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Investing is Awesome

Everyone wants to make their money grow, the problem is, we don’t always know the best ways to make that happen.

3 months ago my knowledge on Investing was extremely limited.

I’d invested in Real Estate, but beyond that I was pretty clueless.

I am a bibliophile, so when I decided to learn about building my future wealth, I read about it. I spent about 3 months reading anything I could on the subject, reading 2 books and 100+ articles.

There are only 4 ways to build wealth:

  1. Spend less
  2. Earn more
  3. Pay off debt
  4. Invest

It became evident that the absolute best way to grow wealth over time was through investing. During those 3 months, I became very impassioned with learning about the various forms of investing and testing out the different tools and strategies.

This post is an overview of that journey, and a high-level outline of what I’ve learned through research and experimentation.

My Investing Background

I’m not qualified to give anyone advice on investing…

Even so, the content of this blog post will probably still be useful to most of you.

So…what am I currently invested in?

I own 2 rental properties

I bought the first in December of 2013, and the second in July of 2014.

The first is my primary residence, and I lease out the spare rooms.

The second is solely an investment property and is leased to a family. I co-own this property with 2 other people.

The first house has increased in value by 10% in the year I have owned it. Yay, Austin.

The second house has increased in value by 15% in 8 months. YAY AUSTIN.

Real Estate is not for everyone, but it was my first taste of investing and it gave me the confidence to pursue other financial avenues.

[themedy_columns structure=”50|50″][themedy_col position=”a”]Pro’s:

  • Basically free money in Austin because of the ridiculous growth of the city
  • One of the few investments that can provide cash flow immediately while still growing your invested money.
  • Free covered parking ūüėõ

[/themedy_col]

[themedy_col position=”b”]Con’s:

  • Adds debt in the form of a mortgage
  • High Risk, High Reward
  • Need good, honest tenants to make this work
  • One the most non-liquid investments you can make

[/themedy_col][/themedy_columns]

This post won’t cover Real Estate because it requires a lot of money to get started, and I’d rather share some things that everyone can do¬†right now.

I have a 401k through my full-time job

I chose all of my investments on my own.

I avoid all mutual funds. Mutual funds are evil.

I focus on a mix of Stock Indexes, Bond Indexes, and REITs.

The mix I chose for my 401k is based on my age, risk tolerance, and research I have been doing.

I have a taxable investing account

I use a robo adviser to invest my savings every month in a risk averse, taxable, investment account.

It is cheaper than a savings account, and out earns inflation, making sure my savings don’t weaken over time.

I’ll talk more about this robo advisor business later in the post.

So what should you do with your money?

There is no cookie cutter answer to that question.

I recently had a friend of mine ask me what he should do with a large sum of money he was about to inherit.

My first two questions were:

  1. How much money do you spend each month?
  2. How much money do you earn each month?

I needed to know this because no matter what advice people receive, if they have bad spending habits, that large some of money will be spent instead of invested.

His spending habits were actually very good. He made twice as much as he spent each month.

If you don’t know how much you spend vs how much you earn, please check out my last post on building wealth.

** Reminder: I am not an expert at this stuff. I’ve just done a lot of research¬†and learned what I feel is the best path for the 99% of us that are not investing badasses. Carry on. **

So this is what I told him. If you know your financial landscape, and actually have the money to invest…

Open a tax-deferred account

These include

  • 401k (through your place of work)
  • Roth 401k (through your place of work)
  • IRA
  • Roth IRA

A 401k is a retirement account that you company has set up for you. Your investment options are limited to what your company has worked out with whatever brokerage they are using. ¬†401k’s are tax-deferred, meaning your money is not taxed when it is put into the account, the growth of the account is not taxed, but only the withdrawals are taxed. If you try to make a withdrawal from your 401k before you retire you will lose a big chunk of it due to penalty expenses.

The 401k is a fund for saving for retirement only, and you are limited to $18,000 a year of deposits.

A Roth 401k is the same as a regular 401k in all ways stated above, except two. Roth money is taxed before it goes into the fund and is not taxed when it is withdrawn.

Use a regular 401k if you feel your tax bracket will be lower than it is now. (Unlikely)

Use a Roth 401k if you feel your tax bracket will be higher than it is now. (Likely)

An IRA is an Independent Retirement Account. It is not tied to your place of work, and so your investment options are much greater.

A Roth IRA is, as you’d expect, an IRA where you get taxed on your money before it is put into the account, and not taxed when it grows or is withdrawn.

Regardless of which of these options you choose, you’ll have to figure out how you want your money allocated. That will be covered in the Asset Allocation area.

Taxable investment account

This is an account you can withdraw from at any time. You can invest it any way that you like, but you’ll get taxed on your returns if you withdraw.

Ex. Say you invest $1,000 and make $200 in a year. After that year, you withdraw $1,200. You’ll be taxed 20% of the $200 you made.

Taxable accounts are great if you want to save up for a big purchase and want your savings to grow over time. Many people save up for car or house down payments this way.

I have a taxable investment account for my savings like I mentioned above.

For this type of account, as with every type of investment account/portfolio, your Asset Allocation is  the most important variable if you want to cut your risk and maximize your reward. The Asset Allocation section is next!

