Starting Point For Saving And Investing

Scope Of This Post

This post is not financial advice, and I refuse to take any responsibility for any financial ruin you experience.  Please do your own research and make your own conclusions.

This post is a list of resources I found useful and a few thoughts not present in those resources.  This post tries not to assume any knowledge of the world of saving and investing.  A lot of friends and acquaintances have questions like "how do I even start saving for retirement or a house?".  I hope this post will help those people see what their options are, and be able to evaluate those options...after reading a lot of stuff from different places.  This is just a starting point; there is so much more to be said.

If you want to yell at me "I DON'T WANT TO KNOW STUFF, JUST TELL ME A PORTFOLIO", then read the oversimplified conversations post, possibly followed up by the steps to buy an ETF post.

If you have questions like, "should I prioritize my 401k or my IRA?", then read Reasonable Prioritizations Of Accounts.

Also, be careful; there's a lot of very bad investment advice out there (ex: "These are the must-buy Chinese biotech stocks of 2018!").  I hope to provide a safe starting point for people to educate themselves, but you should read my words with a critical eye as well.

Some Resources From Reddit

reddit.com is a website with a lot of independent message boards; the Personal Finance message board has a good wiki with introductory articles for investing and personal finance in general:

• Common Topics
• IRAs
• 401k
• Index

Some Resources From Bogleheads Wiki

"BogleHeads" is the name of people who are big fans of John Bogle.  He founded Vanguard and popularized the low-fee index fund; he's also a big proponent of passive, diversified, buy-and-hold investing.  I would consider myself a boglehead.

The bogleheads wiki has a Getting Started page, which has a few links, notably to the investing startup kit ("kit" just being a collection of articles). Here are some pieces of the boglehead approach:

• Don't buy individual stocks in an attempt to "beat the market". (Buying stocks as part of an employee discount stock purchase plan is okay because of the discount part.)
• If you want to invest in the stock market, use a low-fee, diversified, market-cap weighted fund (the bogleheads wiki lists several examples).
• Buy and hold for the long term.  Don't do buys and sells as an attempt to "beat the market".
• Don't buy actively managed funds in an attempt to "beat the market", especially if these funds have high fees/expense-ratios.
• Don't try to predict stock market crashes.
• Don't react to recent stock market fluctuations due to your emotions.  Come up with a "Investing Policy Statement" and stick to your long-term policy.

Low-Risk Possibilities, Especially For Short Term Goals

For short-term saving that isn't the roller coaster ride of the stock market, you might want to think about a savings account, money market fund, or CDs (certificates of deposit).  A savings account or money market fund will usually offer a lower interest rate that will fluctuate over time, but lots of flexibility on withdrawing your money.  A CD will usually offer a higher, fixed interest rate but have limitations or penalties for withdrawing your money before maturity.  This isn't always the case.  Please check what interest rates you can get on savings accounts, money market funds, and CDs when you are trying to decide between them.

Fidelity offers CDs, but for an example with web pages, you can see Ally Bank is offering 1.60% APY for its savings account and is offering 2.1% APY or more on 1-year CDs.  One thing I've noticed is that physical banks usually offer horrible interest rates compared to online banks.  Right now, Comerica's saving account is offering 0.01% APY; Ally Bank's savings account interest rate is 150 times Comerica's rate. (Rates mentioned in this paragraph were last checked on 2018-05-29.)

Yes, interest rates are very disappointing right now, especially compared to inflation (2.1% inflation in 2017), thus many people have decided to lean more heavily to stocks/equities than they used to in previous decades.  However, keep in mind the roller coaster ride of the stock market.  If you really want to be able to afford a house (or a significant down payment) in 5 years, and you really would hate for a stock market crash to possibly extend it to 10 years, then maybe safe stuff is right for you.

Bonds are very similar in function to CDs.  Resources mentioned above focused on bonds, but I want you to know that a well-chosen CD or savings account might even be better for your circumstances, especially considering that CDs usually have higher interest rates compared to bonds of same safety level.

Portfolio Decisions, In An Appropriate Order

Perhaps the most important article in the bogleheads startup kit is the asset allocation page.  There's a lot of considerations that goes into deciding what makes up your portfolio, which the article tries to cover.  I'm going to try to briefly list the decisions you might face, with the earliest and most important decisions listed first.

