How do you invest your money? Some people have been asking me how I invest and how they should invest their money. I’ll admit that I haven’t been totally transparent about my investments. I just put a number that represents the total of our investments in my monthly updates.
Related: April 2017 Goal Progress: Update #14
Today, I want to share with you how I invest and how you should invest your money. I want to emphasize the how as I won’t be telling you where exactly to invest. Here are 3 investing principles I believe in.
- Everybody should have an investment strategy that is unique to them. Just about everyone you know is in a different financial situation than you. Some people have student loans, some don’t. Some have credit card debt, some don’t. Some have car payments, some don’t. Some have a mortgage, some don’t. Some people have huge incomes, some have small ones. Some people have kids, some don’t. The list goes on. As you think about what the best investment strategy is for you, realize that it should not be the same as anyone else’s.
- Everybody has different levels of risk tolerance. There are so many different ways you can invest your money. As you may have learned in economics, some people are risk averse and some are risk lovers. You could plop your money into a savings account. It won’t earn a ton of interest, but you know you won’t lose anything as long as your bank is FDIC insured. On the other hand, you could try your hand at the Powerball or Mega Millions. You could win millions of dollars, but you are almost certain to lose the $1 or $2 you spent on buying the ticket. In between those two extremes are investments in bonds, stocks, mutual funds, small businesses, etc. Take a minute to think about where you fall on the spectrum of risk aversion and risk loving. At this point in my life, I find myself somewhere in the middle but leaning towards risk aversion.
- The most important thing about investing is to UNDERSTAND what you’re investing in and why you’re investing in it. People love to give other people advice about money and where to invest it. But unless they know everything about your financial situation, it may not be the best advice for you. The person that knows best should be YOU! You may need some other people to help educate you about investing, but in the end it’s up to you to make sure you understand what you’re investing in and WHY. We’ve all heard stories of people getting swindled of their retirement money because someone convinces them to invest in a certain investment or fund. Think Bernie Madoff. As with most things in life, don’t just do something because someone you trust tells you it’s a good idea. Think for yourself!
With that being said, I’ll talk about my investment strategy. It’s not the best investment strategy or the one right way to invest. It is uniquely mine, and it is constantly changing.
As you can see from my monthly updates, we have a lot of money tied up in real estate. We have a little over 20% equity in our primary residence and a little over 50% equity in our rental property. I see real estate as relatively stable in this area. Owning real estate is helping us build up equity and helps reduce our taxable income each year. I want to emphasize that I don’t believe in keeping a mortgage just to get a tax deduction if you have the means to pay it off. It’s like paying the bank a dollar so you can save a quarter. My mortgage rates are both 3.25%, but one is fixed and one is an ARM. I’m trying to pay off the ARM early before it has time to adjust. When I pay extra towards the mortgage, it is like getting an instant 3.25% return on investment (technically closer to 2.5% since we are “losing” the tax deduction by paying early).
Most of our remaining investments are in retirement accounts, and a small portion of it is in an individual brokerage account. We also have an UTMA account for our son which we automatically contribute a small amount to weekly.
For my retirement accounts, I have a Roth IRA at Vanguard and a TSP. The TSP is the government’s version of the 401(k).
I am currently managing my wife’s retirement accounts. She has a Traditional IRA and Roth IRA, which I recently rolled over and consolidated at Vanguard.
We have an individual brokerage account and an UTMA for our son, which is also at Vanguard.
The total of all these investments is about $185k. Most of it is in pre-tax retirement accounts (TSP and Traditional IRAs). The reason for this is that I am hoping not to have to work full-time for the government until retirement age. I am hoping to either go part-time or quit well before I turn 59.5. In the meantime, I’m trying to build up our individual brokerage account so we’ll have funds to sustain us before retirement age. I am planning to convert the pre-tax money into post-tax money (Roth IRA) little by little after I quit or go part-time and before age 59.5, when our income is lower.
You’ll notice that I keep anything I can in Vanguard. I must say I was heavily influenced by JL Collins’ stock series. One reason I like Vanguard is that they have index funds with extremely low expense ratios. Expense ratios are basically administrative and management fees that eat away at your returns. For example, one fund that JL Collins recommends is VTSAX (VTI is the equivalent ETF), which has an expense ratio of 0.05%. Fidelity is another great company and has a total market fund with an expense ratio of 0.04% (FSTVX). Take note of how much you’re paying to participate in a fund. You may see some funds that charge well over 1%. That doesn’t seem like a lot, but it adds up over 30, 40, or 50 years. Investing in low-cost index funds isn’t for everyone, but it is something that most people feel comfortable with on their risk/reward spectrum.
I have another confession to make. I dabbled in individual stocks quite a bit last year with my wife’s Traditional IRA account, which was with Capital One Investing back then. I did all right (24.11% return), but past results don’t guarantee future success. It was fun, but I decided I’d rather take a safer, more passive approach to investing.
Another thing I’ve been doing is paying extra on a cheap mortgage (3.25%) when I could be investing and potentially getting a bigger return. Here’s where my risk aversion comes into play a little bit. With a portion of our funds, I’d rather get a fixed 3.25% rate of return (by making extra principal payments) than put it all in the stock market. I already have a decent amount of exposure to the market (which I don’t feel that great about at the moment), so working towards paying off the investment property is a fine option to me.
I know I haven’t covered everything, so feel free to comment below and I’ll be sure to get back to you. If you have some tips for me, I’m open to suggestions too!
Image source: Pixabay