A simple path to wealth, my road to becoming a better investor
Disclaimer; this book does not serve as financial advice on any level. These are the things that I learned from reading this book and hopefully they will give you some value to your life as they did to mine.
I heard from this book from one of my favorite YouTubers George Poulos and I decided to pick it up as I got more into cryptocurrency. Unfortunately, I was not able to strike it rich with Dogecoin quite yet (to the moon!) but I have dabbled quite a bit with many different coins. While my knowledge with investing was just so-so I felt that it was only beneficial to learn more about investing. Especially, since I am young and I have a lot of time for compound interest to do its thing and if I want to have financial freedom I think investing is a great tool. Unfortunately, this book did not mention anything about cryptocurrency as I think crypto was still a very new and daunting thing back when this book was published. So, if you are eager to learn more about investing into crypto this book is not for you. However, if you are wanting to learn more about stocks and how to diversify your portfolio then I would say this book is a great start.
Debt
It is common knowledge that debt is bad but in reality sometimes we have little to no choice. These choices may include taking out loans for school, medical emergencies, and simply just trying to make ends meet when times are hard. In a time where debt is normalized it is hard to be financially successful at the same time. It is important to note that no matter how much debt you have and no matter where it came from you must face it head on. This may be one of those areas in life where people tend to feel shame and would rather put it under the rug because it can be scary. However, debt accrues interest and it only gets worse and worse over time so we must deal with it first before we start investing. This is where it gets a little bit tricky because actually in certain cases it is smarter to invest your money over paying off your debt. In general if your interest rate is 3% or lower it would be smarter to allocate your money towards investments. 3-5% you should do whatever feels comfortable for you. If your interest rate is above 5% you should allocate your money towards paying off your debt instead. After that, you should then allocate your money towards the debt that is accruing the most interest.
VTSAX
VTSAX stands for Vanguard Total Stock Market Index Fund. The author of this book JL Collins is a big fan of VTSAX and I would have to agree with him. In short, the VTSAX is a wide variety of U.S. stocks. Top holdings in VTSAX are big tech companies you may already know such as Apple, Amazon, Netflix and Google etc. You can expect an average return rate of 11% every year. It is important to note that this is a historical average and it can vary drastically year to year. A caveat to VTSAX is that there is a minimum buy in at $10,000. This may be a hard requirement for some people to meet so some alternatives would be VTSMX (Investor shares) at a $3,000 minimum buy in and ETF's (Exchange Traded Fund) with no minimum buy in.
Where to Invest
Now that I got VTSAX out of the way I will talk about general practices to follow when investing. There is no general rule to how much money you should contribute to your investments. Obviously, as much money as you comfortably can would be a good idea. Some recommend the 50/30/20 rule where you allocate 50% of your income to needs, 30% to wants and 20% to savings. However, it is entirely up to you. A good thing to note is to have a diverse portfolio. If you invest in VTSAX it automatically buys a large amount of various stocks in the pool. For context, at this time of writing VTSAX currently has 3,755 different holdings. Yes, VTSAX is only stocks so you may wonder what about bonds and other different type of stocks such as international stocks? Well, if you are young like me then you would benefit the most from a stock only portfolio because we are able to handle the strong dips that go along in the market and stocks historically provide the most gains. However, if you are a bit older you may want to diversify your portfolio into other things such as bonds. You can use VBTLX which is very similar to VTSAX but it is bonds instead of stocks. Now how much of my money should I invest into VBTLX? It is entirely up to you but a common rule some people found is to have 75% of your investments in VTSAX, 20% in VBTLX, and the remaining 5% in cash. You should tweak this in what you are most comfortable with.
Why people lose money while investing
Humans are emotional beings and emotions do not mesh well at all when it comes to investing. Especially, since money is involved and large amounts of it as well. When the market goes down like it inevitably does from time to time people are scared it will fall more and more and sell their investments. This is the absolute worse thing to do when investing. To make money you must buy low and sell high. If you sell when the market falls you are buying high and selling low. Sounds stupid right? Well, it is. Ever since the stock market became a thing back in 1792 it has ALWAYS recovered. Every. Single. Time. The next time the market crashes the chances are on your side that it will recover again. When you sell low you are essentially betting against this. You are saying that the stock market will NEVER recover. Furthermore, timing the market is impossible. You can safely say that every time you try to time the market you are setting yourself up for failure. They say the best time to start investing was yesterday and the second best time to start is right now.
