Do you say “ain’t nobody got time for that” every time someone mentions investing?
Well then you are in the right place.
You can passively invest your money and still become wealthy. Actually, I will show you how to do this and retire a multi-millionaire.
I’ve been investing since my early teen years. The biggest positive to starting young goes beyond the compound interest (which has been amazing). It is actually learning from my mistakes early, when it hurts much less, because I was investing with less capital. For any new investor you want to make sure you avoid the major mistakes early on. Investing can be a simple activity that you can automate or can become a lifelong research project. Both options are profitable and can result in a nest egg of multi-million dollar returns.
If you are just starting out then you need to answer a simple question.
How much time do you want to put into investing?
What I have found is that to be successful picking stocks, you must spend a tremendous amount of time (especially up front) understanding the business. You need to understand the management, financial statements, and price volatility. If you are willing to spend the time, Great! But looking at typical human psychology, most people are not willing to take the time needed to get the deep understanding successful investing takes.
“Yeahhh, I Don’t Want to Spend Any Time At All On Investing”
If you hate thinking about investing or can not trust yourself to be actively managing your portfolio in fear of your lack of knowledge, then you have options. Really the only option you should not be taking is to sit on the sidelines. You are only hurting your future. Lets break it down.
Step One: Open A Roth IRA
Why a Roth IRA instead of a 401K or traditional IRA?
A Roth IRA gives you tremendous flexibility. With a Roth IRA, you have already paid taxes on your contributions, so your money can GROW tax free. You never pay taxes again on a single dollar that you pull out of that account. So when your money compounds into a million dollars, you don’t pay a dime of tax! On top of the tax benefits, you will also have the freedom to take out any contribution without penalty. For example, if you have been contributing the yearly max ($5,500) for two years, then you can take out $11,000 in the event of a zombie apocalypse. Compare this to a 401k or traditional IRA and you will be paying taxes on that money, plus a 10% penalty. Yowza!
I prefer to use Vanguard as my broker of choice for my Roth IRA. They’ve been around forever and have great funds to invest in. Plus, their name sounds really prestigious if your at a cocktail party sipping a martini with your pinky in the air. You can tell all your colleagues your money is at Vanguard.
Step 2: Automate Automate Automate
Set Up an automatic contribution plan.
Since you don’t want to think about those pesky investments, there’s no better way to accomplish this than automation! Have your money pulled straight from your bank account (or paycheck), and deposited automatically into your brokerage account. You don’t have to lift a pinky (except for sipping the aforementioned martini).
Step 3: Choose Your Investments
For the person who does not want to think about their investments, index funds are the way to go. Index funds are a way for an individual to own a large collection of stocks all in one place. Index funds have extremely low fees, which are also great for the investor who does not want to deal with their investments. You wont be oblivious to your broker taking 2%-3% from your portfolio. That 2%-3% can result in hundreds of thousands of dollars by the time you reach retirement.
The Index fund I primarily invest in is the the Vanguard Total Stock Market Index Fund (VTSMX). It charges a 0.05% fee and has earned on average about 8% per year. If you don’t want to think about investing then your money should be here too. This will give you exposure to the stock market as a whole with plenty of diversification. You’ll own a small piece of every company in the market from Apple to Snapple.
(Here is the article I wrote on Index Funds: Index Funds Are Oh So Fun!)
Step 4: Stick to the Plan
Consistency is key when investing passively. You have to continue investing to reap the tremendous benefits. Don’t pay attention to market crashes by selling, just keep investing. Remember it’s buy low, sell high! Just stay your course. Here is why consistency is key (I think it is pretty convincing):
Say whaaat! A lazy investor can put $458.33 away each month and in 35 years become a millionaire. If they can wait an additional 8 years they will have two million dollars (Oprah Voice)! Two years after two million, and you now have made another $500,000! All whilst only investing $11,000 in those two years! Compound interest is truly amazing. The growth only accelerates in the years after.
Don’t forget the best part! If you do this in a Roth IRA, not a single penny of your two million dollars is taxed!
If you don’t want to lift a finger investing, here is your game plan. Follow through with consistency and you will get to a million. Compound interest is your best friend, and if you are young, you can take full advantage. Let’s get stackin’ people!
If you want some additional reading on index funds check out these books:
The Bogleheads’ Guide to Investing
Cheers,
Andrew
Andrew is the host of The Personal Finance Podcast, a show that is changing the way you think about your money. His primary goal with the podcast is to bring as much value as possible to his listeners.
Andrew's favorite free financial tool he's been using since 2014 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.
His favorite investment platform is M1 Finance, a site that allows him to build a custom portfolio of stocks for free. It has no trading fees and is his preferred way to invest without having to lift a finger.
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Gotta love compound interest! After years of grinding and hustling to make a million… The gravy train starts rolling in dumping money into your retirement accounts. A big reason why the rich get richer, right!? Is it worth the hard work up front… You bet!
Absolutely! It is amazing how quickly it grows in the later years. Knowing me, I will never want to spend it!
It’s an interesting concept Lynn but I have found that for myself I tend to sell too early. If you see consistent measurable success then I would keep it up.