I bought my first stock as an investment in 2001. I don’t recall the name of the company, nor which trading platform I used. The strategy was to invest in whatever came across my computer screen at the time in order to grow a tiny amount into a massive sum. My immature investment strategies have since evolved a bit. So I decided to put together a more mature list of basic investment concepts, as they stand in 2019, which I’m sure will change in the future.
After losing a little over $5,000 in stocks in 2009, I got back into investing in 2012, buying mutual funds such as Putnam and Lord Abbett funds – referred to as active mutual funds. This was at the behest of my financial advisor at the time who was earning 5% commissions on the sale of these expensive mutual funds. He created a portfolio of nearly 13 funds which was making my head spin.
My mom had always been a saver, unlike my dad who was a spender. He took bigger gambles but she was drawn towards more conservative investment options. The idea to invest in mutual funds actually came from her and I sort of built off of that.
Basic Investing Concepts
It has only been 7 years since I managed to claw my way out of those high-expense-ratio mutual funds into more cost-effective options. It’s not that Putnam and Lord Abbett were bad funds, I just didn’t have a good strategy to invest in the exact right funds within those companies in order to offset the high expense ratios.
I decided to write this post to summarize everything I’ve learned since then; basic investing concepts which have served me well so far. The focus was always on financial independence which I set out to achieve in December 2012 and finally reached March 2016.
1. Purpose of Investing
I needed to answer the question, why the fuck do I even want to invest? I settled on the answer that I wanted to grow my wealth. I wanted to get a piece of the prosperous US economy which I was fueling with my work and income taxes.
I didn’t want to be rich or wealthy, I wanted to add an extra layer of financial security to my life – the backbone of which was my earning abilities.
I also realize that I am not a saver by nature. I’m not frugal, nor all that considerate. These are things that I’ve had to work hard on. But now, so many years later, it all feels a little more innate.
2. Return Expectations
If you invest in a CD then you know, as of 2019, you’re not going to get much of a return beyond 3%. Index funds (passive mutual funds) might return somewhere around 5.5%. Real estate, 7%. Private equity, 10%. Individual stocks or options, 15%. If you start your own growth-oriented business, you might have 25%-50% annual returns.
I didn’t need a 15% return, nor 10%, nor 8%. I was willing to take less risk, invest over a longer period of time, and set more of my money aside from my income.
Back in 2012 when I started getting serious about investing, 5-6% was an adequate return expectation for me. Now that I’m retired, 3.5-4% will suffice. Despite this fact, I’m not willing to switch into a CD because my risk tolerance is higher than that of a CD investor, which I’ll explain below.
3. Low-Maintenance Investments
The three types of investments which to me are super high-maintenance and don’t jive well with my inherently lazy nature:
- real estate
- individuals stocks
- private business
Real estate investors will tell you that investing in physical properties is rather low-maintenance. I say the same thing when people ask how I stay in shape – it’s super easy, all you have to do is … Physical real estate seems like a pain in the ass to me – REITs might be a decent alternative option.
Individual stocks require a lot of research in order to pick the right funds. Then you have to know when to sell them; when do double down on them; when to diversify. I don’t have the patience for that amount of research.
I’ve owned an auto mechanic shop and i’ve owned a few other small businesses over my lifetime. Much like real estate, a private business requires a fair amount of babysitting and you have to be ready to address the unexpected.
4. Risk Tolerance
I’ve always had a financial advisor and one of the most important things this person can do for you is to help you figure out your risk tolerance.
Are you the kind of person who won’t walk alone at night because you don’t want to risk getting robbed or worse? Or are you the kind of person who accepts that risks and is willing to deal with potential consequences? Do you use the paper seat cover in a public toilet or are you willing to brave anal Leishmaniasis?
I’m willing to risk my investments going down by as much as 50%. That’s a $100,000 investment going down to $50k or a $900,000, down to $450k. Any steeper drop and I’d probably panic.
You can diversify within your securities portfolio and buy both stock index funds and bond index funds. Next, you can buy some small-cap stock index funds along with some international stock index funds.