• Stocks/equities versus interest-bearing assets.  What percent of your portfolio will be bonds/CDs/savings-account, and what percent of your portfolio will be stocks?
• This is the first and most important decision of your portfolio because it has the biggest impact on the risk-and-return characteristics of your portfolio.  In fact, this is the only decision I'm tempted to label "required".
• Appropriate decisions can be something as extreme as 100% stocks or 100% interest-bearing assets, depending on your circumstances.
• At this point, the stocks portion could be implemented with one ETF that covers over 99.9% of the total US stock market.  ITOT and VTI are the ETF I use for that purpose (more details on particular ETFs in sections below).
• The interest-bearing assets could be CDs or something as simple as a savings account.  Also, you could use a overall bond market ETF like AGG or BND.
• Example portfolio implementation at this point:
• 80% US stocks (ITOT or VTI)
• 20% interest bearing assets (AGG or BND or savings account at Ally bank)
• For stocks, domestic versus foreign.  Of your stocks, what percent will be domestic (USA) versus foreign (rest of world)?
• It's perfectly fine to not get to this point, where you skip the decisions discussed in this top-level bullet point and below.  You can leave your portfolio at something like ITOT+AGG.  Don't make your portfolio so complicated that it becomes an unpleasant burden that you neglect looking after.
• The main reason go into foreign stocks is for the sake of diversification, which will make your portfolio tend to be less volatile without necessarily compromising returns.  Diversification is a very important concept; try to make sure you understand the advantages of diversification.  Also, remember that a consequence of diversification is that you will always have some part of your portfolio performing worse than the other parts.
• Many people recommend at least 25% of your stocks be foreign.  Many people recommend at most 25% of your stocks be foreign.  My current target is 25% of my stocks be foreign.  I have some temptation to raise my target to 30%.
• The foreign stocks portion could be implemented with one ETF that tries to cover as much of the non-US stocks as possible, like IXUS or VXUS.
  
• Once you've added foreign stocks to your portfolio, you are at the standard three-fund portfolio.  Also, know that most target date funds (funds that try to be a simple way to save for retiring at a certain date) are just three-fund portfolios that increase their bond holdings as you get closer to the target date.
• Example portfolio implementation at this point:
• 80% stocks
• 60% US stocks (ITOT or VTI)
• 20% foreign stocks (IXUS or VXUS)
• 20% interest-bearing assets (AGG or BND)
• Going beyond stocks and bonds.  What percent for things other than the very conventional stocks and bonds?
• This is a very optional question to ponder, and very much depends on your life circumstances.  We're also leaving the bounds of simple, set-it-and-forget-it portfolios, especially if you decide to start laboring as a landlord.
• This category includes stuff like: real estate, precious metals, annuities
• A very short list of things to keep in mind, which absolutely don't do justice to the complexity of the topics at hand:
• Don't expect positive returns from commodities like precious metals or crypto-currencies.
• You can buy REITs (real estate investment trust) as a way to do passive investing in real estate.  There are REIT ETFs that let you diversify across the entire US REIT market (ex: USRT).
• Note that a US stocks ETF like ITOT has 4% of its holdings characterized as real estate, several of which are REITs.
• Indexed annuities (where payouts have some dependency on a stock market index) are almost always horrible for you and very profitable for the providers, including the salesman who gets paid a huge commission.
• Single Premium Immediate Annuity (SPIA) is an annuity that makes sense for some people.  You can think of it as a bond that stops paying out once you (and your spouse) die.  It's kind of like insuring yourself against the risk of living way longer than you predicted.  Usually doesn't make sense to buy while young though.
• For interest-bearing assets, choices on duration and inflation protection.
• Again, perfectly fine to not get to this point.  Also, perfectly fine to look at all of this stuff and decide to just stick with AGG or your savings account.
• Usually, bonds and CDs with longer durations offer higher yields than bonds and CDs with shorter durations.  The drawback of bonds and CDs with long durations is they are more negatively impacted by increases in interest rates; this is called interest rate risk.
• The difference in yields between bonds/CDs of different durations changes over time.  Sometimes a 10-year bond has a much higher yield than a 1-year bond.  Sometimes it doesn't.  You'll have to look at various offerings at the time you're making your decisions.
• Note that a broad bond ETF like AGG already has a mix of bonds of various durations.
• There are bonds that have payouts that are adjusted for inflation (ex: TIPS).  One of the risks of holding typical interest-bearing assets is that unexpected increases in inflation can really hurt you.  Inflation-adjusted bonds guard against that, but tend to give lower returns than bonds that are not inflation-adjusted.  TIPS might not be right for you, but it's nice to at least know that such a thing exists, especially for people who want to play it super safe.
• Other allocation decisions that are very minor.
• Now I think we're very much into decisions that are tiny in impact compared to previous decisions.  These are extremely optional.  In fact, only entertain these ideas if you think investing and personal finance is fun.  Keeping to a three-fund portfolio is perfectly fine, and better than most attempts to be really clever with your portfolio.
• Let this top-level bullet point serve as a reminder to not think about overweighting small-cap stocks until you've thought about the previous top-level bullet points.
• To pursue diversification further, you could think about overweighting your foreign holdings to emerging markets (ex: IEMG) or foreign small cap (ex: VSS).  A plausible theory is that poor countries and small foreign companies are less affected by big global factors that make the holdings in ITOT and IXUS behave similiarly.
• Small-cap stocks have been historically more volatile and higher return than the overall stock market.  Some people think there are reasons for this small-cap behavior to continue.  So, if you find their arguments convincing and you're willing to have more volatility for the sake of higher expected return, perhaps add some small-cap ETFs to your portfolio so they're weighted beyond their market cap.  Also, the "less affected by big global factors" diversification argument applies here.  IJR is a US small-cap ETF.
• I no longer overweight emerging markets or small cap equities.  I now do the typical 3-fund portfolio of UsEquity+ForeignEquity+UsBonds.
  
