Save as much as possible, pay off credit-cards, max out
employer-matched and other retirement accounts, invest remaining in
non-retirement account.
Invest with a simple, ‘lazy’ investment strategy that doesn’t
require lots of time/effort/complexity; for example, 3 funds in
Vanguard.
More Specific
Save as much as you can (within reason) (i.e. cut frivolous
expenses)
Pay off all bad/high-interest debt first, as quickly as possible
(credit-cards, auto-loans, etc.)
Next, set aside 1-3 months worth of expenses for an emergency
fund
Next, max out any employer-matched retirement accounts, as this is
literally free money
Max out all tax-advantaged retirement accounts (different annual
limits based on whether IRA, Simple IRA, Roth-IRA, 401-K)
Still have money left over? Invest in a non tax-advantaged
account
Invest as much/often/early as possible for maximum time in the
market and potential compounding growth
Don’t try and ‘time the market’
If needed, consult a Fee-Only financial-planner, especially for the
confusing stuff like retirement-accounts, taxable events, etc.
Invest with a simple 2-5 fund strategy. Look for low expense-ratio
funds e.g. this sample 3-fund portfolio in Vanguard:
50% VTSAX (total US stocks) (0.04% ER)
40% VTIAX (total international stocks) (0.11% ER)
10% VBTLX (total bond market) (0.05% ER)
Rebalance quarterly or yearly, but otherwise try and automatically
invest, and never panic-sell. Just keep buying with the idea that with
dollar-cost-averaging, the value of the stock market will hopefully go
up ~7%/year averaged over a 1 or 2-decade period.
Dollar-cost-averaging means buying a steady amount
bi-weekly, monthly, etc, and as prices go down, you’re getting more
shares automatically, and as prices go up, that’s alright because it’s
increasing the value of your portfolio.
Rebalancing means: Sell/buy portions of the above 3
funds until you are again at your target-ratio. I.e. if VTSAX
outperformed VBTLX, and is now worth 65% of your account, sell the
appropriate amount and distribute to the other 2 funds, so you’re back
at your 60-40-10 ratio.
Benefits of the
‘Bogglehead’ strategy
It’s simple, requiring little time or work to maintain
(theoretically can be pared down to as little as 15 minutes of
maintenance per year!)
It is theoretically safer by helping investors avoid many of the
pitfalls of investing:
Buying high, selling low, or panic-selling
Losing most of the advantage due to transaction fees,
expense-ratios, and taxes
Losing tons of money trying to pick individual stocks or investing
tons in other highly speculative ‘investment opportunities’
Dollar-cost averaging should improve one’s performance even
in a volatile market, by automatically having the investor buy more of a
stock when the price is low, and less when it’s high.
Caveats
The Bogglehead strategy is a long-term strategy,
that requires patience, faith, and fortitude, especially in large
market-downturns. It only works if the investor stays the course. It’s
predicated on the idea that the total stock market will go up in the
long run, (counting inflation)
Sections of the market could always crash, and diversifying across
asset classes (us stocks, total stocks, bonds) may not be proof against
that
Doing total-market, instead of just the S&P500, while more
‘diversified’, may lead to lower returns than a super-simple 1-fund
portfolio: 100% VFIAX (tracks S&P500)
The Bogglehead Strategy may be missing the key benefit of dividends
from individual stocks
The Bogglehead Strategy will underperform compared to someone who
just gets lucky (e.g. someone who bought bitcoin or bought nvidia stock
10 years ago)
The Bogglehead strategy may also have other pitfalls that something
like Nassim Taleb’s Barbell-Strategy would avoid (see below)
Nassim Taleb Barbell
Strategy
Nassim Taleb suggests that one should avoid the
‘middle-risk’/‘middle-reward’ path of stocks and index-funds, and
instead get the best of both worlds by having:
80%-90% of assets in super secure, practically no-risk forms
e.g. cash and bonds (and perhaps property counts)
10%-20% of assets in extremely high-risk/high-reward forms
e.g. options, very speculative markets, etc.
This gives you a maximum 20% loss of total wealth, versus
theoretically unbounded upside (a stock could crash and your put option
could x10000, as an example)
The main downsides I see with this are:
It requires expertise, and the people on the other side of the
trades are basically always going to have more
knowledge/experience than you
What happens when you repeatedly keep loosing that 10% that you
allocated to the risky portion of the strategy? Do you just give up at
that point?
Other “Investments”
Some other things that could be thought of as investments, which
might deserve precedence over stock-market investing:
Education, self-education, training - Increasing your
skill-set and/or earning-potential is always a good idea. Think
how much money can be saved by knowing even a very small amount of
Plumbing, for example!
Tools, Equipment, Time-Savers, Stress-Reducers - Similarly,
acquiring an appropriate set of tools (within reason!) is money
well-spent. This might include anything from a time-saving InstaPot to a
basic Laptop, to a weed-eater, to a skillsaw. Anything that lets you do
things yourself, do things more efficiently, or reduce the number of
decisions that need to be made daily/weekly. This could thus include a
well-thought-out, simple wardrobe.
Non-Financial Assets - Time and money spent improving one’s
house or fixing/maintaining one’s car are rarely wasted.
Revenue-Generators - Obviously anything you can lease out,
be it an apartment or an expensive camera-rig, may be worth investing
in.
Revenue-Improvers and
Cost-Reducers
The above “investments” can be split into two major categories: Those
that increase revenue, and those that reduce costs. The latter category
should not be neglected!
Obviously one’s income is equal to the money coming in minus money
going out. Often, things that reduce money going out can do so in a more
permanent way, so that you continue to reap the benefit of implementing
a change for years to come.