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 experts recommend keeping an emergency stash of money in your bank account. However, keeping too much in your bank will limit your returns (long term your savings account will almost definitely return much less interest than your brokerage account).
- Setup periodic transfers if appropriate. Your brokerage may give you the option to setup periodic transfers. Most experts recommend doing this. The idea is simple – keep much money as feasible growing as long as feasible in your higher-interest brokerage account. E.g. you may want to deposit a specific percentage of each paycheck into your brokerage instead of waiting a year to make a large transfer.
- It may take over a week or more for the money to become accessible in your brokerage account. Many 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. Experts recommend purchasing index funds.
These funds closely match the performance of a target (e.g. the S&P 500) with minimal fees. We recommend one for the US stock market (VOO and/or VTI), one for emerging stock markets (VWO) or global stocks (VEU), and one for treasury bonds (TLT and/or VGIT). 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, including those working with a financial advisor, and using less time and effort. (Studies have shown that financial advisors can’t beat the market in the long term either, but they’ll charge you 1% of your assets every year, which reduces long terms returns significantly, see this.)
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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