Hi Pocket Changers! Today, we’re diving into the world of investing! Okay, perhaps getting our toes wet is a more accurate assessment. Regardless, today we’re going to look at a problem facing a number of Americans, and try to understand why investing is important for long-term financial goals. Let’s jump on in! BIG NOTE: The following should NOT be considered investing advice. I’m here to share my experience and knowledge, but I’m not advising you on how to handle your investments. I’m not licensed, and you’re not paying me!
What’s the Big Deal?
You may be familiar with some concepts and terms surrounding investing. You likely have heard of a 401K or IRAs, stocks, bonds, mutual funds, and more but are probably familiar with less than half of them. With the socioeconomic push towards consumerism and materialism, even the familiarity (much less the understanding) of these things is scarce. In fact, there’s an articlethat recently made the rounds on social media that states that the number of retirees (those over 65) that are filing for bankruptcy are 3x higher than they were in 1991. I’ll let you make your own assessment of the article, but it seems like the issue (identified by the author) is the shift from pensions to 401Ks has crippled those folks, likely due to poor planning and management of funds. In this day and age with the infinite knowledge literally at our fingertips, there’s hardly an excuse for someone to reach this age without being able to have enough funds to retire. This isn’t even a financial independence article! Folks following the traditional life path have missed the mark financially and are living the latter part of their lives struggling to make ends meet. NOTE: Naturally there are exceptions as life finds a way, but we’re not discussing the ins and outs of each situation. Friends, we don’t want to end up here at the end of our rope, hanging on by a thread. Social security should not be our lifeline when we get to that stage in life, it should be a bonus (if it’s even still around). Take an active approach to your long-term financial life!
Where do we go from here?
In my line of work, I have discussed retirement, investments, and life after work with many folks over the years. A common thread I’ve seen is a concern that there won’t be enough to last until, well, death. This is a scary thought and one that I don’t want to worry about down the road. I’m working my tail off now because I want to be able to enjoy the fruits of my hard work and investing will help. But wait, you’re probably thinking, “Those folks in the articles above had investments and look at what happened to them!?” Good. That’s the kind of thinking that will get you to your next step. While I don’t know the specifics of their investments, if they used a financial advisor at all, I guarantee that some of their investment funds went to pay for the advisor and to administrative fees.
As a quick example, let’s say you have an investment in a plan of $100,000 and that plan has a fee of 1% per year. The bonus: there are no other fees – all trades are free, and the administrative fees are covered. All you pay (rather, is deducted) is the 1% from your balance. That 1% is equivalent to $1,000 a year on the balance, or $25,000 over a 25 year period of time, assuming no growth. Not a great deal!
In addition, they likely (as many folks are) were sold confusing products that not even the salesman fully understands. I have personally witnessed this many times (which is a different issue altogether) and the clients are ultimately left in the dark with little-to-no understanding. In his book The Simple Path to Wealth, J.L. Collins discusses this very topic. Most financial advisors have a job – to sell you the products and services that the company they represent offers. It’s their livelihood. They get PAID to sell YOU the investments their companies have told them to push because those products are going to make the company money. Note: There are *some* fee-only firms that do not get paid to push specific products. If you feel the need for that type of assistance, look for a “fee-only wealth management firm.”
Low or No Fee Investing
This is where low or no fee investing comes into play. If a product or service provides you value, it should be compensated. That’s fair, and no one will argue that, but what we do argue over is price. If you can take advantage of a low or no fee investment strategy, why wouldn’t you? For example, Vanguard, one of the premier investment companies in the US, offers an extremely low fee index fund – the VTSAX. JL Collins heavily pushes this in his book, The Simple Path the Wealth, because of the function of its structure.
Back to our example of taking the same $100,000 investment, but instead we hold the VTSAX fund. As of the date of this post, the expense ratio is just 0.04%. Yes, 0.04%. That’s just $40 a year, or $1,000 over 25 years. Again, this is speculation but the you should see the difference in cost. Much better deal!
What exactly is the VTSAX? It’s a fund that invests in over 3600 individual stocks from the best performing US companies available on the market. If and when a company doesn’t meet the qualifications of a top performer, it’s replaced on the list by one that meets the qualification. This means there’s not really a ‘loser’ for this fund because it has that same qualification. Don’t be fooled though, the market itself can and will dip. It’s only a matter of time if it hasn’t happened to you yet. You cannot guarantee a fund will perform at x%, but you can look at past performance and make an educated estimate. Below is a screenshot showing the historical performance of the VTSAX fund. As you can see, it has performed well. Friends, investing is scary because of the big words, but it doesn’t have to be. You can educate yourself and likely have a good payout down the road. Feel free to ask questions and learn. Again, do not take what I’m saying as investment advice. Look into what options you have invested in, and research what fees you may be paying! QUESTION: Have YOU invested in this fund or other low-cost funds or is this totally new? Next time, we’ll discuss some personal experience with opening a Vanguard and Fidelity account, and provide updates and specifics! Stay tuned Pocket Changers!