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My Investing Strategy: Taking the first step

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As you know, I’ve been able to save quite a bit of money this year.  As my savings account began to grow past my annual spending, I decided it was time to figure out what investing was all about.  I certainly made a few mistakes along the way, but after reading more and more about investing, I am starting to feel comfortable with my strategy.

Assets, Mutual funds, and IRAs… What?

I learned about the basics of investing when I began my first job and needed to do something with the money I was to save for retirement.  It was an odd feeling since the company expected me to know what I’d like my asset allocation to look like, before I knew what exactly an asset was to begin with.

I was surprised that my 4 years of high school and 4 years of engineering school had never once touched on the subject of investing.  Yet, I was supposed to know exactly where to put my funds upon employment.

So then I thought, if they don’t mention the subject in school, maybe it’s something your parents are supposed to teach you and, you know, mine just forgot.  With this hypothesis I gave my Mom a ring hoping to learn about her secret investing strategy that had never come up in our years of conversation…

Turns out, most people actually are pretty clueless about investing.  They have a “money guy” who handles that for them.  They just set aside a little bit each month, and the “money guy” knows just what to do.  It doesn’t seem to matter exactly how much they set aside.  Thankfully, my parent’s “money guy” happened to be a long time family friend named Josh, so I felt comfortable going to him for advice.

The Basics

I think people who are ultra-smart are a little afraid to teach ignorant folks about complicated subjects.  I was undoubtedly ignorant, so Josh started slow.  He gave me the 3 minute explanation of the world financial market that goes a little something like this.

  • Compounding Interest: It’s magical
  • Stocks: 80% because they’re volatile, but a safe bet for young people
  • Bonds: 20% becase they’re safer but you can expect lower returns
  • Keep your fees at a bare minimum and touch nothing

Now that I look back at that advice, I’m appreciative of Josh’s sage wisdom.  He understood how little I knew, and decided not to bore me with details.  If those are the only 4 things a guy knows about investing, he’ll probably turn out just fine after a 30 year career and reasonable savings.

He also recommend a few investing books, which I rejected, since money was boring… back then.

Whether I was ready or not, my company told me that I had to choose my ratio.  Thankfully, I only had four mutual fund options ranging from 100% bonds to 100% stocks.  Having hada 3 full minutes of instructions on how the financial markets work, I plunged in with my 80%/20% allocation, and that was that.

Vanguard. Vanguard, Vanguard

Once I started to read more about investing, I learned that there were two main types.

  • Passive Investing: Invest in large diversified funds that track the market
  • Active Investing: Choose stocks based on “market intelligence” and other fancy words for gut feel

Since I am a man of statistics, it wasn’t ever a question.  On average, active funds loose to index funds.  I was astounded to learn it was really that simple.  There are a few active funds that beat the market every year, but on average, they don’t.  Most funds lose to the market.

So once I decided that index funds were for me, a number of smart individuals routed me to Vanguard.  Vanguard is owned by it’s own fund holders, keeps expenses low, and is the best way to just track the market.

I could go on and on about Vanguard, but there are much smarter people who know a lot more about investing that would explain it better.

Jumping in

Once I understood how it all worked, and what I thought I was supposed to do, I still needed to take a leap of faith.

Knowing that I might be doing something incredibly stupid, I opened up a Vanguard IRA and put $3000 into a broadly diversified index fund.

Now it all seems so easy, but back then, I had no idea how it worked.  There were so many questions that I pretty much just figured out how I went.  Here’s  a list of the stupid stuff I figured out along the way.

  • What’s a dividend? Before I read and read on the topic, I honestly thought it was all about capital gains and market appreciation.  You can imagine how thrilled I was when I learned about dividends!
  • Do you pay fees every time you buy more of the fund?  No! you just pay an expense ratio that siphons off .17% of your fund each year (not a big deal)
  • Should I invest when the market is looking good? No! invest when everyone else is scared.
  • Should I invest all at once, or throughout the year? Dollar Cost Averaging is probably a safe bet, so spread it out throughout the year
  • So my investments just lost money for the first six months, what do I do? Nothing it will come back up eventually.  Don’t sell!

Learning by doing

As you can tell, I didn’t know very much about it when I started, but having a little skin in the game really motivated me to learn about it.

I don’t suggest that you put half of your life savings in the market before figuring out the fundamentals, but having a couple thousand bucks at stake is a pretty good incentive to find the “investing” section at the library (section 332.6 in case you were wondering).

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  1. December 20, 2012 at 10:51 PM

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