How To Invest For Wealth And Happiness

September 8, 2015

by Ravi Raman

Post updated in August 2021: I originally wrote this blog post in 2015, and since then my overall investment philosophy hasn’t changed much. However, some subtle details have. Therefore, I updated this post!

Few things in the world matter to people as much as money. Money is the #1 cause for divorce in the United States. Money is a big reason 70% of people are stuck in jobs they could care less about, according to research by the Gallop Organization.

Are you different? Have you managed to avoid the gravitational pull that money can have? If so, consider yourself lucky.

I used to think I didn’t need much money. I made a good living during my years working in the corporate arena. Then I left that world, and my income went from well into the six-figures to zero. I panicked. I had plenty of savings. I knew that I would generate income again when the time was right.

Why did I feel so nervous?

I was not above the pull of money. It took me a while to come to terms with my relationship with money and lessen its grip on me. Unless you’ve gone through a process of making a significant amount of money (whatever you deem “significant to be”) and then shutting off that income stream, you really have now idea how much your world is revolving around “the money game”.

The money game = work hard, make money, spend money, dream of the day you don’t have to work so hard. Rinse and repeat.

One way out of this twisted game is to spend less than you earn and invest the difference. Allow your nest egg to build up to the point where you can make the leap towards doing the work you want to do, instead of doing the work you have to do.

If the way out of the “money game” is to earn money, save money and invest that money so it can grow; the big question is: “How to invest?” 

Answering this question is what the rest of this post is about.

Don’t Listen to Me

I’m not a financial professional. Everything you read in this article is my personal opinion. Educate yourself and consult with a licensed financial planner if you are stuck.

That said, I’ve made and lost a lot of money in the stock market. I’ve read dozens of books on investing. It’s a hobby of mine, and a former profession (I interned during college at one of the largest asset management firms in the world, Merrill Lynch). Heck, my undergraduate degree was in Finance. So I think my opinions may be insightful for you.

If you read some of my older posts on this blog, you can see first hand just how bad some of my supposed “advice” was. I’m writing this post to clear up the story and share what I am currently doing to preserve and grow my money for the long haul. It’s an approach I’ve used for the past 10+ years and expect to stick with it for the long-term.

Before we dive in…

(1) I don’t recommend buying individual stocks. In this post, when I refer to “stocks” I mean low-cost index funds that invest in large groups of stocks. Stocks should be purchased sparingly and for most of you, not at all!

(2) Nowhere in my post do I recommend a “robo-advisor” Wealthfront or Betterment. The fees are just not worth it. Even with a .25% of assets fee structure, you will end up paying hundreds of thousands of dollars in fees over the course of your life, assuming you earn a decent salary and are committed to saving. Also, the claimed benefits (e.g. tax loss harvesting, superior asset allocation, etc.) are dubious at best. I recommend avoiding them.

Instead, use the steps listed below as inspiration to set up your investment system to win the money game.

Then get on with living your life!

How to invest in 6 simple steps

I’m boiling down what can be a very complicated topic into a few simple steps. For those who want to read more on the topic of sensible investing strategy, I highly recommend Daniel Solin’s excellent book “The Smartest Investment Book You Will Ever Read.” The books is over 10 years old, but the essential concepts are still relevant today.

1) Open an investment account

I use Fidelity Investments for my brokerage, retirement and checking/savings accounts. I like Fidelity for several reasons. Their website is very modern and they have solid apps. They have a “smart cash account” feature that allows check-writing, ATM withdrawals and unlimited reimbursement of all ATM fees (saves me $100-$200 a year!).

I do all my personal banking with Fidelity, and it is easy to transfer money between accounts and have an overall view of how assets are performing. They also have branches in most big cities in the USA which has come in handy for a few larger transactions I’ve done over the years where I’ve actually wanted to work with a human on something (e.g. buying a house).

Back in 2015, when I originally wrote this article, I recommended opening an investment account with Vanguard even though my personal assets were with Fidelity. Why?

Vanguard is the only investment firm I know of that is wholly owned by its funds, not by outside shareholders. That means if you have money invested with Vanguard, you own the company. They have no vested interest in doing anything besides passing on any operational savings to their customers. They have the lowest fees in the industry. They are old-school, but in a good way! You won’t find any fluff with Vanguard. Their fees are the lowest around. That can save you hundreds of thousands (or millions) over the course of your life.

