Simple Investment Plans: If You Had No Silver Spoon In Your Mouth At Birth …..

And You Don't Own a Bunch of Valuable Stock Options

And you can't be sure of a fat inheritance…..

I guess that covers most Medium members! It would be to your advantage to pay attention to this post. Finance and investments have been a hobby with me for over 50 years. And I’m not selling anything or earning commissions on what I recommend; ignore my advice at your own risk. Risk of what? The risk of having to eat cat food in your retirement years …. or the risk of not being able to help your kids with college costs…. or the risk of not being able to afford first class medical attention for yourself or some family member.

Let’s have a look at some of the most important elements in a proper, US-based savings and investment program. First, some basics (though obvious to many.) The difference between ‘savings’ and ‘investments’ is that the first must refer only to Zero*-Risk assets, that is: cash, insured savings accounts, CDs, US Treasury Bills, and Series I-US Savings Bonds (not Series E). At least 6-months living expenses in savings, but more if you have dependents or are starting late, is needed before proceeding to the second step. If you don’t have this yet, do yourself a retirement favor and put away at least 10–15% of your take-home, each pay day. Do you have the intestinal fortitude to pay yourself first, not last? If not, you had better find some—- fast.

(*- Not true zero, since the risk of run-away inflation or asteroid crashes on your neighborhood can never be totally ruled out.)

After amassing your savings kitty, design and implement an investing program (IP) that fits you in terms of your age, needs, and preferences. It will include some cash plus more Risky assets, like: stock & bond mutual funds or ETF’s, REITS, and perhaps some more esoteric things.**

**I assume that most readers of this article are Freshmen or Sophomores in finance/investments, and that Mr. Buffett and Mr. Gates will not be reading this article.

If you already have an investment program (including a 401(k)plan) established, you may want to apply any good ideas found in this article to your existing investing portfolio.

Some important design elements if starting near zero:

The desired level of Simplicity-Complexity of your new investment program (IP), from Super Minimal to Maximal.

1. How much do you know about investing? If you’re just starting out, you’re better off minimal.
2. How much are you going to invest over the next year? The smaller the amount, the more critical the diversification of your IP and, therefor the better minimal.
3. How involved do you want to be, and how much time do you want to devote to your IP per week? Hands off, or < 3 hours: go minimal (or, if the amount is large, retain a ‘fee-only’ financial advisor.)
4. How cost-conscious do you want to be? There is no long-term difference in performance between a maximal, actively-managed IP ($$$$) and a minimal, index-linked ‘generics’ one ($).

Your age is quite important. ‘Time to grow’ is the single most important factor in any IP. It includes time to recoup reverses when the markets go against you, as they do periodically.

1. Therefore, the answer to the question: ‘When is the best time to start saving or investing?’ must always be: ‘As young as possible, as soon as possible, and as often as possible.’
2. Return and risk are joined as two sides of a coin. If someone offers to sell you a ‘hi-return/low-risk security, hang up the phone, or rush out of his/her office immediately.
3. Young investors ( 20–39) should go for high risk/high return potential, therefore put more in stock funds than in bond funds (a 65/35% split seems appropriate, as of this writing, and only short and intermediate-term bonds, no long-term.)
4. For the group 55–65, the reverse is true; go for reduced risk/return potential. A 35/65% split would be appropriate, with the 65% consisting of short-term bonds, only. Your general health level may also affect your allocations.
5. For the middle group (40–54, once or twice a year, move some $$ from risky assets (particularly if they’re up a lot), to lower risk bonds and insured CDs.
6. For the ‘hands-completely-off’ investor, who wants to avoid the periodic re-balancing chores in the portfolios, see the Super-Minimalist option, below.

The costs of your IP is another important design factor in your investment success.

