Investment Insights Guide
Hope you enjoyed reading “Investment Wisdom: the secret sauce to growing money”. Below you’ll find free additional Insights that build upon concepts introduced in the comic, along with links to explainer videos which have been developed to provide deeper dives for those who are interested in learning more! Please hit the comment/review box to give us your feedback!
Here are questions from investors and my responses:
Question from investor: “Have you over-simplified investing, through this comic?”
No, successful investing can be simple if you tap into the tools highlighted in the comic. The vast majority of investors, particularly those who are in their first ten years of saving towards their goals, need to invest in a simplified, cost-effective manner. That can be done by:
Avoiding high fee consumer "investment products", and instead using low-fee Index Funds and/or ETF’s (Exchange Traded Funds).
Given your unique situation, using a Target Date fund that aligns with your anticipated future timing of withdrawals. Maybe you want to buy a house in 2031? Consider a 2031 Target Date fund.
These are considered “passive” investment approaches, reducing the need to monitor or modify the investments on a day-to-day basis. By investing in a pooled investment made up of a cross-section of many different securities, you can gain a high level of diversification that is not as feasible by selecting individual securities on your own. So, your precious time can be put to use doing something else you may enjoy more and/or be more likely to succeed at. There are exceptions to what I’ve outlined, but they are a small portion of prospective investors.
To learn more about this, see the free explainer video “Smooth Ride”
Question from investor: “Why shouldn't I just set up a brokerage account and pick some of the stocks I read about in the news, like some of my friends?”
The same reason you shouldn’t take your paycheck into a casino. You might win, but you probably won’t. The pain of losing your savings is so high, why risk it? Truth is, the brightest financial minds don't know specifically where the economy is headed, when it's going there, or what the trickle-down effect will be on specific companies, industries, or geographies. So, people who think that a news story, a tip from a pal, or even their financial education will give them a distinct advantage picking securities (stocks, bonds, etc), will likely experience a painful lesson as the market delivers its blows in the most unpredictable ways.
This does not mean that you can't evolve into a more sophisticated/active approach in the future, but until you have mastered your career, your family, and your savings, I encourage you to avoid the trap of attempting to select market-winners, and instead tap into the approaches I've highlighted in "Investment Wisdom." For those who want to understand the tricks n' traps more fully, see my video “Investing Rocket Science”, which highlights some amazing twists and turns in the markets and clarifies how markets behave, and how they misbehave.
Question from investor: “You’ve made a big point of stating that “at least 3 months’ living expenses” should be stored in a safe account, but with “safe” accounts not paying much in interest earnings why not not invest the savings in the market to earn more money, and still call it my “rainy day fund”? “
You could certainly do that, if you are clear on the risk of doing so; my assumption with the “rainy day” is that you may need that money in the near future, and when you need it may be inconveniently correlated with a period when the investment markets are down, thus potentially reducing the balance available for you to cover your expenses.
Investment markets can stay down for extended periods of time, so having a truly safe pool of money to tap into as needed is an approach I strongly encourage.
Another primary benefit to a low yield and boring (safe) savings account, is that it provides a strong emotional cornerstone, to know that you are solid and able to cover your day-to-day needs, regardless of what is going on in the investment markets, your career, etc.
There are exceptions, or variations to this theme, but they are rare, such as being able to “borrow” from your 401k retirement plan if you desperately needed money. While that technique is available, I’ve found it’s best to consider our long-term retirement funds somewhat untouchable, in order to avoid the risk of eroding this important future cornerstone. As with everything, opinions vary, so please know this is simply my opinion. That said, if your employer is willing to “match your contributions” into the 401k plan, I can see the logic of building your rainy day fund while you are also contributing to the retirement fund!
Question from investor: “There are apps like “Robin Hood” (tm) that look fun and will let me buy a “piece of a stock” rather than have to buy the whole share of stock, so I can afford to buy into more different companies. Does that not count “as diversification?”
Compared with buying a single share of a company, buying “slices” of shares in multiple companies does count as “more diversified”. But similar to an earlier question, my response is that If you are an investing genius, and/or have some money to throw around, as in lose it, then you can go for it. But that does not describe most early stage investors I know.
There’s an elixir at work when people are “making money” and want to share with the world how successful they are, but the reality is that it’s been hard to lose money for the past 10 years (regardless what “app” is used), as the markets have been on a tear and thus many investors are feeling a bit smug; this is a classic up-market phenomenon that will correct, and when the harsh oddities our global economy take the untrained investors hard-earned capital, those investors will flee for the hills and de-install those apps. For a deeper dive on what we know and don’t know, which can inform your decision, see the explainer video “Investing Rocket Science”
At the date of this web-comic going live (12/21/2020), I see a news report of such an app provider being fined millions for multiple infractions that jeopardize their clients. Look it up.
Question from investor: “How do I decide if I should hire a financial advisor/broker, or do things on my own?”
I believe most early to mid-stage investors can manage their investments on their own, if they deploy the passive management strategies I’ve introduced. That said, I have many friends in the financial industry who provide amazing services to their clients, and in my opinion, their fees are justified through the advanced intellect they bring to the table and a host of complimentary services beyond simply investing money. My purpose in writing “Investment Wisdom” and providing further insights on this website is to help more people get to a point where they can command the attention of such strong financial professionals. You need to build enough savings and investments to justify the time and fees of “better” professionals, so you are not stuck in an advisory relationship that’s dependent upon the advisor selling you financial products to justify the relationship.
As the investment industry has recognized this reality, the automated tools, such as what I’ve already encouraged you to consider, have reduced the dependency upon advisors in the early years of someone’s savings/investment accumulation.
Look for our coming explainer video “when and how should I ask for help”
Question from investor: “There are many different professional titles and designations that I have encountered in my research and I don’t understand who does what, and who I should consider working with. Can you help me make sense of this? “
Just like with investments, it’s good to have many choices of professionals to choose from, but it complicates the decision process, right? This is also constantly changing, as the financial industry adjusts to market pressures, changing needs, and their desire for success in winning new business.
A simple way to comprehend the myriad of investment professions/titles is to put them into one of 3 buckets:
Planners - can help you reflect on where you are and offer some vision into where your finances are likely headed, and some steps you can take to optimize your path. Can be free (usually are selling something else, so beware), or are fee-only planners who charge for their planning services.
Money Managers - may call themselves brokers, advisors, RIAs, etc, etc, but in essence their job is typically to take the assets you have deposited with their institution and invest them in a way they choose, which you hope is aligned with your sitation and preferences. Here, the road divides into:
Brokers/Non-fiduciaries; essentially can sell whatever they want to you, within some regulatory restrictions, but otherwise let the consumer beware.
Fiduciaries - are precluded by law from selling you anything that benefits them but does not clearly benefit you.
An Explainer Video will be provided to drill down on this topic, as above, in “when and how should I ask for help?”