Today, I’m thrilled to share what I consider to be one of the most important letters I’ve written—one that could potentially transform your financial future.
Now, a quick warning: this letter is a bit longer than usual, but I promise it’s packed with crucial information you won’t want to miss. So take a moment, settle in for about ten minutes, and prepare to take some notes.
In this series, we’ve explored key lessons from early retirees, and I believe we’ve made significant progress. You’ve learned the importance of saving to invest, and why investing is essential. Today, we’ll dive into how to invest wisely and where to allocate your funds.
Preliminary Notes
Before we jump into the details, let’s cover a few essential points:
- Focus on the U.S. Market: This guide primarily pertains to investing in the U.S. It would be unrealistic to comprehensively address every country’s investment landscape, but many principles here will be universally applicable.
- Eliminate Debt: If you are in debt, focus on paying it off before considering any investments. The stress associated with debt can hinder your financial growth.
- Think Long-Term: The strategies we’ll discuss are designed for long-term investment. Don’t plan to touch these investments for a minimum of 30 years. Remember, short-term thinking can lead to failure.
- Keep It Simple: If investing feels daunting, fear not. This guide is designed to simplify the process, and you may be surprised to learn that by following these principles, you’ll likely outperform approximately 96% of active investors.
- Accept That No Investment Is Completely Safe: It’s crucial to acknowledge that there are no absolute guarantees in investing. Understanding risk is vital, but I’ll share strategies that have been proven effective with minimal risk.
- The Worst Mistake Is Not Investing: It’s important to recognize that hoarding cash under a mattress can lead to declines in purchasing power due to inflation. As Theodore Roosevelt famously stated, “In any moment of decision, the best thing you can do is the right thing. The next best thing is the wrong thing, and the worst thing you can do is nothing.”
With these preliminaries in mind, let’s proceed to the core of today’s lesson!
Core Investments: Index Funds
Your primary investment strategy should focus on index funds, which will house the bulk of your wealth—hence the term “Serious Money.”
Why Index Funds? Because managing costs is vital for long-term growth. Many active investors overlook how much they spend on fees and taxes, which diminishes their returns. By investing in index funds for 30-plus years, you can minimize these concerns.
Specifically, consider the following:
- Stocks (VTSAX): This index fund reflects the entire U.S. stock market, encompassing approximately 3,591 companies, including giants like Apple, Google, and Amazon. With VTSAX, you don’t have to worry about selecting specific companies—your investment is broadly diversified. Investing 100% in stocks generally yields the highest returns over time.
For context, if you’d invested $100,000 in VTSAX in the year 2000, your investment would be worth around $278,937 today, despite the 2008 financial crisis!
- Bonds (VBTLX): Bonds represent loans made to various entities—governments, municipalities, or corporations. Holding VBTLX means your portfolio includes 30% corporate bonds and 70% U.S. government bonds. Bonds are usually less volatile than stocks, providing stability in your portfolio.
Moving Beyond Core Investments
After establishing your main investments, you can explore additional opportunities to diversify your portfolio—what I like to call “Funny Money.”
Cash
While it’s wise to keep a small amount of cash for emergencies, avoid letting it sit idle. Cash provides flexibility during market downturns, allowing you to purchase stocks at lower prices when the market crashes.
I personally keep my cash in a Capital One account, but ensure your funds are working for you.
Alternative Investments
If you want to invest in sectors like technology or real estate, be cautious. While you may believe you know these markets well, the degree of risk involved can vary significantly. Many people have faced challenges when trying to emulate successful investors in these areas.
However, these alternative investments can be an exciting way to engage with the market, but treat this with a small portion of your portfolio to mitigate risk.
Asset Allocation
For your portfolio, the following allocation is a good starting point, though you can adjust based on your comfort with risk:
- 80% Stocks (VTSAX)
- 10% Bonds (VBTLX)
- 5% Cash
- 5% Alternative Investments
Consider your risk tolerance and investment goals when determining your allocation.
Final Thoughts
So there you have it! Now you understand how to invest effectively and build a strong financial portfolio.
Key Points to Remember:
- Invest primarily in index funds for long-term growth.
- Diversify your assets and keep some cash for emergencies.
- Understand your risk tolerance and adjust your portfolio accordingly.
Feel free to reach out with any questions, and thank you for joining me on this journey!
See you next week!
Let me know if you need any further modifications or additional content!