Not Knowing What Your Options Are Might Make You Reluctant To Invest
I know some of you type-A mofo’s saw “fear” in the headline and got all pissy, “Fear? who? me?? please!! I’m a dockta!”
This is gonna be a very basic post, I want to talk about what options are out there when it comes to investing your money. I’m not talking about complicated strategies, I simply want to answer the question that might be on your mind “Ok, I know I gotta invest my money but wtf do I pick, there are so many options!”.
I was gonna put up a screenshot of all the investment options available in my Fidelity retirement account but it’s just a fuckfest of funds. If you’ve read my blog you know I’m anal and that I have looked through every option but quite honestly that’s not even necessary. When it comes to investing go after what you want, don’t let the various options confuse you.
Don’t confuse what I’m telling you here for investment advice, remember, I drove a $65k Hummer which was leased and used to buy $2k worth of clothes every other month. But please, don’t let the unknown keep you from making your money work for you. Wall Street is worse than the IRS when it comes to getting at your money but just a few basic facts will help you raise your middle finger proudly in the Street’s direction.
Listen, you should still read some good books on how to invest your money. Even better, get a competent financial adviser who can guide you in the right direction. You can do that concurrently with putting your money to work. I guess I worry that if a doc doesn’t know what their options are they will just remain in a holding pattern… many docs will never be comfortable with the topic of personal finance, specifically where and how to invest their money.
Let’s dive right in and review the various options available to the citizen investor. You have probably heard of these terms, stocks, bonds, mutual funds, money market, CD’s, and of course your run of the mill savings account. That’s really it, you probably thought there is more because there are all sorts of other niche ways of investing which are simply sub-specialties of the above. We aren’t even gonna bother with those … dividend portfolios, TIPS, options, peer-to-peer lending, commodities, hedge funds, futures, currency etc.
I’m not saying that you should forget about the last group, those all have appropriate use in the right portfolio, managed by the right person. But let’s stick with the basics, even more importantly, let’s listen to what wiser individuals have recommended for the average investor to do.
William Bernstein MD, John C Bogle, James M. Dahle MD and even Warren Buffett have all recommended that the average investor should stick with passive mutual funds, specifically index funds. Dude, it doesn’t get easier than that. They are gurus in the investment field (yes, even the MD’s) and except for Buffett none of them can profit from giving the advice that they have given.
Back to the first set of options, stocks, bonds and mutual funds. It really doesn’t matter whether we are talking about 401k’s or private brokerage accounts such as Vanguard, Fidelity, Charles Schwab etc. Those are all accounts or vehicles used to invest your money in. The product which you invest in is the stocks, bonds or mutual funds.
Matter of fact let’s talk about money. I know it’s fucking basic but hear me out. You come into money either through being a doctor or running a phone-sex operation, dealing drugs, side hustles, hooking on Main St, etc. I’m not judging, kudos to you for having such a seductive voice (please share your number in the comments below along with the coupon code for my discount). You have access to your earned money either before it’s taxed or after it’s taxed.
Whatever ends up in your checking account, or that’s mailed to your house, is likely taxed income. You might be more familiar with the term W2 where your state and federal as well as payroll taxes (medicare, social security) are already taken out. You are free to use this money to invest in either stocks, bonds or mutual funds… easy so far right? To do this you wouldn’t need a 401k or IRA. You simply open an account in a brokerage house and you can start buying the right investment product, which we will get to in a minute.
Then there is money that hasn’t been taxed yet, so this would be your gross income. If you are a partner in a group then you would get this as perhaps a K1 distribution or if you’re an independent contractor it would be a 1099. You need to set a portion of this money aside for taxes but some of it you can invest before paying tax on it. This is the money that would go into you 401k, IRA, 457, 403b, pension, cash balance plan etc. The money is no different from the already-taxed money, you can invest it into stocks, bonds or mutual funds as long as they are offered in your 401k plan etc.
There is no doubt that the financial industry is one fucked up blob of shit-talkers. Catchy phrases delivered by memorable actors trying to predict the future in order to get you to buy their products, invest in their systems and swindle you legally out of your money. That’s why it’s important you develop your own investment plan otherwise you will get sucked into one of their plans out of fear or ignorance.
Listening to those fucks is like going to one of those shady oncologists who will claim that if you do xyz then you will definitely be cured of your cancer. Of course, they will phrase it so well that even if you listened to the recording on your deathbed, you probably couldn’t catch them on any one particular thing they said.
When it comes to mutual funds for the most part there are 2 types, active and passive. The active ones are managed by trader(s) who pick and choose which stocks/bonds they want to trade within their mutual fund portfolio. Their goal is to beat a specific market.
A mutual fund is basically a mix of stocks and/or bonds. There certainly are other types of mutual funds but the majority of them hold various stocks and various bonds. Sure, we can get into all the different types of stocks and bonds but that’s actually not quite as important, you’ll see why in a minute.
Here is a good example, if the ticker symbol for Apple Inc. is AAPL and WMT for Wal-Mart then someone can come along and create an index fund with these 2 and use ticker symbol AMT… okay, shitty example but you get the point right? The mutual fund has its own ticker symbol but is made up of a bunch of different stocks or bonds.
Come on, isn’t this shit fun? So we are talking about mutual funds and if you recall those big-wigs I mentioned all unanimously recommend passive mutual funds for us novice investors. The reason active mutual funds are not recommended is because of their historically poor performance and the higher fees associated with them. The conversation would get very complex if we were to dive into the details of it because there are exceptions. For our purpose we don’t even wanna go near them active ones, set them aside, trust me they will still be there if you change your mind.
