This may be the shortest article I’ve ever written because investing your money intelligently is remarkably easy.
If you find yourself in thriving circumstances — having handled your debt and with expendable income each month — then you’re probably wondering, “Where should I invest my money and How?”
If you’re only now starting to entertain the idea of letting your money work for you, first and foremost, consider whether you’re comfortable with your savings taking a loss. Will you need that excess cash in the foreseeable future of at least 2-3 years? A down payment or graduate school? If your answer is, “No.”, then I will give you the same advice the famous investor Warren Buffett shared* with his wife —
- One: Open an Individual Retirement Account (IRA) account on Vanguard.
- Two: Invest the excess cash every month into Vanguard’s Total Stock Market Index.
That’s it. That’s all there is to it.
If you’re thinking, “The stock market is too high right now.”, or waiting for the market to correct itself so you can buy low, then I want you to consider another great line from Buffett, “It’s not about timing the market, but time in the market”.
By depositing our excess cash every single month, we are doing what investors call “dollar cost averaging”. With this approach, we are investing during high periods in the market AND during low periods. This approach also helps to mitigate the risk of us staying on the sidelines too long.
We could get into a discussion about proper asset allocation and optimizing our portfolio, but if we are still sitting on cash and haven’t invested then we might be partaking in an activity called productive procrastination or analysis paralysis.
Two Largest Obstacles when First Investing: Productive Procrastination & Analysis Paralysis
Acknowledging and addressing the psychological and emotional aspects of investing is equally as important as the technical aspects (such as asset allocation, IRA vs Roth, 401k vs IRA, HSAs, 529’s, tax loss harvesting, etc.).
The problem I’ve seen with millennials and other first time investors is that they get stuck in what software developers describe as analysis paralysis.
In other words, people become so focused on obtaining the “perfect solution”– the “most optimum form of investing” — that they forgo taking any action at all.
This paralysis leads people into another large obstacle called productive procrastination. Instead of taking action, we opt to knock off some of the lower priority items on our task list while avoiding the important ones.
I experienced all sorts of productive, yet meaningless behavior when I had to study for my CPA exams. I would clean my entire apartment before I would sit down to study. If I received a text message, I would jump on the opportunity to respond right away. If an idea popped up, I would find myself researching something completely off topic. I would do anything other than what I had set out to do.
There is one simple truth to maximizing the value in our portfolio at the end of each year: Spend less than we earn and invest the rest.
In the end, productive procrastination and analysis paralysis are large obstacles, but that biggest item holding us back will undoubtedly be our savings rate. The rate at which we control our expenses (including your taxes through tax-efficient investments) will have the largest impact on when we will reach financial independence.
The most important takeaway we remind ourselves is, if we haven’t invested our excess cash by now, then we need to take action and start benefiting from the power of compounding interest by placing our money into the market now.
*(Page 19 of 23 from Warren Buffett’s 2013 Berkshire Hathaway Annual Letter)