I often am asked, by esteemed colleagues, friends, and readers, “What is investing my money, and how?” Here’s the explanation. Never pay anyone to tell you this same stuff, in a more boring way.
SO YOU HAVE SOME MONEY
Great. You have made it to the first step: having a lil extra money. One thing that all of the “personal finance” charlatans who attempt to sell you financial advice about your “path to financial freedom” tend not to mention is that investing will not do you a whole hell of a lot of good if you do not have some money, to start out with. Of course, it is possible to have credit card debt and student loans and a car payment and a low-wage job and constant money troubles and still, by scraping and doing without luxuries, put together $25 a month or whatever and invest it. And if you do this religiously for the next 30 years or so, you will have like 30 grand saved up. Which is better than not having 30 grand, but is hardly the sort of money that you will be able to retire on.
So the first and most important step to investing your money is to get to the point in life where you have disposable income each month that you can invest. That means first paying off your debts and being able to pay all of your bills. In America, the majority of people never truly make it to this first phase of financial life. Most people never accumulate significant enough excess income to invest in a way that would make a meaningful difference in their lives. This is why American capitalism itself must be smashed and rebuilt from the ground up until socialist blood pumps through the cold heart of every Wall Street financier. Personal finance skills will never provide financial freedom to the majority of Americans—only systemic economic and social reform resulting in mass redistribution of wealth will do that. So don’t feel too bad if you find yourself wondering why reading a Suze Orman book or whatever seems insufficient to reform your life. The system is the problem.
That said, if you do have some extra money you better learn how to invest that shit because if you think the government is gonna provide for you in your old age you are one overly optimistic fool. So, on to point two…
HOW TO INVEST YOUR MONEY
Maybe you have a 401(k) or other personal investment/ retirement plan through your work. Fine, put your money in there, because generally they match it, and that’s free money. But to invest your own money, open a Vanguard account. There are a zillion companies that all basically do the same thing, but Vanguard charges you the least, and Vanguard is also owned by its own investors rather than by some rapacious businessman, so its incentive is actually to lower its fees rather than try to raise them. Fees are one of the only things in the financial world you, a nobody, can actual control. Take advantage.
Open that Vanguard account and you’ll see that you can now buy the entire universe of financial products! Stocks, bonds, mutual funds, index funds, ETFs, commodities, REITS, and many other things that you do not understand, if we’re being honest. So?
WHERE TO INVEST YOUR MONEY
Is your name Warren Buffett? If so, you should feel free to pick stocks to invest in based upon your own brilliant business insights like “People drink a lot of Coca-Cola these days.” If your name is not Warren Buffett, you should invest in index funds.
WHAT ARE INDEX FUNDS ANYHOW?
About 50 years ago, a fella named John Bogle had a bright idea: Instead of making people pick individual stocks to invest in, why not create an index that would allow you to invest in all the big stocks at once? Thus was the index fund born. Index funds take advantage of the fact that almost nobody really knows which stocks will do better than others over the long term. Stock-picking—an industry that has allowed countless Wall Street types to grow very rich by charging other people to do it for them—is, with very few exceptions, basically just gambling. Ample studies have confirmed that almost nobody is able to beat the average return of the market over many years. (Warren Buffett has done it, which is why he is very famous and astoundingly rich. Whoever would be telling you which stocks to buy almost certainly is just guessing). It is EXTREMELY HARD to beat the market, and studies have shown that individual investors like you tend to do worse than the average return of the market. Why? Because you follow your own instincts, which are all dumb: you buy and sell frequently based on some dumbass thing you saw on TV, which kills you with trading costs, and you also tend to buy when prices are high (because everyone is super hype about stocks when things are good) and sell when prices are low (because people tend to panic when things are bad). In other words, do not pick stocks. Do not pay someone to pick stocks for you, because they can’t do it either. Instead, buy index funds, take the average return of the market, and be happy that investing is really just giving you money for doing nothing.
These days, there are index funds for every damn kind of asset class you can imagine. Big US stocks. Small US stocks. All the stocks in any industry, or any country, or any region, as well as indexes of bonds of all types of companies and real estate holdings and lots of other types of things. So which ones should you buy? Well, based on the true premise that you have no fucking idea what will go up and down when, you should probably start out with the Total World Stock Index, which is all the stocks in the whole damn world. A little bit of everything!
WHAT ABOUT DIVERSIFYING?