Back in 2015 I wrote the following reason for not switching to Vanguard myself:

Why don’t I switch from Fidelity to Vanguard? Well, I own a bunch of Fidelity funds and a Vanguard S&P500 Fund for my 401K, which is also held in my Fidelity account. Switching would require my selling those Fidelity funds and paying taxes on the gains. Also, the total expenses I pay for my Fidelity funds are super low since I invest in Fidelity funds that are ultra-low cost. I’m content where I am.

However, as I’m updating this post in 2021, Fidelity has improved their selection of low-cost index funds, lowered fees across the board (in some cases beating Vanguard fees) and offers additional features, such as robust checking and cash management, making it a viable alternative.

So which brokerage to choose, Fidelity or Vanguard?

It’s up to you, and the choice is less crucial than simply making a pick and getting started.

2) Select your portfolio allocation

 

Source: Vanguard

Source: Vanguard

 

Asset allocation has a big impact on overall portfolio returns and volatility. When I talk about asset allocation, I’m referring to the amount of stocks and bonds you hold, as well as the mix of assets across various countries and market sectors.

Global Stocks and some Bonds (maybe!)

The simplest way to think about allocation is this: when you are young, invest in stocks and as you age increase the amount you invest in bonds based on your tolerance for risk and income level. Beyond stocks versus bonds, invest in both the US and global stocks to maximize potential gains while lowering risk.

Some financial experts believe that a properly allocated portfolio needs to consider assets like commodities (gold, etc.) and real estate. I’ll cover these at the end of the post. For most people, they are a distraction until you have a sizable critical mass of investable assets, and even then I don’t consider them essential.

Figuring out the optimal asset allocation is more art than science. Warren Buffett will tell you to figure out how much money you want to invest for the long-term and put it in the S&P 500, an index of the 500 largest companies in the US.

Here is what Warren Buffet told Tim Ferris when asked this question:

Tim: “If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage.”

 

Buffett let out a small laugh and began. “I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work…”

Many other experts and financial textbooks would disagree with Warren Buffett, and emphasize the need for bonds and global stocks in your portfolio. The claim is that these asset classes reduce volatility while improving long-term gains without adding risk.

The good news is that there are some simple questionnaires you can fill out online that will help you figure out the right asset allocation for you. I like Daniel Solin’s questionnaire that is available for free on his website. It’s complicated, but good!

Another method you can use to determine your asset allocation is a rule of thumb in which you subtract your age from 120. So if you are 50 your asset allocation should be 70% stocks and 30% bonds. If you are 35, as I am, your asset allocation should be 85% stocks and 15% bonds. Keep in mind, this assumes you plan to use the money you are investing during retirement. If you have other sources of income, you may want to just keep investing like you were 30 years old, even if you are 80!

Essentially, the amount allocated to bonds has as much to do with near-term income requirements, earning potential and risk tolerance as anything else.

Complicating matters, as I’m writing the update to this post in 2021, the outlook for bonds appear bleak. With interest rates so low, it’s inevitable that they will have nowhere to go but up over the next decade. In a world of rising interest rates, bond funds suffer as investors seek newer bonds that pay higher rates (yields). However, even experts disagree on what the outlook is for bonds. Vanguard says to “hold not fold” when it comes to bonds right now.

My current long-term target allocation is 0 to 10% bonds, depending on how much cash I desire to have on hand for other purchases and my willingness to tolerate volatility in the equity markets. I’ll reassess this allocation as I get older.

Global allocation

You should also consider the balance of global stocks in your portfolio. United States is no longer the majority of the economic productivity in the world, and an investment portfolio should reflect that. Charles Schwab has published research, corroborated by many other sources, on the fact that Global equity investments help to diversify a portfolio of United States stocks.

The chart below from Charles Schwab, shows investment returns over rolling 10-year periods. Notice how the “world” bars (this captures US and global developed market stocks combined) show equal gains but less loss than just US stocks.

Source: Charles Schwab. The "international" bars represent development global markets outside the US. The "world" bars include the US.

Source: Charles Schwab. The “international” bars represent developed global markets outside the US. The “world” bars include the US.