Investment Advisors
Many people hire investment advisors to invest for them because investing can be a daunting task. However, it does not need to be a daunting task because investing into VTSAX solves that for you. Furthermore, investment advisors market themselves saying that they can be more effective than other investments like VTSAX when largely this is not the case. At the end of the day no one can manage or care for you money as best as you can and your best bet is to ditch investment advisors and do things on your own. Some investment advisors may say that they can time the market and provide better results but in reality no body can time the market. Always remember this. Keep things simple and you will be just as effective if not better than someone else managing your money for you.
Dollar Cost Averaging (DCA)
Prior to reading this book I thought DCA was the best way to invest your money. Turns out, I was wrong. For those of you that don't know DCA is when you slowly put your money into the market to average out the return that you will receive or to lessen the impact of volatility. For example, I have $10,000 I want to invest and DCA says that it would be bad practice to put all of it in the market at once because what if it goes down tomorrow or the next day. So what you would do instead is to put the $10,000 in over time such as 5 months. Therefore, you will put in $2,000 a month for 5 months. Easy enough. Well, when you DCA you are betting that the market will go down tomorrow or the next day. This goes against what we said earlier about timing the market. It is impossible so you shouldn't try. In fact, history has shown that there is a 23% chance of the stock marketing going down on any given year. That means that there is a 77% chance of the market going up. When you DCA you are betting on that 23% that the market will go back down. In this case, we will give you the benefit of the doubt and lets say it goes down and it goes down hard right when you invest all of your $10,000. Remember, the stock market always goes back up and you only lose your $10,000 when you sell. If you manage to ride the storm the chances are that the market will recover and you will end up with more than $10,000. Furthermore, what about when you are done DCA. What if on the very last day you put in your remaining $2,000 and the market tanks. Now what? You DCA and you still lost. Just remember, you cannot time the market and you are better off investing all of your money at once.
Cryptocurrency and Robo-advisors
I would like to talk about these two topics a little bit here. The book did not include either of these and I feel like they would have been included should there be an updated version of this book. I will not talk about whether or not you should invest in cryptocurrency or use a robo-advisor but I will talk a little bit about what they are. Should you find them interesting then I suggest you research further and determine if these are something you would like to be a part of or use. In a nutshell cryptocurrency is a form of decentralized digital currency that uses blockchain technology. The appeal to cryptocurrency is the security behind it and the use cases each token or coin offers. In compared to stocks cryptocurrency is very volatile and experiences lowers lows and higher highs. There is many different types of cryptocurrencies out there that come in the form of digital coins or tokens. If you are interested in cryptocurrency and the technology behind it I highly suggest watching this video. Popular coins to look into are Bitcoin (BTC), Cardano (ADA), Dogecoin (DOGE), VeChain (VET), and Ethereum (ETC).
Robo-advisors use data and computer algorithms to find out which investments fits your needs based on information that you provide such as income and age. There is many different robo-advisors out there and charge various amounts of fees. Majority of these robo-advisors are apps that you can install on your phone and are very user friendly. If you are interested in using a robo-advisor for investing I suggest you read more about them. A robo-advisor that I use is Acorns.
Conclusion
Please note that none of this serves as financial advice and should be further researched at your own discretion. This article is for me to share what I have learned from this book and hopefully it adds some value to you as well. I think we can all agree that investing is good practice and a good stepping stone to financial success. Should you find some of these topics interesting and would like to know more feel free to research further or you might want to give the book a try. Remember that investing does not have to be this scary thing. If anything, it has gotten easier over the years thanks to things like robo-advisors and more resources to learn about investing. Simple things like VTSAX have existed since 1992 and continue to be a reliable source to allocate your money towards. If you are to only takeaway a couple things from this article, please let those things be that you cannot time the market and the second best time to start investing is right now. Thanks for reading.