In January 2009, during the last semester of my undergraduate degree, I accepted a full-time job as a Residence Hall Director at the university that I was attending. I had previously worked in a university dorm, and I knew the work and other Residence Hall Directors well.
The university had an unexpected departure in the middle of the school year. Instead of doing an external search, they prioritized internal undergraduate students for this staff position that was typically held by graduate students. My name was on the shortlist of potential candidates. Long story short, I put my hat in the ring and was hired for the job.
The job came with many perks including retirement benefits. The only problem was that it was optional. I declined the generous employer match. I opted to keep all my earnings as take-home pay, not realizing that I was missing an incredible opportunity to begin investing at a young age of 21.
I remember explaining the decision to my (at the time) soon-to-be father-in-law. “I don’t need to think about retirement at my age.”
He responded with something like, “I’m not so sure that’s true.” I ignored his advance and continued on with my decision to waive enrollment in the retirement plan.
I voiced the reason for my decision as something that wasn’t necessary for someone at my age. The reality is that I didn’t understand the stock market at all. With the recent stock market crash of 2008, all that I understood about investing was that it was risky or that I could lose money.
Looking back at it now, I lacked the knowledge and understanding that I have today. I let my fears prevent me from capitalizing on an incredible opportunity.
As history has proven time and time again, the stock market recovered from the 2008 collapse. If I had invested at that time, I would have received an employer match immediately doubling my investments. Those (already doubled) dollars would also have doubled again over the next 3-4 years.
Shortly after graduating from college, I decided to educate myself. I started reading a lot about personal finance and investing over the course of several years. Heck, I’m still learning to this day. This gave me the confidence that I needed for us to begin investing while we were still in our early twenties.
Fast forward to today, stock market investing is now a major part of our plan to reach financial independence. We have a high savings rate. It is the intentional decision to invest most of our savings and the growth from those investments that helps us achieve more financial freedom each day.
We would not have the financial freedom that we have today without investing. And we will not reach our goal without continuing to invest. It’s an essential part of our plan and it should be for anyone pursuing financial independence.
I want to share our approach to investing with you. My hope is that it can help others see that investing in the stock market does not have to be complex. While there is still volatility and risk, it will help you achieve your long-term goals.
A Guiding Principle to our Investing Strategy
Before I jump into the mechanics of our investment strategy, I want to start with a fundamental principle that informs our approach:
Investing > Not Investing.
This is another way of saying that you should avoid analysis paralysis. It’s better for you to invest, even if you make mistakes. Don’t let the complexity of the finance industry or the fear of losing money prevent you from investing.
Just get started.
This perspective is informed by a simple and almost guaranteed aspect of economics: inflation. History has taught us that the cost of goods or services will inflate or increase over time. This means that the buying power of a dollar will decrease over time. This is why the cost of bread (and almost everything else) has increased over time.
Inflation is the single best argument against putting money under your mattress. While it may seem like you’re not going to lose this money, inflation is all but guaranteeing that the buying power of that money will decrease over time.
Let’s give a concrete example:
Let’s say that you receive an inheritance of $150,000 at the age of 35, intended to help with your future retirement. The thought of losing any money in the stock market gives you anxiety. Instead, you open up a safe deposit box at your local bank and keep it there for the next 30 years, until the age of 65. You feel great knowing that you didn’t lose a single dollar of your ancestor’s hard-earned cash. Until you realize that the original $150,000 does not have the same buying power that it originally had. The $150,000 now has the same buying power as $74,078 would have had 30 years ago. This effectively means you have lost over half of its value to inflation. (Using 1990 – 2020 inflation data as an example).
Another way of thinking about inflation is a walking sidewalk that is moving against you. While the speeds (or rate of inflation) may change over time, it is almost always moving against you. Refusing to invest is like standing still on the moving sidewalk, meaning that you are going to be moving backward, away from your goal.
Once you understand the inevitability of inflation, you comprehend the importance of investing to build long-term wealth. You have to invest and grow your wealth at a rate that exceeds inflation and to increase your buying power over time.
Index Investing: A Simple Approach to Investing
Investing isn’t just about keeping up with inflation. It’s also about gaining more freedom and flexibility in the future as your wealth grows.
My initial understanding of stock market investing was that it was like betting on a horse race. To grow my wealth, I need to find the best companies to invest in. By doing so, I could get the best return on my investment. Only by doing the hard work and proper analysis could I find the best companies.
Little did I know there was a much better and simpler approach to investing with index investing. As defined by Investopedia, index investing is:
a passive investment strategy that attempts to generate returns similar to a broad market index.
In other words, index investing is a strategy that tracks the performance of the overall market. Instead of trying to pick and choose individual stocks or companies, an index investor will buy an index, which is a large compilation of companies.
This definition makes it sound like an index investor settles for the overall market return, implying that they are sacrificing some returns for simplicity. But the surprising reality is that the market return for the index is far better than the majority of non-index investors.
There is growing evidence that index investing results in greater returns than actively managed investments. CNBC summarized an ongoing study of index vs. actively managed funds. They report that the majority of actively managed funds underperform the market or index on an annual basis. Additionally, it’s very rare for a person to outperform the market in the long term.
After 10 years, 85 percent of large cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent are trailing the index.
In other words, there will be few who manage to beat the odds and achieve a better return than the overall market. For the rest of us, index investing will result in the best returns.