 

The proper allocation of global vs. US investments is tricky. This is where investing is part science but mostly art.

For example, Vanguard has steadily increased the allocation in their LifeStrategy funds to have roughly 40% of their stock investments outside the US. You can geek out on more research from Vanguard here if you like. If you just look at the economic value, the US economy is roughly 25% of the global economy in total.

Overall, according to research from multiple sources I’ve read, investment portfolios that hold between 20% – 40% of their stocks in global companies are getting a meaningful diversification benefit.  

Right now, I target a 20% long-term global allocation across all equity investments in my portfolio.

3) Buy only low-cost index funds (or ETFs)

The outrageous expenses charged by many financial advisors should in my view be illegal. Does anyone have a right to charge a percent of your hard-earned assets every year just for the privilege of being able to call themselves your financial advisor?

After all, research has shown that stock pickers fare no better than monkeys in picking winning stocks. You might as well invest in the broad-based market, which is a bet that the overall economy will grow over the long-term. Given globalization, technology improvements and growing populations, it is a safe bet that this will turn out to be true.

We are no longer living in a world where stock and mutual fund trades need to be filled by hand. Everything is automated. Information is available freely. Advances in mutual fund and ETF options mean that with less than one hour a year of your effort you can set up a system for investing in keep it going for the rest of your life without paying hundreds of thousands of dollars in fees to a broker or adviser.

After 30 years, a fund with a 1.5% expense ratio will provide an investor with several hundred thousand dollars less for retirement than a 0.15% index fund with the same growth. The image below that I found on The Bogleheads (originally created by AllianceBernstein) illustrates the impact of someone making $45K and investing 6% of their salary initially. Their salary grows over time to $85K as does their saving rate, which hits 10%. It shows what having just 1% greater return (e.g. 1% less in expenses)  can do for you!

An example showing that 1% of additional costs will reduce available retirement funds by 10 years. http://www.bogleheads.org/wiki/File:Annual_Return_-_Fee_Impact.png

An example showing that 1% of additional costs will reduce available retirement funds by 10 years. http://www.bogleheads.org/wiki/File:Annual_Return_-_Fee_Impact.png. Originally published by: AllianceBernstein.

 

If you’re currently stuck with a financial advisor who is charging you 1%, 2% or even 3% just to manage your money – you need to think long and hard about why you are doing that!

Which low-cost index funds to buy?

There are enough options here to make your head spin. In addition to index-funds of countless varieties, the rise of “ETFs” (exchange-traded funds) over the past decade adds to potential choices. ETFs are essentially the same as mutual funds, with a few unique properties.

It’s generally advised to purchase ETFs in a taxable brokerage account, as they are are more efficient in how they account for capital gains. Index Funds or ETFs would work equally well in tax-protected retirement accounts. If you think you might want to move you assets around to different brokerage firms over time (why????), ETFs would be a better choice since they are more “portable” between brokers than index funds, which you sometimes cannot move between brokerages.

Having read up a lot on the matter, you really can’t go wrong with either index funds or ETFs, but if you have a choice, go for the ETFs in any taxable investment account and pick either one for retirement accounts. Instead of listing all the investment options here, I’ll refer you to the wonderful Bogleheads wiki page.

Once you have decided your allocation across US Stocks / Global Stocks / Bonds, purchase the indicated ETFs (or index funds) and you are done!

Pro Tip: if even this first step is overwhelming, just start by purchasing a Total Market Index Fund or ETF representing the United States market. The Vanguard Total Stock ETF (ticker: VTI) or Fidelity Total Market Index Fund (ticker: FSKAX) are great choices. You can always add bonds and global stocks to the mix over time.

4) Add money at regular intervals

To build a sizable nest egg you need to invest. The way to make this painless is to automate investing.

To accelerate savings, whenever you get a raise, it’s a good idea to send the majority of the raise amount – at minimum – directly to your investments.

Early in my corporate career, when I was living like a monk and had few expenses, I set aside a very high percentage of my pay to be automatically diverted to my Fidelity brokerage account. As I received raises and bonuses over 14 years of working at my previous company the percentage of my salary that was automatically invested stayed the same or increased.

As a result I never had to make a conscious decision to invest my money. It happened automatically. This made it painless and easy.

