market Stock Index about 19% and Developed Markets 81% holdings). Someone may look to hold those two funds separately because they want more exposure to Emerging Markets than what the Total International fund gets them. With the Total Stock and Total International you own the whole world in stocks. For bonds/cash you may consider a Short-Term Bond Market Index or Prime Money Market Fund  (could be used as your emergency account).  A Total Bond Market Index as the core part of your bond portion.  By doing all or just some you will beat the vast majority of investors.

If you want to diversify a little more you can invest in a small-cap value index fund, emerging markets stock index fund, REIT index fund, and value index fund.  All of those are at Vanguard at a very low cost.

The One Fund Approach

If you don’t want to have to worry about too many funds you can just pick one and feed it month after month and never have to worry about re-balancing. Pick a Target Date Fund from Vanguard that meets the age you plan on withdrawing money.  Within this fund, it holds stocks and bonds at a very low cost. When picking a target date fund make sure to focus on when you plan on withdrawing the money and not when you plan to retire.  Gradually over time as the date gets closer to the year, you picked the fund will hold more bonds and fewer stocks.  Learn more here.  You can start investing in a target date fund with as little as $1,000.

Family Portfolio

A couple of key points to remember is your portfolio includes the funds you have at your work, outside your work, and if you have a spouse those funds as well.  You don’t want to be paying twice for the same fund. Before investing in a fund know why you are doing it though.  Do your research and know why you have decided to invest in that particular mutual fund and then take action.  Ask some questions like what does this mutual fund invest in, how does it correlate to the other funds I own, what does it cost, what is its tax efficiency (will help to determine if you should hold it inside or outside of retirement account).

Investing – Diversification

By investing in a wide array of asset classes it helps to shield us against huge losses because some of the time when one goes down another goes up (importance of diversification).  There are times when they can all go down but that is rare.  We are playing the probabilities over the possibilities.  As many finance professionals say by diversifying yourself you are seeking that probability of a high return and reducing your risk.  It is not guaranteed, nothing is in investing but the likelihood of it is greater.  On top of that if you have all your money in only one individual stock and that goes down dramatically there goes all of your money, think of Enron.

Investing – Tax Efficient and Inefficient Funds

Below is a list of tax efficient and inefficient funds that you can find at Vanguard.  In most cases, I would recommend investing in retirement accounts before taxable accounts.  Each situation is different though and that is why it is important to educate yourself.

 

Investing – Tax Efficient Funds- Could hold these in a taxable account because of their low turnover. Can hold the first two in retirement accounts as well.

  1. Total Stock Market Index Fund OR 500 Index Fund  (Don’t own both)
  2. Total International Stock Market Index Fund (holds emerging and developed markets) OR Emerging Stock Market Index Fund and Developed Stock Market Index Fund.
  3. Intermediate Term Tax Exempt Fund (Bond fund) (Might consider owning if you are in 22% tax bracket or higher)
  4. A short-term bond index fund or prime money market (could serve as an emergency account)

 

Investing Tax Inefficient Funds- Hold these in retirement accounts due to their high capital gains/dividend payouts

 

  1. REIT Index Fund
  2. Small Cap Value Index Fund
  3. Value Index Fund
  4. Total Bond Market Index Fund

 

If you are still unsure and skeptical I would encourage you to listen to the greatest investor of our time.

“Most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.” – Warren Buffett

 

If you need help to seek out a fee-only advisor and NOT a fee-based advisor.  Make sure to ask the right questions.  For example:  are they a fiduciary, how are they paid, are you paying a load.  If you don’t pay them directly then get out of there.  Key points: You should NEVER pay a load when investing and ONLY you should pay your advisor.  You should know exactly what you are paying.

I am a fee-only advisor and the first meeting is free for us to get to know each other.  Therefore, you are out nothing just for meeting with me.  I specialize in looking at your complete picture, so not just the investing piece.  We look at insurance, debts, cash flow, workplace benefits, social security, medicare, and the investing piece.

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