“It is the first time meeting you,” is roughly the direct translation of this Japanese word, which is the traditional greeting used when meeting someone for the first time.
I will assume you have some working knowledge of basic financial terms. If not, use a reliable site like Wikipedia or Investopedia to reference unfamiliar terms. This is probably not your first time thinking about investing if you found this blog. But it’s always good to review some basics and establish a foundation of thinking that will inform your more advanced, future strategies. You need a primer–a preface to what will hopefully be a lifelong journey of financial learning.
Let’s first talk about where you should be putting your savings for maximum return.
The ranked order of WHERE to put your money should be:
- Work-based plan – 401k or 403b for example. Make the minimum contribution necessary to get the full employer match–free money! Investments in a tax-deferred account will allow you to earn many years of compounded interest on money you would’ve otherwise paid straight to federal income tax–an interest free loan!
- Pay off high-interest debt – This is like making a no-risk investment with guaranteed returns of 10-20+% depending on how high the interest rate is–I challenge you to find me a comparable investment product!
- Health Savings Account – If your annual healthcare costs are low, this is certainly the next most important account to max out–it’s basically more room in your 401k, except you can spend it anytime you want for healthcare costs (primary care, dentist, etc). This might not make sense if having a high-deductible health plan–a requirement of using an HSA–costs you more each year.
- Traditional or Roth IRA – Depending on your eligibility, you should then contribute the maximum to a Roth or traditional IRA. If you do not directly qualify for a Roth IRA, then read about the backdoor Roth strategy. These accounts are typically self-directed and can become your primary brokerage account, allowing you to grow your savings without worrying about annual taxes on capital gains and dividends.
- Work-based plan: part deux – If there is still unmatched room in that employer plan, make the maximum employee contribution. If you are lucky enough to have even more excess income to invest after all of the above, then you can begin to look into more exotic ideas like a so-called ‘Mega backdoor Roth,’ after-tax 401k.
- Stop – I’m serious. You have this much excess capital to invest? Just go buy some real estate or a Ferrari.
Investment is using capital to produce profit. Why do we invest? Why not just shove all your cash into a mattress or keep it in your savings account at the bank? Inflation. The US Dollar becomes worth less over time and you are actually experiencing a NEGATIVE return on uninvested fiat currency–averaging 1.8% over the past 10 years. You need to beat inflation just to break even each year!
How much should you be getting as a yearly return to make it to your retirement goal? I’ll cover that in another article, but others have written extensively about this. Instead I want to briefly talk about risk tolerance.
To begin, it is helpful to think of investments as a sliding scale of risk directly proportional to potential profit–low risk usually is low return and high risk is capable of high return. You are paying for that higher return by a higher chance of losing it all though.
Examples of low risk investment include things like gold, US treasuries, and US savings bonds. For example, TLT–an ETF of 20+ year US treasury bonds–has returned an average annual return of 7.9% over the past 10 years. If you have uninvested cash in your brokerage account, you should keep it in an ETF of US treasuries IMHO.
By comparison, a diversified investment in the US equities market brings more risk, but had greater returns over this time period and I would still consider this relatively low risk. For example, the S&P 500 had an average annual return of 13.3% over the same time period with reinvested dividends.
And so you can realistically expect to achieve your retirement goals if you plan ahead and balance your risk appropriately.
Now let’s say instead you had been investing some money in cryptocurrency and decided to buy Thorchain coin (RUNE) about a year ago. That would’ve given you a staggering 4369% return.
Don’t be fooled though. For every coin that did this, there are probably 100 others worth nothing after a year. Read about survivorship bias. This is the equivalent of betting it all on black. This is gambling with extra steps. On this website, I’ll be mostly discussing high risk investments. But understand that most of your long-term savings should be in relatively low risk investments.
DO NOT MAKE HIGH-RISK INVESTMENTS YOU CANNOT AFFORD TO LOSE.
But if you’ve come this far…
You want to learn about the really clever, exotic things that come with disclaimers. How about things like:
- Unlimited self-directed 401ks
- Deducting a significant percentage of your new car purchase
- Employing your children
- Options trading
And many more…
Why not just put everything into these relatively low risk investments, maximize commonly utilized tax strategies and ignore everything else. For me, it’s about:
- Intellectual curiosity
- chance of greater gains
This is a chance to responsibly gamble with extra steps. Boring and uninteresting are common complaints about some of the existing websites discussing retirement investments. A miserly attitude creeps in–promoting the accumulation of wealth as an end unto itself rather than as a means to worthwhile ends. ‘Don’t you dare spend on a luxury car or some guilty pleasure!’
I’m not here to judge you on how you use your savings. What are your reasons for wanting to do more with your long-term savings?