Investing is incredibly simple.
At least, it is if you do it the right way.
In fact, the best investing strategy can be explained in one sentence:
Once you’ve paid off all your credit card debt, invest as much as you can in your 401k, and park your money in an index fund without paying any attention to the market.
Once you’ve paid off all your credit card debt, invest as much as you can in your 401k, and park your money in an index fund without paying any attention to the market.
That’s it.
That’s all you need to know about investing.
If you want more detail, or you don’t know what an index fund is, keep reading.
Otherwise, thanks for stopping by.
I’m glad I could drastically improve your life and retirement in 30 seconds.
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They aren’t about investing, but I wouldn’t charge you for a one-sentence book.
Investing is incredibly simple
Most people think investing is complicated and difficult.
That in order to understand it you need to be some sort of wizard, with advanced degrees and complex math knowledge. That you need to do all sorts of research, analysis, and know the meaning of terms like “p/e ratio,” “yield,” “beta,” and “stock-bond dingle track.”
(I just made that last one up, but I’m betting half of you didn’t even notice.)
That’s why they’ll pay other people to do it for them.
Or if they’re ambitious, they’ll buy books, seminars, and classes to learn complicated methods for investing.
I went to Economics graduate school and spent twenty years working in Finance. I not only know how to read financial statements, but have built them from scratch.
I understand the complicated stuff.
So I can tell you an incredibly important point very few people realize:
Investing is only complicated if you do it badly.
About simplicity
This blog is dedicated to finding easy ways to improve your life.
For most of the things I recommend, I focus on things that are easy and “good enough.”
But often “good enough” isn’t “best.”
If you were to put in a huge amount of time, effort, study, dedication, and willpower, you could find a better solution than most of the things I suggest.
But realistically you’re not going to put in that effort. And it’s outright impossible to put in an enormous amount of effort and time for everything you do.
Which is why I aim for “good enough” + easy.
That’s the main premise behind my book The Weight Loss Habit. You’ll never lose weight attempting the “best” diet, and then giving up after two weeks because it’s too hard.
Which is why most diets fail.
Instead, the way to lose weight is to find “good enough” strategies that are easy enough to build into lifelong habits.
With investing, easiest is the best
It’s different with investing.
With investing, the easy solution genuinely is the best solution.
It has been consistently shown that the most brilliant stock analysts in the world are worse at picking stocks than a monkey throwing darts, picking stocks at random, or an average of all the stocks on the market.
Any effort, study, time, and dedication you put into trying to do better will end up giving you worse results.
Theoretically you could get lucky. And sometimes people confuse their luck for genius.
You could also take your money to Vegas and hope for the best. That’s not a sound retirement strategy.
Some people with complicated strategies consistently make money. What they don’t notice or tell you is that they would have made more money with the simple, easy strategy that takes zero skill and anyone can do.
The incredibly simple things about investing you need to know
If you want more detail than the one sentence above, here are the only five things you need to know about investing:
- Pay off any credit card debt as soon as possible, and be sure to pay your credit card bills in full every month.
- Contribute as much as you can to a 401k or IRA, especially if your employer has any sort of match.
- Invest excess cash that you won’t need in the near future. Pull money out only when you absolutely need it. Try to keep investments for the long term. Don’t move investments around. Make decisions based only on your cash needs, not any analysis of the market. In fact, it’s better if you don’t even look at how your investments or the market are doing.
- Only invest in index funds, for both your 401k and other investments.
- Never buy individual stocks, actively-managed mutual funds, commodities, gold, or cryptocurrencies, unless it’s for fun with money you can afford to lose. Never ever under any circumstances short stocks, buy on margin, or buy weird derivatives. (Rule #5 is redundant with Rule #4, since you should only be investing in index funds. But it’s worth reiterating.)
That may sound more confusing than the one-sentence guide. But most of the complicated stuff is telling you what not to do.
In other words, you’ll only get yourself in trouble once you try to make investing hard.
Pay off your credit card bills. Put as much as you can into your 401k/IRA. And put your 401k/IRA and excess cash into index funds, then leave them alone.
That’s it.
In terms of what you should do, the only thing that might be confusing is if you don’t know what an index fund is.
What’s an index fund?
Index funds average together large groups of stocks and/or bonds.
They’re kind of like actively-managed mutual funds, but better in every way. They have lower fees and higher returns, which could easily make a difference of half a million dollars by the time you retire.
Have you ever looked at the investment houses and wondered who actually pays for their fancy Manhattan skyscrapers, Superbowl commercials, the salaries of their analysts and support staff, the commissions of their salespeople, and all the big fat bonuses that they spend on Lamborghinis?
You pay for that stuff, if you invest in an actively-managed mutual fund.
They don’t send you a bill or list it on a statement. They just take money out of your account every year without mentioning it, and you earn less (or lose more) than you should have.
They bury this in the fine print as something called an “Expense Ratio,” which is listed as a percentage, not a dollar amount, so it’s even harder for you to notice.
This would be fair if they were doing an awesome job of investing and earning you more money than they were taking.
But remember, they’re getting worse results than a monkey throwing darts, or the average of all the stocks on the market.
Instead of paying people to lose you money, an index fund simply averages the stocks on the market.
It gets better results, and there’s no high-priced analysts buying Lambos to take a cut.
According to economic theory, it is literally not possible to find a better investment on the stock market.
(I don’t want to turn this super-easy guide into a graduate seminar on Economics. If you’re interested in a deeper dive, see here.)
Which index fund to choose
There’s more than one index fund.
How do you choose which one?
That’s easy too.
Decide what year you want to retire, and round it to the nearest five. (2045, 2050, etc.) There will be an index fund that targets that retirement date. That’s where to put your money.
Done.
Two other important things:
- Investment advisers, brokerages, and banks don’t get to take money from you when you invest in index funds. So they’ll often try to steer you toward something else. (Usually actively-managed mutual funds.) Don’t fall for this.
- There may be actively managed mutual funds with similar names that also target retirement in the same year. Check the expense ratio, which will be listed toward the top of the prospectus. (Investing guide.) Make sure it’s between 0.05% and 0.15%. If it is, it’s an index fund. If it’s more like 0.75% to 1.50%, stay away.
Credit card debt
I’m only going to touch on this briefly. You’ve probably heard it before, and a bajillion other people say the same thing. (Because it’s correct.)
Credit card debt will crush you financially. Paying 27% interest, or whatever astronomical rate your card charges, is insane. Especially when it compounds.
Any money you put into paying down credit card debt is money you’re no longer paying that crippling interest on.
Which means paying down credit card debt is essentially a guaranteed 27% (or whatever) return on investment.
There is nothing on the stock market remotely close to that. There’s nothing worth investing in while you have credit card debt.
There might be more important priorities in your life, like a car to get to work, or medicine you need to live.
But if you’re even thinking about investing before paying your credit card bills, you’re doing it wrong.
401k/IRA
The tax advantages of a 401k/IRA are enormous.
And if your employer has a match, that’s an instant 50% or 100% return on your investment.
Plus it’s extremely important to prepare for retirement, especially when you’re young and not thinking about it. That’s when your money has the biggest impact.
But you’ve heard all this before. I won’t go on explaining what you already know.
Incredibly simple investing
So that’s it. Once again, the one sentence you need to know about investing is:
Once you’ve paid off all your credit card debt, invest as much as you can in your 401k, and park your money in an index fund without paying any attention to the market.
That’s it.
Anything more complicated than that will give you worse results.
And to quote the Dread Pirate Roberts:
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