Christmas is the perfect time of year to discuss our take on investing. Up till now, we talked a lot about how to save money, from avoiding credit card debt to cancelling cable TV to bringing a pack lunch.
But what do you do when you find yourself with a cash windfall?
For many, Christmas is often a time of receiving pay check bonuses, but also a time of extra spending.
It’s so easy to spend that Christmas bonus check in your mind, even before you’ve received it! (think Chevy Chase in National Lampoon’s Christmas Vacation, who wrote a check on a backyard pool before he even had the money to do it).
But what happens when, like Walt Griswold, you don’t get that bonus check? Disappointment and debt!
But there is a better way!
You see, the best way to make sure you always receive a Christmas bonus is to invest that cash windfall in things that pay you like stocks and bonds.
Stocks will pay you in the form of dividends and appreciation, and bonds in the form of interest.
What! Booorrriiiinnggg. Come on CoupleofCents, can’t I have a little fun?
Of course. Consider this. What if Walt Griswold had budgeted for his dream pool and started putting aside money from his paycheck every month the whole year before Christmas. He could still have his dream pool without having to spend money he hasn’t even earned yet.
Around our house, December does tend to be big a bigger spending month than most. Yet, we still make sure to use money from our regular budget for all the gifts, the holiday treats, and fancies dinner parties.
So what are we doing with our Christmas bonus this year. After tithing 10%, the rest of it will go to fund help fund our Individual Retirement Accounts (IRAs).
This sets us up talk about our investment philosophy and how that shapes the the types of financial instruments we use to to achieve our long term financial goals.
***This is not a primer on which stocks you should pick. You need to do your own research. I’m just a guy writing a blog. I merely want to provide an example of how we do our investments. I do not receive any compensation for the funds listed on this post***
FIRST, A WORD ON INVESTING IN THE STOCK MARKET…
There’s a lot of hype out there about investing in the stock market. When you should buy, when you should sell. What sector is hot right now. Cable TV “experts” talk for hours about their their latest stock tips.
Literally there are billion dollar industries depending on you getting super confused so you can fork over your hard earned money for them to manage, all for a generous fees that eat away your returns.
Really, though, it doesn’t have to be that complicated!
Perhaps the best write up I’ve seen of the way to invest and understand the market is over at read Jim Collins “stock series” at jlcollinsnh.com. (Really, you can save yourself tens of thousands of dollars over your life time if you take the time to read this series).
Jim points out that since the inception of the stock market, the stock market always goes up over the long run, and yet so many people lose money in the stock market.
How is that possible?
Everyone has a tendency (including me) to think they can time the market or pick the best fund managers. In fact, our human instincts are usually dead wrong when it comes to buying and selling. The majority of people who try to time the market buy when stocks are up and sell when stocks are down.
It’s easy to see the market as it’s going up and jump on the band wagon, not knowing the next stock market crash is just around the corner. Likewise, as the stock market experiences a melt down and you see your life savings vanishing into thin air every instinct is telling you to cut your losses and run. Successfully timing the market not only requires you to know when to buy, but when to sell. A tricky, and costly endeavor for sure.
So how can we remove ourselves from these pitfalls?
Rather than trying to pick individual stocks, buy index funds that track the entire market. You’re not betting on one company to make it big, you’re betting on the entire market. And as history has shown, the stock market has always gone up over the long run.
Rather than trying to time the market, invest for the long haul (20-30 years). Don’t withdraw those funds until you retire. This will greatly decrease your chance of losing money in the stock market, because you’ve given your investments time to grow. When you withdraw money in the short term (less than 5 years), it’s very likely you’ll be withdrawing your money at a bad time. Stocks fluctuate up and down a lot in the short term.
So how do we apply this philosophy to our investments.
CoupleofCents Investment Portfolio
- U.S. Stocks in VTSAX – 51% We use Vanguard’s VTSAX for it’s simplicity, low fees, and exposure to all types of stock investments: large, mid, and small cap. Vanguard’s VTSAX index fund tracks 3600 publicly traded companies in the U.S. for a rock bottom expense fee of .05 ER.
- Int’l Stocks in VTIAX – 22% we use Vanguards VTIAX for the same reasons we use VTSAX. Adding international stocks diversifies our portfolio and reduces risks when markets in the U.S. are down or vice versa.
- Bonds – 15% we use VBMSX and VTIBX to get domestic and international bond exposure. At 31 years old, we keep our bond allocation around 15% since we have decades still until we will need to use the money.
- Alternatives – 8% we have 2/3 of this category invested in Vanguards REIT fund, which is essentially a stock index fund that invest in all types of real estate. The other 1/3 we invest in LendingClub loans, which is a peer to peer (P2P) marketplace where you can loan others money much like a bank does with credit cards.
- Cash – 4% in Ally Online Savings Bank
Investing in the stock market doesn’t have to be complicated. You could literally invest in only 1 fund (Vanguard Total U.S. Stock Market fund VTSAX) if you wanted to and still come out way ahead of most.
Do yourself a favor if you haven’t already spent your Christmas bonus. Invest it. Your future self will thank you.