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This article provides concise instructions to invest saved money efficiently.
The reasoning for this approach is mostly excluded to keep this as concise as possible
(other articles like this are available for that).
- Create a brokerage account. We recommend using Vanguard to do this.
We earn no commission from this recommendation—we recommend them because they charge no fees to buy and sell Vanguard funds (which are excellent funds for most people).
Creating and setting up your account is free.
Higher fees typically lead to lower returns.
- Deposit money into your brokerage account from your checking or savings account.
Most advisors recommend keeping an emergency stash of money in your bank account, enough
to cover 3 to 6 months of expenses.
However, keeping too much in your bank will limit your returns.
- Setup periodic transfers if appropriate.
Your brokerage may give you the option to set up periodic transfers.
Most advisors recommend doing this, as it appears to have numerous benefits.
- You will tend to invest your salary quicker, meaning it has more time to grow.
This can really add up over the long haul.
- You can save time manually logging in to your accounts periodically to move money.
- Some people claim they get accustomed to their reduced bank account and spend less.
- It may take over a week for the money to become accessible in your brokerage account.
Some people get frustrated with this, but that’s the way it is.
You should receive an email or other notification when your money arrives,
depending on the settings you agreed to with your brokerage.
- Purchase assets.
Unless you really, really know what you're doing, you should purchase broad index funds.
These funds closely match the performance of a target index (e.g. the S&P 500), with minimal
fees.
We recommend one for the US stock market, e.g. VTI,
one for stocks outside the US, e.g. VXUS,
and one for bonds, e.g. BND.
The percentage of money you allocate to each should depend on your unique situation,
but a simplistic guideline is provided here.
- Many people ignore the previous step and try to pick individual stocks and/or time the market.
Some of them succeed in the short term, just as some lotto tickets exceed the statistical expected winnings.
However, in the long term they almost always fall behind, just as most chronic gamblers fail.
They do one or more of: (1) pay “frictional costs” like short term gains and/or transaction fees,
(2) miss out on interest while money is out of the market between sells and buys,
(3) make mistakes caused by human psychology, and
(4) waste time and effort that could have been applied to a more beneficial pursuit (day job, side business, …).
- Rebalance periodically. Most experts recommend checking your brokerage account 1-4 times per year.
Set a schedule for yourself to ensure you do this.
It shouldn’t take long, you need to do two things:
(1) decide what you want your percent allocations to be (e.g. as you get older or
approach a time when you may need to withdraw money,
you should hold more conservative assets like bonds) and
(2) buy/sell assets to attain your target percentages.
- Enjoy. Simply following these steps will typically earn you more interest
than 90% of investors while using less time and effort.
Studies have shown over and over that active trading, even by professionals, very rarely beats
the market in the long-term.
Furthermore, good index funds avoid fees that can
dramatically reduce long terms returns.
If you need help, we recommend hiring a fiduciary (not a financial advisor). You'll pay a flat fee for a consultation in which he/she is required to act in your best interest.
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