My second installment on post-consumer finances is about how we simplified our investing and at the same time got it flowing more efficiently.
Through years of dabbling in personal financial research, I came up with my own post-consumer investment strategy. Mind you, I’m no math whiz or money expert, so do your own homework, will ya? Nonetheless, I feel like I’ve come up with a smart and minimalist investment strategy that’s really working FOR US. Here are the principles it’s based on:
I am the most qualified person to manage my money.
Our DIY approach to living does not end with our money. Only I know what my goals are and what my risk tolerance is. Only I can take full responsibility for what happens to my money, because I am the one who experiences the full repercussions of those decisions.
I believe I am just as smart (smarter?) as at least the average person who works in the financial industry, who might be managing my money. I have the power to educate myself and form my own opinions. I can learn from my failures.
I make more money by managing my own money.
Trusting my money to someone else costs money in fees and percentages, which totally misses the whole point, right?
Before solidifying our post-consumer investment strategy, we had our money in Fidelity mutual funds. I didn’t realize how much money I was losing in fees.
What difference does a percentage point or two in fees make? Well, let’s take a look. I used the handy-dandy fee comparison calculator referred by the SEC website.
I compared two comparable funds that mirror the stock market, and therefore should require little management and get similar returns: Fidelity Spartan® Total Market Index Fund Investor Class [FSTMX] and Vanguard Total Stock Market Index Fund Admiral Shares [VTSAX].
I input a $100,000 one-time investment with a generic 6% return for 10 years to keep the variables simple.
Shockingly, Fidelity’s fees came to $1,349.82, more than double that of Vanguard’s $676.76. Factoring in the effect of compounding interest with all other things being equal, the difference in profits after those 10 years was an additional gain in value of $888.66 for Vanguard. And after 20 years? Vanguard nets an additional $3159.16 over Fidelity—just because it has lower fees.
We’re talking thousands of dollars over time, here. And that’s just in no-load mutual funds. Now think about what it’s costing you if you’re paying a financial advisor to manage your funds. They’re taking a much bigger cut—regardless of whether you profit or lose.
I can’t beat the stock market.
“Beat the stock market” is hype you read all over the place. If Warren Buffet does it, why can’t I? Well, that’s sounds like someone buying a lottery ticket, thinking that since someone has to win, why not me?
But there are reasons you can’t beat the market. Reasons which I don’t quite understand, but this 2013 Nobel Prize winner does.
While I can’t understand it, I can appreciate good statistics. And those say that historically, the stock market has outperformed actively managed funds. That’s so well documented, I won’t even bother to reference it.
And I sure don’t want to spend my time researching what I’d need to know in order to gamble on individual stocks. That’s so not my post-consumer life.
That’s why the simplest, most productive investment for me is in a total stock market index fund that simply mirrors the stock market.
Yep, 100%. My diversification is built into the stock market index.
My dad, who owns gold bars among his well-balanced, highly diversified investments, is freaking out for me right now.
I buy and hold.
Now, everyone says you’re supposed to diversify and keep re-balancing your portfolio to play it safe.
There will come a time for me to diversify and invest in more conservative things like bonds. Like when I’m 90. (I did a life expectancy estimator yesterday. Based on my lifestyle and health, it predicts I’ll live to 98, unless I get attacked by a mountain lion first. Or something.)
Since I probably have a long time ahead of me, it’s not time for me to get conservative with my money. I take a longer term perspective, in the belief that, because I have time, any short term losses will be made up in the long run. And any play-it-safe bond investments I’d invest in now would not only slow down my long-term pace, but some 10-15% allocation won’t preserve much capital through the crashes to make it worth the long-term losses compared to investing in stocks.
So that crash in 2008? Yeah, our retirement savings dropped a lot. But they’ve also come right back up. You’ve got to be able to watch your savings tank. In fact, you have to know that they WILL tank several more times.
But I’ve got time, the awesome power of compounding interest, and the historical superiority of the stock market index on my side.
I make money for me, not investment company owners.
So knowing that I need an index fund, which one? Vanguard is clearly the only choice.
Similar to why I have my money in a credit union instead of a bank, Vanguard is owned solely by the investors. It is run at-cost, not at a profit for its owners.
Vanguard is the only investment company set up with this model. That means, if I invest through any other company, part of my money goes to make a profit for someone else—whether I make money or not. Ludicrous.
And why all of our retirement savings are sitting in a traditional IRA (more about why this over Roth, later) in Vanguard Total Stock Market Index Fund Admiral Shares [VTSAX], while I do absolutely nothing other than watch how much money our money is making for us over time.
How’s that for simple?
Shouldn’t I put a disclaimer in here about assuming your own risk? Nah. But I will put in a gratuitous photo of our creek, since this post is a little too chart-heavy and it’s miserably hot today. Consider it a metaphor for keeping the debt-free money flowing.