Quite honestly, that stuff doesn’t make a whole lot of sense to me. I’ve read Dr. Bernstein’s books on the topic. I’ve read countless white papers on passive index fund strategies. I’ve read book after book and, sure, I’ll diversify a bit there but to me the stock market is a fuzzy blur.
Rather than getting too granular with my passive index funds, I have focused on other diversifications:
- investing in my various income streams
- in my primary residence as a potential future real estate investment
- in my own businesses
- in my network of like-minded people
- in currency exchange by living in another country
- in learning new skills such as healthcare consulting
6. Income Streams
In a way we are all investors. As long as you use a currency to run your household, you’ve made an investment decision of some sort. Maybe you’ve decided to invest in debt, maybe your have chosen to invest in rare Bourbon, like my buddy J.
I’m definitely an investor and getting better at it. What makes the most sense to me when it comes to investing is the income stream from it. I don’t care about my net worth, don’t care about the value of the rental income property.
I care about the kind of steady income it produces.
$250,000 invested in a 3% CD will earn me a gross income of $625/month. This makes sense to me. Or, if I move out of my Portland condo and rent it out, I will have about $600/month left over after I pay for all of the overhead.
My income streams also include any time I trade for income. It’s a Thursday afternoon, 2pm, and I’m sitting at this sunny cafe in Santiago de Compostela, writing. This is what I want to do. I love it. If I make money doing this, then I have found the kind of income stream which isn’t work – it’s fun.
Most of us invest for a specific reason; usually to have more income in retirement. Actually, I think many invest in order to have a high net worth but once they retire they will realize that the net worth is less important.
The less you spend, the less you need to save up for retirement. The less you spend, the less income you need from your investments; the less risk you need to take; the less work you have to put into managing your investments.
Budgeting is an essential part of investing. Taking it into account is the proper integrative approach to investing. I’m not sure if the average new millennium physician can outearn or out-save their traditional spending.
Actionable Steps for Basic Investing Concepts
A lot of these are nerdy terms and they don’t make a lot of sense unless there are real world examples. So here is the advice that I would have given young Dr. Mo.
Investing is a skill which you’ll get better at. Start with something safe like a Vanguard index fund. Something like VTSAX or VTI. These funds have low annual expense ratios and capture a large portion of the entire US stock market.
Start investing slowly but never stop. If shit hits the fan and you’re going through a divorce, cut your $500/month contribution down to $100, just don’t stop investing. And once you have a little more to invest, increase it to $1,000/month and then $3,000, $5,000, whatever you have.
With the same slow, methodical strategy get your feet wet in real estate, CD’s, individual stocks, private equity deals, collectible, or whatever the hell else is calling your name. Either you’ll make good money and keep doing it or you’ll lose a small amount and realize that it might be too much work for you.
It doesn’t matter whether you invest in your employer’s 401k or 457 or 403b or IRA or Roth or whatever – just invest. If you don’t like traditional retirement accounts then you can buy VTSAX and VTI in damn near any brokerage account. The nice thing about having only 1-2 individual funds is that the account maintenance is damn near non-existent.
I would have advised young Dr. Mo to open a solo 401k (aka individual 401k) when he was moonlighting back in the day. That would have cut his taxes down even more and allowed him to continue to invest.
I would have told him to not worry so much about benchmarking his investment returns. Investing is long-game and there is a lot to learn, slowly. I would have told him to look at other doctors who have invested for 3+ decades and see what worked for them.
I would have told young, handsome Dr. Mo to find an investing buddy. Someone to compliment him. My buddy is V., a lawyer who is a couple of years younger than me. She is ultra-mega frugal and we have kept each other to our investing promises. I benefited from her thrifty ways and she learned how to take risks and change out of a shitty job into the ideal job.
I would have told Dr. Mo that he can one day live off his investments. There is nothing magical about it. Everyone eventually will live off of investments when they get to a particular age.
Find your investing buddy and teach each other to become better investors. Have someone sit your down and show you how to literally invest a sum of money. It can be intimidating opening those financial pages, but not any more so than your pathophys book. Basic investing concepts have to start with something actionable and you can build on top of it and eventually develop your own investing strategy.