My long-term and fully-automated investing strategy
If only early retirement were as simple as putting money into a checking account and then just stockpiling it there. Things would be so much easier. I wouldn’t have to pour over The Bogleheads’ Guide to Investing, or read countless entries on Mr. Money Mustache and Mad Fientist. These are all resources that have helped me choose my investing strategy, and they all seem to agree on the same thing. Perhaps there is a little bit of confirmation bias going on here, because I have other people in my life that would vehemently disagree with their main investment vehicle: the index fund.
What is an index fund? It’s almost like a mutual fund, but it’s set up to track a whole market’s index…such as the S&P 500. So, instead of picking one or two stocks and owning those, you own a little bit of everything. Typically, over time, everything goes up in value. It has since the beginning of the market, and it will continue to do so.
What’s wrong with picking stocks? Nothing, if you can pick them. There are countless individuals that work for investment firms that live and breathe this stuff. They get up and plan their day, then go into work, come home and talk about it with their friends and spouses. They are in contact with the heads of these major corporations that they are buying and selling. They speak to that corporation’s clients and customers. This individual was specifically tasked to cover a certain sector as their area of expertise, meaning they have impressive and focused knowledge of this area of the market and economy. You know what, though? Typically over a decade, they will not beat the returns if you had just invested in the S&P 500.
It’s extremely hard to do and takes a ton of effort, knowledge and training. In case you haven’t noticed this site’s tagline, I’m a bit of a slacker. I also know that even if I was on my game, as these people are, I’m not much different from them. I would come at it from a position of “wanting to make money” and not from a “love of investing.” And, that’s where I would go wrong.
The argument for buying and selling stocks – many many stocks – nearly daily, is…you can make money on all of the ups and down of the market. You can even make money when the stock market goes down, if you’re savvy enough. In a year’s time, even if the market is down overall, you would have made money. Whereas if you had just invested in the overall market, you would be down.
This is a little short-sighted. For one, to be “up” from day trading over the span of a year, you have to be one pretty goddamn excellent day trader…and you have to be on your game every day for 365 days. This is no easy task and it basically has to be your job. Even still, there are professionals that have day trading as their job, and they’re unlikely to do that.
It also does not take into the account the other side’s story, from the position of the long-term investor. You will have years where your portfolio goes down (looking at you, 2008). But, that’s just one year. What happened from 2008-2015? The market is the highest it has ever been. And, like everything, it will go down. Overall, it will trend upwards.
For the long-term investor, you have to hold strong through everything. The above image is a little overly complicated, but we need to pay attention to that red trend line that is the upward trend of the market since 1870. Look at all of those crises all throughout history. The Great Depression, Dot-com bubble, Subprime mortgage crisis and everything in between. They’re all just hiccups. Focus on the red line.
So, looking at these trends, doesn’t it look like we’re about to take another downward spiral? I mean we’re pretty high up there right now. Surely, we’re due. If you think you can time the market, see how well, on average, you do at this game. You may win a couple times. You’ll probably lose a lot more.
What’s more, you’ll have expended a ton of effort. Long-term index fund investors expend almost zero effort. In fact, I do spend 0 effort. I never think about when I’m going to purchase, I just do…whenever I have money. I never think about selling. I never (should) check the balances…ha! What can I say. I’m not a robot, I’m human. But, if only I could be more like a robot.
You can be like a robot! Emotions should stay far, far away from your investment accounts. What you need your emotions for, is to come up with a list of goals. What you need robots for, is to maintain a steady course on the way to those goals. In the market trend picture above, your emotions would be the blue lines…while the robot would be the red line. Focus on that red line!
These days, there are Robo-Advisors like Betterment that can give you investment advice that was typically only given to the very wealthy in the past. Since it’s done by complex computer algorithms, the overhead is low…and so is the cost. Without buildings, offices, hundreds of employees, meetings, calls, golfing trips and seminars to go to…the services can be sold at a very competitive rate (as opposed to managing the funds yourself).
Everybody’s opinions on these Robo-Advisors seems to be hit-or-miss. The die-hard Boglehead that has been managing their own funds for years now may scoff at the idea of paying a computer to take over. This is especially so, because these services will typically just sell you Vanguard index funds that anybody could have bought without much thought. While in the other side of the ring, the user of the Robo-Advisor…or a new investor…might look to these services since it’s automatic and everything (like annual rebalancing and tax-loss harvesting) is done for you. The added services given to you by a robot may more than likely pay for the extra cost, and then some.
Me? I’m super lazy. I’ve gone with Betterment, all the way.
As much as I like investing, I don’t really have the knowledge right now to keep my portfolios for different goals balanced and doing what they should be doing. With Betterment, I can make a different dumping ground for each of my different goals, and have (probably) a better ROI than a savings account. This is the key aspect that made me select Betterment over other Robo-Advisors. So, how have I setup my goals within Betterment?
Squirrel Fund goal
This is my emergency fund. With this ratio, I don’t think I have to worry much about the value of the fund going to $0. I am risking a bit of money, but overall, I feel pretty confident that I will have the same amount or more.
Next Vehicle goal
This is like this for now, because I believe I have many years before I’m going to need a new vehicle. I’m putting most/all of my commuting miles on the electric bike, so I’m not driving the Prius that much. As Betterment sees my goal coming to a close, this will shift closer to a more bond-oriented ratio.
Roth IRA, Traditional IRA, and Eff You Fund
I could probably put this more in stocks, because the target date is so far away (10+ years), but this is what Betterment suggested for me…probably because of the slight risk reduction. I’m happy with it now, but maybe after reading more, I will change it. That’s what I like about Betterment. I can just drag a slider and all of the background selling/buying of bonds and stocks happens as efficiently as possible in the background.
How am I depositing money?
My Traditional IRA is what I’m going to stick to, so I’m going to deposit $458/mo to meet the maximum contributions every year. I plan on starting a Roth conversion ladder when it comes closer to retirement, so that I can access the money nearly tax-free.
For all other goals, I’ve setup Betterment to monitor my checking account and, once the account’s value is over $2000, deposit everything but that $2000. Basically, I have a maximum of $2000 in my account and when Betterment sees that I have more, it takes it all automatically and invests it.
Betterment calls this feature “Smart Deposit” and it seems to be only available for one account at a time. So, I’ve set the destination for my money to be my Emergency Fund goal, and forgot about it. When I achieve that goal, I’ll move it over to my Next Car goal, and then my Eff You Fund.
If you’d like to give Betterment a try, click this link and get up to 6 months free through my affiliate link. Yes, I do get money if you use this link. I took them on as an affiliate because I like their product and I wanted to share it. Since they’re my main investment company, I thought it’d behoove me to use them as an affiliate. If you don’t want to use my link (and get some free months!), just use this regular link.
So, this is how I plan to store my money. How much am I going to sock away?
As much as I can. I will probably even step away from the “Smart Deposit” setup and forcefully rip the money out of my checking account, forcing me to survive on whatever is left…though, that will be in the first quarter of 2016. I have a little home improvement project coming up.
I do plan on doing monthly income, spending and net worth updates, though…so we can see how the numbers play out. I thought people might like to see where I’m storing the money and why, since it is the foundation to the monthly update posts. Speaking of, the very first one is due very soon!
How are you saving your Eff You Fund? Do you trust Robo-Advisors?