Asset Allocation

This is the most important section.
^ Have I said that before?

Also, throughout all of my reading and research, the one constant that all the honest experts mentioned, is…
[themedy_alertbox icon=”asterisk” colour=”red” font_awesome_att=”” custom_colour=””]Do NOT invest in Mutual Funds. Ever. [/themedy_alertbox]

^ Mutual Funds are expensive, and the fees charged destroy your compounding (the multiplying effect of your money making more money over the years).

I think the math says that mutual fund manager’s and their companies will reap ~70% of your money over a course of 20 years?

You’ll have to fact check me on that. The point is, mutual funds are unreliable, expensive, and a money sucking pit of no profits. Don’t do it.

What is Asset Allocation?

This is how you spread your money out into various investments so that no matter how the economy turns, you take the least amount of damage.

Typically you want a blend of the following:

  • Domestic Stocks
  • Foreign Stocks
  • Domestic Bonds
  • Foreign Bonds
  • REITs (Real Estate Investment Trusts)
  • Commodities (Gold, Silver, Coffee, Oil, Cannabis <- Not kidding)

In my experience, the best way to reduce your risk and maximize your reward when it comes to these different categories is to take advantage of low-cost index funds.

Index funds are a large grouping of the best performing stocks. Indexes are not actively managed, and they mirror the market. The most well-known index is the S&P 500.

The stock market as a whole always outperforms any individual stock, and indexes match the market.

Index’s have extremely low fees, and investing in them diversifies you across the market/industries of the stocks in the particular index.

There are Indexes for Stocks, Bonds, REITs, and even Commodities.

By investing in low-cost indexes across these different assets, you are diversifying in your diversifications….

Or for those of you that have seen the movie Inception. Diversifiception.

Inception Meme about Financial Diversification

Fittingly bad meme

This is confusing, make it easier

Okay, fine.

How about I tell you about companies that will do exactly what I just described for you for extremely cheap?

You invest with them and they will:

  1. Spread your money out over Stock and Bond Indexes
  2. They will reinvest any dividends your earn for greatest tax efficiency
  3. They will automatically re-allocate your money for best returns
  4. You can set up an IRA, Roth IRA, or taxable account. Or all of them.
  5. You can watch all of your money grow with pretty pictures and graphs.

The rise of the robo advisors

Robo advisors are software products that automatically invest your money across diversified indexes (described above).

In my opinion, they are awesome. I use them for my Roth IRA and for my Taxable Accounts I’m using to save up for stuff.

The Robo advisor I use is Betterment. 

I use them because they are the most transparent of the many I have looked at, their customer support is lightning fast, and they have an extensive blog that provides a ton of information. Their blog can be viewed without being a member.

The other two are listed here

Wealthfront is actually pretty awesome. Their pricing is a tad bit different from Betterment’s, but they are a great tool. Wealthfront offers a bit of wider asset allocation options. I just prefer Betterment’s Bond allocation over Wealthfront’s.

The brand new Charles Schwab robo advisor just came out a week ago or so, and from what I can tell it offers many of the same services that Wealthfront and Betterment offer. The Charles Schwab tool also invests your money into Gold, and is the only one that will do so (that I can find). This is a very appealing option for some people who want to spread out their money into commodities.

My one issue with this Charles Schwab tool is that the costs and fees associated with it are very difficult to find. Betterment has their costs displayed on their front page. Any company that makes me dig through the fine print to find their fees always gets me worried.

Don’t just take my word for it

Do your own research! Read a book!

I’ll recommend 2 books I have read recently. (you knew this section was coming).

One is a book solely based on the investment world, the other focuses on investing in yourself to build wealth. Both offer great information.

The first is Tony Robbins new book “Money Master The Game”

This book is great because it covers the basics. Tony always adds a lot of build up and fluff to his books, to keep the readers excited to keep reading (seems redundant), but the information he covers is very solid stuff. This book is a worthwhile read for everyone, even if you already know about everything I’ve talked about in this article.

Just remember, Tony Robbins is NOT an investment expert, but the 20+ badasses that he interviews ARE investment experts, and the information he gets from them is worth reading.

Dig through the fluff until you find the many nuggets of pure gold.

The second book is James Altucher’s “Choose Yourself: Guide to Wealth”

This book makes me smile. It is extremely unconventional and at times completely disagrees with everything I wrote in this post. I like that.

This is important because when it comes to investing your money, you should always look at multiple perspectives. It’s YOUR money to grow the way you see fit. I love James Altucher’s perspective on money, wealth, and growth even if he prefers that I hide all my cash under the mattress (kidding).

Also…he agrees that mutual funds are the spawn of Satan.

Closing Section

Thank you for reading! This was a fun one to write.

I really enjoy investing, I find it fun.

I didn’t cover much in this post, but I wanted to give you all a very brief view of what I have learned and experimented with.

I’ve also experimented with day trading, which is the buying and selling stocks for the short-term.

If you’re curious about that send me a message or ask me about it in the comments.

Let me know how you liked the post in the comments below, and then go make some money!

Additional Resources

Because the learning never stops and I don’t know that much about this stuff. I am good at the basics.

Articles & Research

Low-Cost Robo Advisor’s

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