• Always keep in mind the expense ratios of the funds you use, but be especially aware that low-fee funds get harder to find the more specialized you get.
• Example portfolio implementation that is really starting to add a lot of complexity for not a lot of added benefit:
• 80% stocks
• 60% US Stocks
• 50% US total stock market (ITOT)
• 10% US small-cap stocks (IJR)
• 20% Foreign Stocks
• 5% EAFE index stocks (IEFA)
• 5% emerging markets stocks (IEMG)
• 10% small-cap non-US stocks (VSS)
• 20% interest-bearing assets (AGG)

One very unfortunate thing about these questions is there are no hard-and-fast correct answers. How do you peer into your own soul and determine how risk averse you are?  How can you make a risk-and-return tradeoff on stocks vs bonds when the risks and future returns are almost unknowable?  Sorry.  My approach has been to do a lot reading, pondering, and I do recognize that a rough guess is better than nothing.  For instance, I'm currently ~35% into foreign stocks, and have only very weak answers as to why it's not 30% or 40%.

Something Concrete: You Can Make A Fidelity Account And Buy The ITOT ETF

A fair amount of the above words and linked articles are abstract and vague; articles will recommend stuff like "max out your IRA; buy a low-cost total stock market ETF"...okay, how does someone get started on that?

For instance, you can open an IRA account and a normal brokerage account at Fidelity, transfer some money in from your checking/savings account, and then buy something like ITOT.  That can be it.  Here is a click-by-click post explaining how to transfer money in to Fidelity and then buy an ETF.

• Here are details on ITOT.
• If you decided to get into foreign stocks, here are details on IXUS.
• If you want to poke around and see the various sorts of ETFs, here is a list of iShares-brand ETFs where I encourage you to select "list view" and then sort by expense ratio so the lowest-fee ETFs are at the top.
• Vanguard ETFs are also pretty good.  You can open up a Vanguard account, or you can buy Vanguard ETFs from Fidelity with no transaction fees. I own plenty of Vanguard ETFs in my Fidelity account.
• notable Vanguard ETFs are VTI for US stocks and VXUS for non-US stocks.

I've been very pleased with Fidelity's customer service and extremely low fees (zero fee for almost everything that I've done).

Of course, you'll want to read up on stuff before you would do any of that.  For instance, above a certain income, you might not be eligible for a traditional IRA, or even a Roth IRA.  Also, I agree with a lot of the advice linked above that stuff like high-interest debt and 401(k) contributions can have higher priority than an IRA.

Another abstract piece of advice is "choose low-fee funds".  But what is low-fee?

• The fund should have no load fee.  A load fee is where the fund itself charges you for buying or selling the fund.  This is not the same as your broker charging you a fee for the transaction. None of the iShares or Vanguard ETFs have any load fee that I know of.
• Low-fee is mostly about the annual expense ratio
• Simplest rule of thumb: look for fund with annual expense ratios under 0.25%
• The simpler and broader the fund, the lower the annual expense ratio you should expect
• total US stock market funds can be had for 0.05% annual expense ratio or lower
• broad foreign stock funds can be 0.14% annual expense ratio or lower
• niche funds like "US small-cap value" are really getting up there, with annual expense ratios of 0.25% and more
• Shop around amongst providers known for their low-fee ETFs.  Things are pretty competitive between iShares and Vanguard, but sometimes one notably outdoes the other.  Charles Schwab is another source of low-fee ETFs.

Understand What You're Buying

This incomprehensible mess should scare you.

It's very easy to look at some ETF, CD, or something, and to come to wrong conclusions about that thing, and then you are disappointed after you buy it.  It's very easy to make a mistake because you think you understand what you're buying, but you don't.  I will try to illustrate with examples.

Also, if you keep your portfolio simple, then you don't have to understand a whole lot and you minimize your chances of making a mistake.

Example 1: Do You Buy A Growth Fund If You Like Growth?

