I'm a huge fan of budgeting and I highly recommend you start budgeting with YNAB (You Need A Budget).
Jesse Mecham, the founder of YNAB wrote “Invest Like a Pro” for people who want to invest but have zero interest in the complex stuff.
In this book, you will learn why investing is important, how it works and how to get started today. It's an essential read if you want to start investing and building a better future for yourself.
Here are my notes from the book.
Biggest lesson: you don't have to understand everything to invest in your future today.
My rating: 8/10
“Invest Like a Pro” Notes
Learn why investing is important, how it works and get started today. It's an essential read if you want to start investing and building a better future for yourself.
You should NOT invest if:
- You want to make quick buck.
- You think the market's going to "make a move."
- Your uncle/aunt/dad/brother/neighbor has been talking up some opportunity that won't be around much longer.
- You don't understand what you're investing in.
- You don't have a clear goal, with a firm timeline.
In the end, there's only one reason to invest: to build wealth.
But understand that wealthy people, by definition, are investors. There are no exceptions to that rule. If you want to be wealthy, you need to be investing.
Speaking of wealthy people living next door, in Thomas Stanley's The Millionaire Next Door, he writes that the average millionaire invests almost 20% of their income. What percentage of your income are you investing?
Most of you are familiar with Rule One of the YNAB Method: Give Every Dollar a Job. Some of those dollars go off and buy groceries, some feed your hobby of artistic blacksmithing, and some... some of those dollars are your levers.
When you invest, you're leveraging your money. Your money basically goes out and does work for you. It's beautiful. They're the easiest employees to manage. They never talk back. They always stay on task. And they recruit other employees to keep doing the same thing. When you build wealth, you are leveraging your money.
Just this morning I was reading job applications for a Quality Assurance position on the YNAB Team. One of our standard interview questions is to ask, "What do you want to learn next? And what do you want to learn after that?"
The same researchers at Princeton that settled on the $75,000 "happiness number," recommended that we spend less on material items (which don't increase our happiness), and more on experiences, which do. What experiences could you have, or share, with your wealth? I find that question motivating.
Investing should be goal-driven.
You should not be investing for any other reason, except to reach a specific, wealth-building goal.
SMART goals are:
I will invest $ 125 (SM) each month (A) into my investment account so I can purchase a new car (R) in five years (T).
I will double (SM) the percentage I'm investing for retirement within 36 months (AT), so I can take greater advantage of my company's 401k match (R).
In the end, just like your day feels wasted if you don't have clear tasks to accomplish, your investments can easily be wasted if there's no specific target to reach. If you don't have a specific investment goal in mind, you likely 1) won't get started, 2) won't invest enough and 3) won't continue.
I'm still not going to mention stocks, ETFs, mutual funds, or expense ratios. We'll save that for NEVER. Well, almost.
I don't care how fancy anyone wants to make investing seem, it all boils down to these three components, in all their glory:
- The amount of money you're investing.
- The length of time your money will be invested.
- The rate your investment is growing (often called an investment's "return").
The tax situation changes like the weather. Taxes are your life's single biggest expense. Don't take them lightly.
What many CNBC pundits don't want to tell you, because this never sells ratings, is that investing to *win* is actually... really boring.
Today, we'll discuss those principles. They are:
- Starting now.
- Choosing to be boring.
- Understanding risk & reward.
- Understanding allocation.
- Diversifying (appropriately).
- Buying Low and selling high, on autopilot.
- Focusing on what you can control. (Discussed on its own tomorrow.)
Have you ever noticed how people don't talk about their "investments" in their online savings accounts? That's because those are predictable, boring, stable, insured conversation-killers. That's how your investing should be. As boring as an online savings account.
You control with 100% certainty, WHEN you start investing.
You control with 100% certainty, HOW you will invest.
William Bernstein, author of The Four Pillars of Investing, says it best:
"Since you cannot successfully time the market or select individual stocks, asset allocation should be the major focus of your investment strategy, because it is the only factor affecting your investment risk and return that you can control."
Index funds are mutual funds that automatically invest in all of the companies in an index, or list.
You have these investment professionals out there basically investing on your behalf, if you're invested in a mutual fund. These funds, where investment professionals actively manage them, are called "actively managed funds." Cute, I know.
There's another group of mutual funds that are not actively managed. They're called "passive funds." Index funds are passively invested. Again, the creativity is breathtaking. An index fund's investment choices are governed solely on matching the index that the fund is following.
Index funds are, in my book, a great way to passively invest. And passive investing, in my book, is a sure-fire way to outperform almost every other investor out there.
Exchange-Traded Funds (ETFs) are also mutual funds, but they're traded like stocks, and have some very attractive advantages that normal mutual funds just can't beat.
Taxes are your life's single biggest expense, so I encourage you to take them seriously. ETFs are tax efficient as long as you don't sell them.
The best way to invest in stocks is passively. The best investment type for diversified, passive investing, because of its tax efficiency and extremely low expenses, is ETFs.
Bonds are less risky than stocks, and there are good reasons why:
- If a company goes belly up and has to liquidate, bondholders would be paid before stockholders. Stockholders get what's left.
- There is an expiration on the bond, meaning your money will eventually be paid back to you (the $ 1,000 you lent YNAB, at the end of the bond's term, will be paid to you). If you own a stock, it's very rare that your capital is returned to you.
- Bonds are paid interest before stockholders are paid any dividends (the company is obligated to pay the interest, they are not obligated to pay a dividend).
Bonds are less volatile than stocks, and certainly belong in a well-diversified portfolio. Because they are less volatile than stocks, they're used to make a portfolio more conservative.
You should know that both investment types should be part of a diversified portfolio, and that investing in ETFs gives you the greatest tax advantage (if you buy and hold!), and smallest investment cost.
Just like a car carries around people, an investment vehicle carries around investments. That's it.
A checking account holds cash. A 401k holds mutual funds. You don't invest in a 401k. You invest in a stock or bond, which may or may not be held in a 401k.
In order to do this correctly, you have to start. Today. You cannot beat yourself up about not starting yesterday, or ten years ago. Think about it this way: The only correct time to start, is right now.
There is no amount that is "too small" when it comes to regular, proper investing. You'll just set it up on autopilot, and see if you can't squeeze a few dollars more every few months or so.
I do NOT recommend picking your own stocks or mutual funds. I do NOT recommend picking your own index funds or ETFs, and then managing the asset allocation on your own. I recommend having all of that done for you, so you can focus on things you actually enjoy doing.
One very quick and dirty option is to allocate your age as a percentage of bonds, the rest should be in stocks. I'm 31, so I should be at 31% bonds, and 69% stocks.
If you hear the stock market is down, just smile to yourself and say, "Excellent. Now I can invest cheaper!"
Investment performance is something you don't want to chase. As a matter of fact, they've found that the more frequently you trade in and out of market, the worse you perform. For more information in that regard, I highly recommend reading A Random Walk Down Wall Street.
Trying to time getting in and out of the market, or in and out of a specific fund, is a fool's game.