Where Should I Invest?

I get this question a lot. I get the impression that there are quite a lot of people who believe that if they could just pick that right stock to buy, their financial worries would be over. We are razzle dazzled by stories of the secretary at Apple who ended up a multi-millionaire because she was paid in shares at the founding of the company. Yes, people do win the lottery. No, that is not an investment strategy. So where should you invest?

1) In yourself. Far and away the best investment you can make is in building your own skill set. I hate to say it, but I am not 100% a proponent of the “follow your dreams” school of education and vocation. I am, however 100% sure that if you find the intersection in the Venn Diagram of the set of “Your Dreams” with the set of “What adds value such that someone will pay you to do it”- and pursue something in that subset- you will have a great start on gainful employment. This is the best thing you can do to get on the path for financial independence. Note that planning for a job that does not meet the “Your Dreams” criteria will be a losing proposition in the long run- misery isn’t sustainable- but most of us have had plenty of jobs that are not our dream job as we built in the direction that we wanted to ultimately go-and you can learn a lot from those jobs. I loved hiring people into Wall Street jobs that had waited tables- you learn to work hard, put customers first, and you are probably pretty humble — all great attributes. This doesn’t mean that you abandon your passion that you probably can’t make a living at- it just means that you do it in your off hours, and who knows- maybe one day you are discovered for your poetry writing/comedy improv/golf playing skills- or whatever is your avocation- and that actually becomes your job. It does happen.

2) And more about Education- Education is key- but Education is a very broad term that can mean a lot of different things. If you plan to get a college degree in 14th century French literature, you may need to be a little more creative when beginning your job hunt, or be ready for some graduate school to be able to put the degree to use. Figuring out how that looks when lined up against a potential student loan burden is really important to do before embarking on this path. Education should, like all investments, be considered in the standard cost/benefit or risk/reward framework. The good news is that there are many kinds of education — and more than ever the world is changing so that we all need to figure out how to “future proof” what we know. Irrespective of whether we are in college or decades out of school, re-investing in our skill set to be relevant for the job market of the future is an ongoing process. Education should create a differentiated skill set that makes what you offer valuable in a monetary sense. If you have ever had a broken pipe in your house, you know that plumbers have done a wonderful job of knowing how to do something really important that most of us can’t do- and they charge handsomely for it. So, think broadly about what “education” means- but also practically. The stats on student loans are pretty sobering — over 12 million students borrow money annually to fund college, and there is over a trillion dollars of outstanding student loan debt in the US. 14% of these loans are past due, and the average amount of debt is $30k per student. Making sure the education you are paying for is worth it, given the expected job you will get with what you major in, is key.

3) So, what if you are already past the “what should I do for a living” stage and you are now out in the “real world”- now what? You should:

a. Make sure you have an adequate nest egg in case of emergencies. 66 million Americans have no emergency savings at all.

b. Pay off expensive debt- you are making your credit card company rich so stop it!

c. Get a budget-and stick to it- so you stop digging yourself into a hole

d. Get a second job if you can manage to do that if you need the extra income- there are lots of creative ways to do this- I know an amazing woman who became a “power seller” on eBay and used the proceeds for a down payment on a house. This is actually really hard work but with technology today being what it is there are options open that have never before been available to people who are unable to leave the house (because of family obligations or mobility issues) more than ever before.

The first step towards financial independence is making sure that revenues minus expenses is a positive number.

4) Ok- actual financial investments. Seriously if you haven’t done the above go back and do those things first. Now that you have a foundation on which to build, consider the following:

a. Does your company have a 401k plan- are you maximizing its value? If not, do that first.

b. Do you own a home or want to? Real Estate isn’t a liquid investment but there is value in putting money in an asset vs paying rent to someone else that you will never get back. Consider it- it is not for everyone but you may be really happy 30 years from now that you did this.

c. Do you have an IRA? This can be another really solid way to build wealth for retirement, and if you are self-employed or your company doesn’t offer a 401k, it is a great place to start. Make sure you have educated yourself on the rules and limitations. Fortunately, there are plenty of online resources available for helping you to know if this is viable for you. Check this out to see if it could be a place for you: https://money.usnews.com/money/personal-finance/mutual-funds/slideshows/7-reasons-to-invest-in-an-ira. I liked this one too http://www.artofmanliness.com/2011/08/17/a-young-mans-guide-to-understanding-retirement-accounts-iras/

d. Is saving for your kid’s college part of what you are trying to invest for? Start with a 529 plan for tax deferred growth and flexibility. A Coverdell Education Account is another option but it has way more restrictions than a 529 plan so may not be best for everyone.

If you have gotten this far in the article, you may be very annoyed that we still haven’t gotten into the “sexy” part of investing — the picking of that undervalued stock that is going to sky-rocket in value, catapulting you into the Lifestyles of the Rich and Famous. As you may have guessed, that is not going to happen. There is significant evidence that passive strategies (like index funds) result in greater returns to investors than active strategies (i.e. picking individual stocks and timing their purchase and sale). In many instances, if you solicit advice from a broker you will never hear this- because they make money when you buy and sell. I get back-up from the Sage of Omaha on this one — Warren Buffet’s commentary in Berkshire Hathaway’s 2016 annual report, in which he explores this issue, concludes — “The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”

There is a place for stock picking- and to me there are two major criteria

i. You won’t miss the money if you lose it, and

ii. You have the time to really do your homework and develop a thesis about why you think the stock is undervalued

There are certainly people out there who have made it their life’s work to be good at this. You may be one of them- but please make sure that if you dip your toe into risky investments, you have already built a solid financial foundation, and you can withstand the potential rollercoaster of wins as well as losses.