I used to hate doing investing and personal finance stuff.  At one point, I decided it was important to overcome my aversion, and so I forced myself to get the ball rolling.  I was going to try to buy a low-fee, diversified, stock index ETF like I had heard about.  It was so important to get the ball rolling, I gave my permission to make this purchase before doing a lot of homework.  This means I was going to make a suboptimal decision, but it was definitely better than continuing to neglect my finances.

I asked someone what ETF he had that fit this criteria, and he said IVW.  So, I bought IVW through my Fidelity account.  IVW is a "S&P500 growth" ETF with an annual expense ratio of 0.18%.  This purchase was not a horrible decision.  IVW is a fairly low-fee and diversified.  "Growth" sounded aggressive: high risk, high return.  That sounded just like what I wanted; I was wrong.

A few reasons IVW was suboptimal for me:

• IVW is significantly less diversified than ITOT, a total US stock market ETF.  IVW is probably 40% of the stock market, rather than ITOT's 99.9+%.
• IVW has an "okay" annual expense ratio of 0.18%, but ITOT's 0.03% is much better.
• "Growth" is actually less aggressive/risky than the opposite category "Value".

Note that the first two bullet points are cases of me simply not knowing about superior alternatives.  I knew I was going to make mistakes for that reason.   I'd like to bring extra focus on the third bullet point: I thought "growth" meant more aggressive/risky due to normal intuitive reasons about the word, but I had it completely backwards.  Your everyday intuition will often be violated by how things are labeled in the investing world.

Someone who keeps their portfolio simple with AGG+ITOT+IXUS runs a lower risk of running into misleading labels.

Example 2: Is Poland Part Of Europe?

A popular index for stocks in developed non-US countries is the MSCI EAFE IMI.  I've owned some IEFA for the exposure to developed non-US countries, which uses the MSCI EAFE IMI.

MSCI is the company that does the work of making and maintaining the index.  EAFE stands for "Europe, Australia, Far East".  IMI stands for "Investable Market Index".

Poland is part of Europe, but it is not part of the MSCI EAFE IMI.  Also, take a guess about whether the far east countries of South Korea and China are in the index.  Check your answer here.

Also, there plenty of ETFs which use the MSCI EAFE index...which is slightly different than the MSCI EAFE IMI index.

Indices/funds will exclude and include things that will surprise you if you just look at the name of the index/fund.  Also, you will be surprised when you do things like buy a MSCI-EAFE-based ETF when you really wanted to buy a MSCI-EAFE-IMI-based ETF and you didn't even know you had to distinguish the two.

Someone who keeps their portfolio simple with AGG+ITOT+IXUS doesn't have to mess with these headaches.

Example 3: Is Five Thousand Bigger Than Two Thousand?

Here's another fun one when it comes to index funds.  It's just so fun, I can barely contain myself.

WFIVX is a mutual fund with the short description of "Wilshire 5000 Index Investor Class Shares".  The WFIVX webpage also says, "The goal of the Wilshire 5000® Index Fund is to replicate...the total return of the Wilshire 5000 Total Market Index".

Sounds like you can buy a fund that has ~5000 underlying stocks. That sounds really neat!  Hahaaaaaahahaaa (imagine a solid 20 seconds of laughing and coughing), no.

The Wilshire 5000 index (wikipedia) started at ~5000 stocks when it was created, but includes ~3500 stocks now.  The WFIVX fund holds 1816 stocks. Wow, so, it has roughly half as many stocks as ITOT, and also has stupidly high fees (12b-1 fees and a 0.67% annual expense ratio).  I think it's a disgrace to call the WFIVX a "Wilshire 5000 index fund".

The previous example about MSCI EAFE showed you will be mislead if you just look at the name/description of a fund or index.  This example shows where you can't even trust that a fund faithfully implements the index that it says it implements.

Are you having fun yet?  Are you feeling the cynicism and distrust grow within you?  I hope so.

Example 4: Do Not Confuse Complexity With Diversity

I have seen people's portfolio's where they have the IUSG (US growth stocks) and IUSV (US value stocks) ETFs in roughly equal proportion.  Intuitively (and wrongly), it makes sense to diversify by having a "growth" fund and a "value" fund.  However, you can achieve the same diversification with ITOT.  ITOT has all the stocks that IUSG and IUSV have, but ITOT is simpler and cheaper (lower expense ratio, lower taxes).

Also, I've seen a similar problem with portfolios recommended by professional financial advisors.  For instance, one financial advisor at Vanguard recommended 70% VV (US large cap), 20% VO (US mid cap), and 10% VB (US small cap) ETFs for the US portion of the portfolio.  It might sound good to have funds for all the different sizes, but the advisor is just recreating a more complicated and more expensive version of ITOT (or VTI if you prefer the Vanguard brand).

Someone who keeps their portfolio simple with AGG+ITOT+IXUS gets huge diversification and very low complexity and very low cost.