1. Don’t hire a financial adviser unless you want to help him/her buy a bigger yacht, OR unless you want to invest a big amount all at once (generally, a mistake) and you have absolutely no time and no interest in DIY. If this is your case, I suggest Dimensional Fund Advisers, Hq. in Austin TX.
2. For the average small investor, I suggest funds—- baskets of stocks or bonds, or a mixture, available in Balanced Fds. Funds are marvelous instruments that democratize capitalism (although, at times, they too can lose you money.) They are the little guys’ shoehorn into tight-fitting capital markets—- putting: stocks, bonds, and real estate into his/her reach, as never before. They are the only way for him/her to get immediate diversification. If you have no IP set up as yet, I suggest Vanguard Group as your best choice. It is the most cost-effective provider of mutual funds and ‘exchange-traded funds’; it has NO shareholders.
3. Fat cats don’t need to use funds so much because once they have an adequate emergency savings kitty set up, their other resources allow them to buy a sufficient number of individual stocks and bonds to achieve their own level of diversification. The point is that whether small or large all investors should follow the old axiom of Bernard Baruch (American financier and author): ‘Don’t put all your eggs in one basket.’
4. To repeat, funds come in 2 main varieties: traditional Mutual Funds (MFs) and Exchange-Traded Funds (ETFs) that you buy and sell like individual stocks, through a broker. Both types are available at Vanguard and should be traded online, if you want to keep costs to a minimum. Vanguard has a minimum initial investment of $3000. for most of their retail mutual funds; ETFs all have a one share minimum for any purchase.
5. All funds can also be grouped into 2 other categories (across MFs & ETFs). They are either ‘Actively Managed’ ($$$$) or passively managed ‘Index’ ($) funds. Over the long term, there is little or no difference in performance between the two. These categories are directly related to the Minimal/Maximal division, as we’ll see below.
6. All funds have management costs to run each fund. These are expressed as the MF’s or ETF’s Expense Ratio (or ER%). The ER may run from a few pennies /each share owned/year (stated as .08% eg) to as much as $2. or more (eg 2.3%). Index funds (whether MFs or ETFs) have lower ERs than Actively-Mgd. funds usually.
7. Let’s put some meat on this skeleton.

SUPER-MINIMAL APPROACH (1 MF to fit your timeline, automatic rebalancing)

Mutual Funds: VFFVX^———-VTTHX^^————VTXVX^^^

RETIREMENT: 2055—————2035——————2015

AGE NOW——20–39————-40–54——————-55–64

^Vanguard Target Retirement 2055 Fd.; ^^Vang. Trgt Retire. 2035; ^^^Vang. Trgt. Retire. 2015 Fd. Each of these funds rebalance automatically for you, so that they’re truly ‘hands-off’. They each have a $1000.- minimum to get in.

VERY MINIMAL APPROACH (2 MFs)

Mutual Funds: VTWSX^——- VBMFX^^———-Rebalance

AGE———20-39: 75%————-25%—————-Once/year

—————40–54: 50%————-50%—————-Twice/year

—————55-75: 25%—————75%—————Thrice/year

^ Vanguard Total World Stock Index Mutual Fd. & ETF

^^ Vanguard Total Bond Mkt. Index Mutual Fd.

SLIGHTLY MINIMAL APPROACH (4 MFs)

MFs: ———VTSMX^-VGTSX*—VGSIX^^—VBMFX**—-Rebalance

ETFs: ———VTI^—--VXUS*—--VNQ^^——-***

AGE: 20–39:-40%——30%———5%————25%——-Once/Yr

—— 40–54:-25%——-20%———5%————50%——-Twice/Yr

——-55–75:-10%——10%———-5%————75%——-Thrice/Yr

^Vanguard Total US Stock Index Mutual Fd & ETF; *Vanguard Tot International Stk Index Mut Fd & ETF; ^^Vanguard REIT Index Mutual Fd & ETF; Vanguard Total Bond Mkt. Index Mutual Fund; *** Do not use ETFs for Bonds.

MAXIMALIST APPROACH

Individual stocks & bonds, Options, Frequent trading, Closed-end funds, Using leverage, Futures, Commodities, Foreign Currency Exchange.