Episode description

• In last week’s Facebook Live episode with Frank Vasquez, he pointed out that we are in the Golden Age of Investing. In this episode, we explore what that means and if we appreciate how good we have it.
• In an ideal world, we would all like to maximize investment returns while reducing volatility. Holding uncorrelated assets helps to prevent catastrophe.
• But what is the goal of investing? Although it’s a broad question, Brad believes the ultimate goal is to accumulate wealth. Investing itself is a very broad term, but it is essentially when the money you have saved is working to produce additional income for you.
• Financial independence is getting to the point when you have saved and invested enough to get to the point where working can become optional.
• In the last 20-30 years, investing has become fundamentally easier. Even Brad’s first investing experience 20 years ago under the old system was a negative one, where he and his lack of knowledge were taken advantage of by an unscrupulous advisor. Back then, you needed an expert to help you invest money and paid dearly for it in the form of fees.
• When many of us think about saving money today, it is through a savings account or certificate of deposit where the bank holds your money and pays you an agreed-upon interested rate in exchange for being able to loan out your money at a higher interest rate. Based on current interest rates, it would take a very long time to make a meaningful return on money invested in this way.
• A more aggressive form of investing would be owning shares of a company’s stock and the value increases as the company become more profitable.
• Bonds are where a company, the government, or other entity raises capital by selling debt. You buy the debt and are paid back with interest.
• Mutual funds are yet another investment that first came about in the 1920s, but mutual funds really rose to fame in 1975 thanks to Jack Bogle when he created the Vanguard First Investment Trust. It was game-changing for modern-day investing.
• With mutual funds, you own a little piece of many different companies with one investment. In the case of an S&P 500 index fund, you would own a little bit of the top 500 largest companies, although it is cap-weighted, meaning you own disproportionally more of the largest companies and less of the smaller.
• The index funds approximate the market and so you don’t need to pick individual stocks to invest in, which is good since we tend to do so poorly at stock picking both on the information and behavioral side.
• Owning a single stock is a risky position. If something goes wrong, the investment can become worthless and your money is gone. You can mitigate that risk by diversifying your investment across multiple companies.
• Jack Bogle changed the game in 1975 when he decided you didn’t need to pay for experts to put together and manage mutual funds comprised of hundreds or thousands of companies. Computers could use an algorithm to manage a fund designed to track a particular index. He predicted you could get a better return from owning all the winners and all the losers and keeping the fees rock-bottom low than with an expert team picking stocks.
• Although the entire investing industry laughed at Jack Bogle, after 25+ years of data, the results show Bogle was right. The process dominates over one of actively picking stocks, especially with a timeline of several decades.
• Today, in the index fund space, there has been a continual race to the bottom when it comes to lowering index fund fees and the expense ratio today has been cut by a factor of 10 or more.
• Something ChooseFI has discussed over and over again is how much of an impact fees can have on your investments. An extra 1% fee can lower your net worth by as much as 30-50%.
• It’s because index funds with expense ratios of 0.04% or lower that say this is the Golden Age of Investing. It’s no longer necessary to pay 0.75-1.5% expense ratios or 5% front-load fees.
• In addition, changes to the tax code have made it possible to control our tax rate. In 1974IRAs became available, followed by 401Ks in 1978, Roth IRAs in 1997, HSAs in 2003, and 457bs in 2010.
• These investment vehicles allow us to control our tax rate and save for financial independence. With the exception of Roth IRAs, all of the other accounts are pre-tax, so that every dollar going in reduces your taxable income.
• Some couples may even be able to reduce their taxable investments by $78,000 if they have access to both 401Ks and 457bs and max out their investments, possibly reducing their taxes to 0%.
• Investing on your own today could not be easier. It can be done on your own, online, in about 15-20 minutes. Even better, you can automate your investing and send over an extra you have when you have it.
• The barriers to entry are also lower than ever before. You don’t need to have your money sitting on the sitting lines until you have accumulated enough to invest. You can start with $10 or $20 and invest in Exchange Traded Funds (ETF) if you don’t have enough to meet the minimum investment for a mutual fund or even buy fractional shares.
• Brad has his finances on autopilot even if it is suboptimal. He suspects many of these new companies are moving toward a system where everything is connected, will be able to optimize everything, allowing customers to keep anything extra invested.
• Jonathan believes making investing seamless is magical. Using dollar-cost averaging as an example, it guarantees a mathematically favorable average price for your investment.
• Brad thinks the most obvious benefit is behavioral. You don’t need to think about when to buy or what the market is going to do. Our brains screw us up with investing more than anything.
• There are a few other forms of investments, outside of stocks and bonds. Real Estate Investment Trusts (REITs) are basically mutual funds for different types of real estate, or ETFs made up of stocks in different types of commodities. Investing in a business, crypto, collectibles, NFTs, art, or single commodities are all other options.
• Speculation and investing can be conflated terms, but they are different. Speculation is not based on the fundamentals of a company or asset.
• Last Fall, Jonathan bought $200 worth of DOGE and just sold it for $5,000. While the gain is real, his purchase was entirely speculative.
• He remains skeptical of cryptos in general but sees where there may be value in cases where a problem is being solved, such as XRP and Swift.
• With any investment, you don’t want to be the one left holding the bag. Know what your risk tolerance is, what your timeline is, and what your goals are.
• With buy and hold investing in large swaths of the market, you don’t have to worry about whether or not you have the winners or the losers. The market is self-cleansing.
• As long as you keep living below your means and investing the difference between income and expenses, you’re going to be successful.

• ChooseFI Episode 313 Are you as Diversified as You Think You Are? With Frank Vasquez
• Register to receive a copy of Brad’s weekly email, The FI Weekly, right to your mailbox!
• ChooseFI Episode 013 The Unfair (FI) Advantage of Teachers | 457b
• Motley Fool article: Dollar Cost Averaging: What Investors Need to Know

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