Other Benefits of Index Investing
If achieving the best long term returns were not enough, there are other inherent benefits to index investing, including:
1 – Diversification
Instead of investing in one or a handful of stocks, purchasing an index through a mutual fund or ETF means that you are buying a part of many companies. In the case of an S&P 500 index, it means you own a part of all 500 companies.
This means that the performance of all of the companies informs your investment return. This makes it less likely that one company spoil your returns.
2 – Lower Fees
Because index investing is not actively managed, the expense ratio or associated fees with owning an index fund is cheaper. Investment fees have a compounding effect and can have a significant impact on your investment balance over an extended period of time. The SEC does a great job of detailing how fees can impact your return.
3 – Simplicity to Manage
As I will talk about in greater detail in the next section, managing a portfolio made up of index funds is simple to manage. We don’t have to spend time tracking the performance of individual companies. We’re not trying to figure out which companies to sell or what to buy next. Instead, I can spend my time focusing on building our side hustles, increasing my salary from my day job, and exploring other business opportunities. All these activities would take a hit if we focused on managing an active portfolio.
The Nuts and Bolts of Our Investing Strategy
Here is how we execute our investing strategy. While I wouldn’t tell anyone to simply match our strategy, I hope this gives an example of key considerations when implementing your own wealth-building strategy.
Max Out Tax-Advantaged Investment Accounts
The IRS offers several types of tax-advantaged investment accounts. This includes employer-sponsored plans like 401(k), 403(b), and Simple IRA.
We each have access to an employer-sponsored plan. Jess has access to a 401k, and my work offers a Simple IRA. Each retirement plan is different, especially with maximum contribution limits. We max out both of these plans and receive a company match for a part of what we contribute.
All of our contributions to the employer-sponsored plans are pre-tax. We used to make some of these contributions as Roth contributions. We switched when we realized that pre-tax contributions would help us grow our wealth faster. Pre-tax contributions lower our taxable income, which reduces the amount of taxes we owe. This increases our take-home pay and allows us to contribute more to other investment accounts now.
After we max out our employer-sponsored plans, we also max out our Roth IRAs. I like the balance of both pre-tax and Roth accounts because it will give us greater flexibility in the future when we begin using these accounts.
We initially opened our Roth IRAs at T Rowe Price but transferred the accounts to Fidelity Investments a couple of years ago when they came out with zero-fee index funds. We’ve been using Fidelity for many years now, including our main checking account.
Side note: Being a customer for 10+ years was one of the reasons we were excited to partner with Fidelity to share this post.
Supplement Investments with a Taxable Account
After maxing out our tax-advantaged investment accounts, we also invest money in our taxable brokerage account at Fidelity.
The ways to access funds in a tax-advantaged investment account are complex. Investing in a taxable investment offers us a lot more flexibility to access these funds before the traditional retirement age. Our hope is that we can build up this taxable account (along with other revenue streams) to cover our annual expenses until we reach the traditional retirement age.
This will leave our traditional retirement accounts (401k, Simple IRA, and IRAs) to grow until then.
To make all of this even more straightforward, we automate all these steps. This means we don’t have to think about it each month.
As we’ve talked about in other posts, we create our annual plan at the beginning of each year. We then update our withholdings with our employers and set up automatic transfers to take care of the rest. Then, everything happens like clockwork throughout the year.
Here’s an overview of how the money flows:
Automating our investments ensures that we reach our contribution goals each year. There’s no human element to it.
I’ve also found that automating our investments helps me ignore the noise. The market will always have volatility. Automation helps us not watch the market too closely and reduced our worries. I know what to expect in the market over the long-term (hint: it will go up), and that’s good enough for us.
Your Investing Strategy Doesn’t Have to be Complex to Be Successful
This is the strategy that we have used to accelerate the growth of our wealth. By committing to a high savings rate and automating our annual plan, we are able to invest in our future.
We aren’t chasing the best returns or trying to beat the market. But by leveraging index investing, we are getting the best possible return for us (with our limited knowledge and skill).
As I mentioned above, it takes very little mental energy to manage. We don’t spend a lot of time managing our investments. Instead, we spend our time and energy focusing on building the lives that we want to create.
As our investment balances grow and the amount of expenses that the portfolio could sustain, we gain more and more financial freedom.
Well, now this helps me understand the response on Twitter a bit more 🙂 Thanks for sharing all those details!
Appreciate you pointing out the aforementioned automation process, too!
It certainly …pays… to be able to kick back and relax while your little green workers march off to their respectful places of employment, all on their own. Ha.
Keep it up Jess and Corey!
I like the little analogy. Relax while the little green workers march of to their places of employment, lol.
Nice post covering many important investing tips! I too am a happy Fidelity customer and fan of the Fidelity Zero funds. The fact you can trade ishares ETFs with no commission is also huge for your taxable accounts.
I just listened to your interview on the choose FI podcast. I really like the “coast FI” concept as well as your comments of “Fi is a journey and not just a destination”. Thanks for what you do!
I’m so happy to hear you enjoyed the Choose FI interview. I’m so glad you resonated with our thoughts about the journey.
Jess & Corey,
What are the benefits of choosing a mutual fund for low-cost index funds compared to an ETF?
Hey. I’d encourage you to check out this article about ETFs vs. mutual funds: https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp
They have a lot more in common, but the key thing is to ensure that it’s an index fund that’s passively managed. If you are planning to buy and hold, it doesn’t really matter if trading can happen during the day or only at the end of the day (which to my understanding is the key difference).