Yeah, diversify. Diversifying is also based on the principle that nobody knows what will go up or down short term, so you get a little bit of everything to cover your bases. An index fund itself is diversified, but you can also diversify by not just buying stock index funds, but also index funds of some bonds, some REITS (real estate trusts), or whatever. But honestly, if you are reasonably young, most of your money should be in stocks, so just put in the world index and forget it.
WHAT’S THE DEAL WITH STOCKS VS BONDS AND ALL THAT?
Historically, stocks are riskier investments than bonds, meaning they fluctuate up and down more severely, but over the long term, they earn a higher return. Bonds are more stable and tend to fluctuate less but earn a lower return long term. The basic idea of investing for retirement is that the younger you are the more stocks you have, because you’ll be able to ride out all the ups and downs, and the closer you get to actual retirement, the more bonds (or even cash) you have, in order to cut down on the volatility and “lock in” your gains. This is the short explanation of what any retirement planning advisor will tell you at great length, while charging you a lot of money. Perhaps you are thinking, “If only there were one single inexpensive thing I could put my money in that would automatically adjust this mix as I got older, so I didn’t have to worry about it?” WELL IT’S YOUR LUCKY DAY, there is such a thing, and it’s called a Target Date Fund. Pick what year you want to retire, buy the target date fund with that date, put your money in there and don’t fuck with it, ever. Never do anything! Leave it alone! Which brings me to another important point…
WHEN DO I BUY AND SELL?
Buy when you have money that you will not need to touch for a minimum of ten years. (Financial markets fluctuate a lot over the short term but over a period of decades it has historically been very likely that you will make a meaningful positive return). Sell never. SELL NEVER. The way for you to make money successfully is to hold onto all your investments for a long time, not to jump in and out of them. The idea that you can buy and sell stocks successfully based on which way the market is going is called “timing the market,” and you cannot do it successfully, no matter how smart you believe you are. Trust me. That is called “trading,” and if you knew how to do that you would already be employed at a financial firm and you would not be seeking advice on respected internet sites like SplinterNews.com I am advising you here on “investing,” which is to say: When you have money you can spare, put it in your index funds, and leave it alone, forever, until the day comes decades from now that you need it. Don’t invest money that you can’t spare for a long period of time!!! Don’t be selling shit unless you are facing a serious financial emergency!!! Ever!!! Buy and hold!!!
WHAT ABOUT THE FACT THAT ALL BIG COMPANIES ARE EVIL?
They sure are, my friends. When you open up an index fund and look at it, you will see that all of its holdings are public corporations, many of which are demonstrably evil, for reasons that can be read about elsewhere on SplinterNews.com. There are a few ways to approach this fact. For one thing, there is an entire industry called ESG investing (Environmental, Social, Governance lol) that constructs a wide array of index funds that screen companies by all types of do-gooder criteria, so that you can buy index funds that are more environmental or socially responsible or whatever. Feel free to do this, but please be aware that “ESG” is basically just an advertising slogan and there is no telling what they actually put in those index funds just by looking at the label. Some of them are great—no guns or fossil fuel companies, yeah!—and others use criteria that is so banal that they end up stuffed with all the evil companies anyhow. Read the fine print.
In the bigger picture, here is the truth of what you are engaging in when you invest your meager nickels in index funds: You are capturing, for yourself, the world’s economic growth rate. Without having to do any actual work! The economic growth rate of all the businesses in the world is higher than what you will make by leaving your money under the mattress, and that is why you invest. Rich people figured this out long ago, and this is how they stay rich. From another perspective, this is what Piketty was talking about: wages go up only so fast, but invested wealth can grow even faster. If you, the working person, stick all your cash in a savings account, and Chet, the heir to an evil fortune, puts all his money in the financial markets, Chet’s money will grow while yours will not. Investing makes your money grow, whereas saving and spending your money makes it eventually disappear. This is why the Chets of the world will be able to buy a new Jeep for Chet fucking Junior on his sixteenth birthday, even though they do not appear to have real jobs.
American capitalism is not designed to provide a healthy safety net for people who do not invest their money—which is to say, the majority of people. Invest your money, capture the economic growth of the world, and then use the money you have made to fund the campaigns to reform the inequities of America. This is what every large institution that does good things, from union pension funds to charitable foundations to educational centers, already does. The fact that you, a nobody who reads SplinterNews.com, can—at a very low cost—invest your own tiny bit of money in essentially the same things that billionaires do is one of the only fair features of American capitalism. If you do not stand to inherit a large amount of money or intend to eat cat food in your old age, start investing as soon as you can.
Buy some damn index funds, leave them alone, and never ask me about this again. I’m extremely busy.