Photo by Megan Ruth on Unsplash
Important:
Investing for the long-term. Think decades. My holding period for VTSAX is forever, other than maybe selling a few shares while living on my portfolio. I am investing for generations.
Unimportant:
Market Crashes. These are an expected part of the process, like blizzards in New England and hurricanes in Florida. Scary and dangerous if you make the wrong moves, but they always pass and the sunshine returns.
They are best ignored. What the stock market does today, this week, this year — That’s just noise.
Important:
Staying the course. This is the only way to enjoy the long-term growth of stocks. If you panic and sell, the market will leave you bleeding by the side of the road.
You have to be an optimist, believing in the future of the United States, the world in general, and that the incredible drive, creativity and problem solving ability humans have displayed so far will continue.
Unimportant:
Obsessing about safety. No investment is 100% safe. Stocks are volatile. Cash in the bank is guaranteed to lose value to inflation. Real estate investments can turn sour in more ways than you can count.
As an investor, you don’t get to avoid risks. You only get to chose which ones.
Important:
Long-term, 10+ years, stocks actually carry very little risk. In fact, stocks are about as safe as you can get.
Long-term, stocks also offer the highest return.
Unimportant:
Also, unimportant — if you choose to ignore my advice and invest internationally anyway (which almost everyone else is telling you to do).
Jack Bogle, Warren Buffett and I don’t feel the need, but if you do, you’ll be fine. International stock markets, for the most part, have done pretty well.
Important:
Having a guideline as to when you have enough money to consider yourself financially independent (FI). Here’s the one I like:
25x the annual amount you spend/4% of your assets.
Spend $40,000 a year x 25 = $1,000,000 to be FI/spend 4% of $1,000,000 = $40,000 to spend each year.
This is what is known as “The 4% Rule”
Unimportant:
Whether 4% is exactly the “correct” withdrawal rate percentage.
4% was originally arrived at as a very conservative number and, indeed, the Trinity Study bears this out. (see link above) However, twice in the period of that study it failed.
If you have the misfortune of retiring at the beginning of a multi-year stock market decline, and you set your 4% withdrawal, and adjust it for inflation each year, and you put it on auto-pilot and you forget it, well then, you’ll have a slim chance of running out of money before the end of 30 years.
This is called Sequence of Return Risk.
But you’re not going to do that, are you?
If you are the kind of person who reads this blog and thinks about this stuff, there is exactly zero chance of you doing that.
Rather, you will begin your withdrawals and, keeping an eye on the market, adjust as/if needed. This adjustment, BTW, may well lead to you withdrawing more money as your investments grow. Indeed, in the Trinity Study, portfolios were far more likely to grow substantially in value than to crash and burn.
Catch 22: If you are the kind of person who obsesses about what withdrawal rate you can safely put on auto-pilot and forget about, you are the kind of person who would never put your withdrawals on autopilot and forget about it.
4% is a poor “rule” but it is a fine guideline.
Important:
Becoming financially independent. In doing so you have bought your freedom. Freedom to spend your life and time as you wish without the need to trade your labor for money. With every step you take, you are that much stronger.
There is nothing more valuable that money can buy. At least for me.
Unimportant:
Whether you choose to retire from your job or keep working once you are FI. Being FI doesn’t require you to quit a job you enjoy. It just means you get to choose, which is the point.
Important:
Finding meaning and joy in your life and your activities. It is hard to imagine anyone with the focus, intelligence and work ethic to achieve FI wanting to spend the rest of their lives doing nothing.
Unimportant:
Having “the internet retirement police” declare you Not Retired! because some of your new activities generate income.
For me, it has never been about retirement.
Important:
Investing in broad-based, low-cost stock index funds.
Unimportant:
Which investment company’s funds you use.
I prefer Vanguard, for reasons I outline here.
My preferred fund is VTSAX which is Vanguard’s Total Stock Market Index Fund.
But an index fund is an index fund, and a total stock market index fund or S&P 500 index fund or total bond market index fund are essentially the same across investment companies. Feel free to use the firm of your choice.
Unimportant:
Whether you use a total stock market index fund or an S&P 500 index fund.
Both are broad-based, low-cost funds, which is what you want.
VFIAX is Vanguard’s S&P 500 index fund and it is more commonly found in 401k type plans than VTSAX. (Or the equivalents from other firms.)
I prefer VTSAX, because it holds some mid-cap and small-cap stocks as well as the 500 largest.
But because these funds are “cap-weighted” ~80% of VTSAX is made up of the S&P 500. If you track the performance of VTSAX v. VFIAX over 20 years the difference is tiny.
Jack Bogle held VFIAX until his death. Warren Buffett has it as the investment of choice for his heirs. If it is what you have, or what you prefer, you’ll be fine with it, too.
Unimportant:
Mutual Fund v. ETF.
There are differences between funds and ETFs (exchange traded funds) but none that really matter to us long-term investors.
VTI is the ETF version of VTSAX. VOO, of VFIAX. In both cases they hold exactly the same respective portfolio.
Which you hold is more likely a function of your age than anything else — you own what was available/new when you came of age.
Either is fine.
Important:
Expenses.
Expense ratios (ER) are the fees funds/ETFs charge their shareholders and are a direct drag on our returns as investors. The difference between a 1% annual ER of an actively managed fund/ETF and the .04% of VTSAX is HUGE compounded over time.
Most broad-based index funds like VTSAX & VFIAX or ETFs like VTI & VOO are very low-cost. High ERs tend to be found in actively managed funds to, well, pay for all that active management.
Unimportant:
When the difference in ERs is .04% v .03% as it is between VTSAX and VTI.
Important:
Choosing index investing over active management/stock picking.
When Jack Bogle introduced the first index fund in 1975, it and he were widely ridiculed. But as the decades rolled on and the research piled up, the brilliance of the concept was repeatedly confirmed. Indexing outperforms active management and the greater the time period, the greater the outperformance.
Outperforming the market is extraordinarily hard, especially with the handicap of high fees to overcome.
Unimportant:
Having an investment advisor to help you buy your index funds. More than unimportant, potentially dangerous.
Advisors are better served by putting you into high fee, actively managed funds that pay them better while likely underperforming.
To be sure, there are honest advisors out there but by the time you are well educated enough to recognize them in the herd, you are educated enough to do this yourself.
If you have an advisor and your answer to the question of “why” is some variation of…
- “I’ve had them a long time.”
- “They were my parents’ advisor.”
- “They are my friend.”
…it’s time to take a very close look at what they have you invested in, what the fees are and why it is so damn complicated. Because it probably is.
Red flag: If they resist this conversation.
Oh, and if your answer is that last one, it could be being your friend is the real skill their company hired them for.
Important:
Your savings rate is one of the most powerful tools you have to reach FI. I used 50% in my journey. At the risk of stating the obvious, the higher your rate the faster you get there. The lower, the longer. Your choice.
Unimportant:
Whether your saving rate should be calculated based on your pre-tax or after tax income. Clearly, 50% of the former is more than of the latter. Who cares?
That’s it…
..for now.
I’ll add more if/as they occur to me.
Your turn:
What have I missed?
Share your “things important, and unimportant” in the comments below.
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