On to passive index funds. If you want to know the details of exactly what an index fund is then I recommend you do your own reading. This isn’t a post about the ins-and-outs of index funds specifically. However, I do want to talk about the benefits of a passive index fund. This is a fund that holds an assload of stocks traded, for example, in the US, which may be geared towards growth, or geared towards maintaining their value, etc. The various specializations is what makes for different types of funds. They even have ticker symbols like stocks which you can look up online.
Here is an interesting fact, the first mutual fund I ever invested in was when I was 17 years old, it was a Putnam fund. My mom helped me set it up, and if course I raided it once I was in college. Good job! Even though it was an active mutual fund it probably would have been better to have kept it rather than cash it in.
Now, you might come across ETF’s, which stands for exchange traded funds. They are investing in the same thing but are traded differently, therefore it doesn’t make a difference to the topic at hand. Think of passive index funds and its equivalent ETF as the same thing.
Why are passive index funds so favorable? They don’t cost much to operate, the good ones don’t have any hidden fees and they are relatively easy to understand. They are internally diversified which gets rid of the need to buy a shitload of different types of stocks in different industries in order to diversify. Index funds are also nice because they benefit from a buying-and-holding strategy as opposed to constant trading that would be necessary in many stocks or option strategies.
As I mentioned, index funds can hold stocks or bonds, real estate or a mix of those as well as other types of investments. The stocks could be US or international and the same is true with bonds. Bonds are further broken down by their time horizon.
So if you take anything away from this post is that those who know much more than us amateur investors recommend we invest in passive index funds. They also happen to recommend Vanguard because it’s a brokerage house with the lowest fees. The gurus also recommend that we hold some of our money in stocks index funds and some in bonds index funds. Here, each one has their own unique perspective though overall they agree that the ratio should be determined by your individual risk tolerance. If you care to know, 90% of my index funds are in stocks (also called equities).
When it comes to picking stock index funds they recommend having the majority of your holdings in what is popularly phrased as a total US market fund. All this means is that the index fund owns a ton of US-based stocks from all industries, sectors or whatever terminology you want to use. It’s safe, it’s comforting and doesn’t cost much.
You’re ready to change your 401k elections right? Huh? What?
So, your 401k contributions are deducted from your paycheck or however you set that up. They get deposited in some brokerage account. Usually the brokerage account will invest your money into their favorite investment item (read, the one that makes them the most money). Your goal is to tell them to suck it and select the investment which is right for you.
To change this you need to change your future elections so that any money coming in will get deposited into the passive index fund of your choice. Almost all brokerage companies allow you to do this online. In the example below I chose Vanguard’s Total US Stock Index Fund (this is the passive index fund) inside my Fidelity 401k. You might see that I have other things besides this fund but the majority of my money is in that.
So which ones should you select? Start with the basics, pick the one that’s the most recommended, and I’ve shared with you what my research has revealed above. It’s not the end of the world, you can go back and make changes later.
You might be asking at this point how much you can expect to profit from this fund. That’s a complicated answer. Interestingly it’s not the right question but fuck it, we won’t get into that right now. The average investor will do a great job sabotaging themselves, they will pull out and sell out of an investment when it bottoms out. And they will buy when the market is doing well and everyone is buying it, which means buying when everything is overpriced.
So, if you can NOT be the average investor and just regularly invest in these passive index funds (even just one passive index fund) then you will be worlds ahead of your fellow doctor. Before taxes, fees and inflation you could expect returns somewhere in the 4-6% range.
Index investing is a strategy, it has various steps which need to be followed. Money has to be invested into the index fund regularly (dollar cost averaging) and holding the fund for a long period of time is important to the success of this strategy.
The details of the strategy are important and shouldn’t be understated. Don’t try to buy the index fund when you think they are low and sell when you think they are high (called market timing), that’s not the strategy that I’m talking about nor is it the strategy that our guru’s are recommending to us. Matter of fact Dr. Bernstein would crack his reflex hammer right over your face if you try to time the market.
If you decide to change your strategy later on in life that’s not a problem, it might even be better for you. Every investor needs to decide what she is most comfortable with, what risks he can tolerate, what concepts make the most sense to her, and find the gurus s/he believes in who they can follow throughout their many years of investing.
If you are after high returns then index fund investing is not for you. Statistically those who stick with this strategy will grow their money the most (read that sentence carefully) in comparison to those who pick active mutual funds or individual stock investing etc. If you’re after making your money grow with the least risk and the highest probability of success (yeap, that’s what I’m after) then I recommend the passive index strategy to you.
If you want much higher returns on your investment then you would need to seek different Wall Street strategies, such as options, individual stocks etc. But homie, you better do your research. I know many docs who have dabbled in that stuff and I don’t personally know of one who has made their money grow. They have had many successes but just as many failures.
The purpose of this post is to get you to lose the fear of investing by letting you know of the options which are out there. I also wanted to point out to you what trustworthy gurus recommend. This is a great platform to launch off of. If you want to add options trading, REITs investing, peer-to-peer lending or even real estate dealings then do so after you get the basics down.
I trained in Family Medicine, I will always recommend to my patients that in order to have the best chance at a healthy life with longevity they should decrease their stress, eat a healthy diet and keep active throughout the day. Is that enough? Yes, probably for the majority of my patients this is more than adequate. I can get into details such as getting enough sleep, doing meditation, following a plant-based diet and going for a 60 minute walk every day. I can then get into further detail by checking their cholesterol, their BP, getting a family history etc, but guess where the bang is for the buck? I hope you guessed it.
Do you have a headache after reading this? How nauseated are you? I recommend zofran.
Are you planning on crawling under a rock after reading this? If so remember to look for scorpions, that’s where they like to hide.