Set up an automatic investment plan even if it’s $50 a week. Have the money automatically deposited from your checking account to your investments. Increase the amount until it is painful and causes you to take a hard look at other spending, to make sure you are prioritizing your investments over anything else (aside from spending money on important life experiences, I’ll write more about that in a future post).

Use tax advantaged accounts first

If your company offers a 401(k) make sure you are maxing that out to get your corporate match (e.g. some companies will match your 401 contributions up to a certain amount).

In addition, if you are able to invest in a Roth IRA, be sure to do so. Money invested in a Roth IRA is able to grow tax-free and eventually be withdrawn at retirement tax free as well!

5) Rebalance annually at tax-time

Research shows that by rebalancing just once a year we’ll garner most of the benefits though some people may choose to rebalance more often.

The theory behind rebalancing is to make sure you’re always investing in assets that are considered “a value” and that your asset allocation isn’t out of whack. “Value” assets are those that have not increased in value as much as other assets. It also ensures that you are getting all the benefits of diversification.

For example if US stocks have increased significantly over the past year while global stocks have increased less so, you will want to sell some of your US stocks and shift the money to global stocks when you rebalance. This this ensures proper diversification.

I rebalance once a year around tax time. I look at the allocation of my portfolio and compare it to what my desired allocation is. If any asset is off by more than 5%, I rebalance it. If you don’t want to sell one asset to rebalance, you can simply divert new investments to whatever asset is underrepresented your portfolio.

6) Get on with living your life

Spending time over-analyzing your investments is a waste of time. The most valuable investment you can make is in yourself. So once you’ve picked a strategy, chosen your brokerage and invested it’s time to get on with living your life!

If you are still working you should always remember that your biggest financial gains will come from your career and your rate of savings. Figure out ways to get ahead in your career, earn more money and save more. This is a much better use of time than and over-analyzing your investments.

Elephants in the room

There are a couple of elephants in the room. These lumbering beasts are the questions of stock picking, real estate and alternative assets (gold, cryptocurrencies, angel investing, venture capital, etc.). For the vast majority, you would be well-served to ignore all three. Focus on maximizing your retirement account contributions and investing any additional savings in low-cost index funds. Use your spare time find ways to increase your earning potential and enjoy life more.

However, there are certain cases where it would make sense to dabble beyond the bounds of low-cost index funds. One case if where, as I am finding myself lately, there is growing interested in the game of investing. Another scenario, and one for which Real Estate is well-suited, is where there is a desire for investments that generate passive income.

Stock picking

I would not recommend any beginning investor get into the stock picking game. It’s a no-win proposition. For the last 10+ years I’ve avoided picking any individual stocks. However, in the past 6 months I added a few small stock positions to my portfolio.

Why am I breaking from my own advice? To get exposure to specific companies that I believe in, that are not captured by the broad-based indexes. I also find it interesting and enjoyable. Over time, I anticipate investing in a few stocks that reflect companies I believe strongly in. I’m not rushing into these investments and am making them each with the goal of holding the companies for a minimum of 10 years. Should stock-picking no longer be interesting and enjoyable, I’ll stop and direct savings back towards low-cost index funds or Real Estate (see below).

Real Estate

In addition to a primary residence, I see the value in owning additional real estate as a way to general consistent income and exposure to an asset class that can be robust in erratic and declining financial market environments. I currently own a vacation condo, that is rented out when I’m not using it. However, there are other options for real estate investing that I am exploring.

Alternative Investments (Crypto, etc.)

The only other other asset class I invest directly in are crypto-assets. As a tech nerd I can’t ignore the promise of blockchain technologies and decentralized finance. However, I am also well aware that such investment can vaporize overnight (literally). I do hold an allocation of these assets, that fluctuates quite wildly given the whims of the market.

Your choice in investing in such assets should be a personal one. For any beginner investor, I would not recommend doing so until you have sufficient savings and investments to make any such decisions a “no brainer” for you. If losing your alternative asset investment gives you heartburn, you shouldn’t be doing it!

Conclusion

I hope, at the very least, that this blog has inspired you to start investing if you haven’t already.

If you are already investing, I hope you are now thinking about ways to make your investing process more efficient and effective.

Lastly, if you are stuck in analysis paralysis….just open an investment account and get started!

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