Investing Should be Simple

Without careful, long-term planning, investing is a fool’s game. And folks reading this blog are certainly not fools. Obviously, my readership – aware of the looming pitfalls out there – is looking for a better way. I take no credit for inventing a so-called “better way”. Still, I found something that works pretty well for me.

But let me first remind the young wannabe investors of a few hazards in this seemingly complex investment game: Does it really have to be complex? There are folks out there that would like to convince you that it’s certainly too complex to navigate alone. I call ‘em Wazoos. I don’t mean for the word Wazoos to be a disparaging term. It’s just my way of lumping a faction of like-minded people together to refer to them collectively.

From my rather biased perspective, Wazoos are the folks attempting to separate you, the perhaps untutored young investor, from a meaningful chunk of the ultimate yield on your investment dollars – their bony fingers busily clutching at a piece of YOUR pie. Wazoos come in many forms: fee-based and fee-only investment advisors, money managers and marketers, brokers and investment bankers, accountants and lawyers, etc., all aided by the necessary back-room operations that support their myriad activities.

And investor outlays to Wazoos come in just as many forms: flat, by the hour, and annual percentage fees, brokerage commissions, transactions costs, custodial fees, annual operating expenses, legal, advertising and marketing costs, and yes, self-help books and internet blogs. Each in its own unique fashion trying to separate you, the investor, from some of your precious nickels and dimes.

In addition to the aforementioned Wazoos are those unavoidable market risks that await all investors, exacerbated by the inevitable erosion of Izzy the Inflation Monster who, over the long haul, has historically taken an enormous bite out of the diligent investor’s purchasing power. Makes you want to cry… or look for a simpler, cheaper way to approach long-term investing.

Let me start that journey with a couple of slogans, the first of which is: Financial Planning: It’s Never Too Late, But Early Is Best!

The second slogan involves a very basic investment approach I practice and sincerely believe: Investing should be simple for the average young investor. No mincing of words here. I mean very simple – as in four easy steps.

1. By necessity, you must SAVE…particularly, once you have “earned income”.

2. Create a Roth IRA, which requires the aforementioned earned income.

3. Invest all or a portion of those savings (without fail every month) in an Index Fund, preferably a Total Stock Market Index Fund. (I emphasized "or a portion of” your savings because this simple plan is intended to initially represent only one important leg of an investor’s Three-Legged Stool. We will discuss the stool in a later blog).

4. Don’t stop saving and investing until you retire, which requires discipline and patience – things we’ve already talked about – and cost avoidance, which we will address in future blogs (no actively managed funds please and avoid those Wazoos, including Squeezy the Syphon Python, who I will fully introduce later).

The late mutual fund industry giant, John Bogle’s approach to investing was even more pithy. Short and concise enough to be jotted on the palm of your hand:

1. Bogle advised investors to diversify by owning the entire stock market (a good example would be to own Vanguard’s Total Stock Market Index Fund, but then, Vanguard’s founder, Bogle, was biased).

2. And then to exercise boundless patience. “Don’t just do something, stand there,” he constantly reminded people.

3. And finally to invest at the lowest possible cost (in short, if possible, avoid Squeezy and the rest of those Wazoos).

Both approaches seem almost too elemental, don’t they? Elemental, indeed, but even simple things can be difficult to achieve. In any event, having gained your attention – if only for a moment – let’s review a couple of options. If you don’t wish to read any further, take a discerning look at my four-step program above, hop aboard or not, and get on with the rest of your life. It’ll work without constant monitoring. All you have to do is save a few bucks a month, invest those dollars in a broad market index fund, and then exercise a ton of patience. And…and…dare to be average! More about being average later.

However, if you don’t mind reading future blogs, allow me to elaborate a bit on those four simple steps to gain a better understanding of why this long-term strategy might work for you. I’ve already discussed an important first step in the saving cycle (see my July 5, 2019 “Rainy Day Funds” blog), an important protective shield for an investor’s long-term savings plan. But first (next week), let’s discuss a long-term plan that seems to be the fundamental approach of many investors in today’s world, the [Tottering] Three-Legged Stool. To my subscribers, look for an email announcing its arrival. To those who are not subscribers, please consider subscribing!

But before I close, how about a HYPOTHETICAL example of the potential of this simplistic approach to investing for retirement. Suppose an individual was gifted $3,000 by his/her parents (to meet the minimum investment requirement), started saving $100 per month right out of school, and then invested the $3,000 minimum and the monthly $100 (and all fund dividends and long-term gains) in Vanguard’s Total Stock Market Index Fund until age 65, compounded quarterly, assuming a yield of 6.82% per annum – the fund’s average yield since inception. This hypothetical plan would produce $416,300 before inflation and taxes, after 45 years. Double the monthly amount saved (but not the initial contribution) and the amount accumulated at age 65 becomes almost $770,000. Do I have your attention?

This simple investment approach as one leg of your Three-Legged Stool might be worth a second glance. All you have to do is Dare to be Average…and save, save, save!