This post seeks to take a daunting subject, such as investing, and break it down into simple, manageable steps that anyone can follow. Along the way you will hear reasoning and sources, far superior to me, that help vet this line of thinking. Over time, I have adapted these basic investing strategies as my only form of investing.
If you are anything like me, then when you hear the word “investing” it conjures images of maniacal people waving tickets on Wall Street yelling “Sell!” and “Buy!” and whatever else they do. That is, in a word, stressful.
It’s also incredibly intimidating.
It’s enough to completely rule out the mere idea of investing for myself. There is no way, as a teacher, that I will have the bandwidth to deep-dive some company, like Warren Buffet does, and look at their practices and margins and try to predict if they are a winner or not.
Not happening.
And you know what else is not happening? Me, monitoring the stock market to see if some stock dips or spikes so that I can buy low and sell high… I’m teaching during the day and have no energy for that either.
Thankfully, the approach I am taking to investing does not involve any of those aforementioned practices.
It is backed and vetted by many other sources (which I’ll share and which include Warren Buffett himself). It’s also low maintenance. I set it and forget it.
In this post I will share these very basic strategies that I use, but first I want to dig a little into why I choose to invest in this manner…
Why Invest at all?
With everything on this site, I am going to tell you why I do things, so you can decide if it works for you. I’ll also say this until I’m blue in the face: I am NOT a financial expert and am not telling you (and never will tell you) how you should use your money.
Now that that’s out of the way, here’s why I choose to invest:
Investing Basics Reason 1 – Inflation
Due to inflation, the value of each dollar you possess, goes down over time. It’s how grandpa could brag about getting a gallon of gas for a nickel. If my money sits under a mattress or in a checking account (basically the same thing), it loses value. I don’t want it to lose value. I want it to gain value. That’s one reason I invest.
Investing Basics Reason 2 – The Market has always gone up over time
Many times, when we hear the word “investing” the word “risk” is not far behind. And true, with every investment their is some level of risk. But can we all agree, that some investments are riskier than others? With that in mind, I try to mitigate risk and still jump on this trend that has been happening since the conception of the stock market. The trend is this: “Over time, the stock market always goes up.”
Sure it’s got dips and dives with its spikes and highs. But, since its conception, it has trended up to the tune of 8% return per year. This is what I want a piece of. I’m not doing the high risk investments that can double overnight or some such nonsense. Frankly, that scares the daylights out of me.
Nope, I just want a piece of that 8% improvement per year. And if you’ve read my post on doubling money or the one on compounding interest, you know that an 8% return will double your money every 9 years or so. And as you keep adding to it and harnessing this power, your net worth begins to grow exponentially.
This is what I want a part of! This is another big reason I choose to invest.
Investing Basics Reason 3 – People much smarter than me tell me to invest
Whether it’s my wizened parents, Warren Buffett, or the many characters I have discovered and come to trust in the world of personal finance, they are all delivering a very similar message: If you want your money to grow, you need to invest it (wisely).
Reason 4 – If I don’t, I have to win the lottery or work for 25 more years
This is kind of related to reason 1 of not letting your money sit and erode due to inflation. However, it’s also distinct in its own right.
As you probably know, the whole reason I am here writing this is because I burnt out teaching, found personal finance and wanted to share my findings so other teachers (or anyone else) could find the same hope that I found.
Before I found this world I was staring down the barrel of decades of the job that had me burned out so I could collect my full pension. Because that was so very daunting, I was desperately scrambling to find other jobs I could do to preserve the 11 years of service I had already completed.
It was looking pretty dire.
Now, given my new plan, I’m hoping for 5 -9 more years before I have the option to retire. I won’t need that full pension. Head to my “About” page for a rundown on how I plan to make that happen.
None of this is possible if I don’t invest so I’m going with it. This is also connected to reason 5.
Investing Basics Reason 5 – I’ve done it before and it has worked!
There is no substitute for experience right? Sometimes a student needs to actually employ the strategy you are teaching before they buy in right? Well, that’s what worked for me.
When I was younger and working in a hospital out of college, my parents convinced me to start a 403b plan, even though I was making low salary and living in Boston. The fact that this hospital had a matching program (read: free money) was what tipped the scales for me.
So, I did the paperwork, put my money in whatever funds my parents suggested, and pretty much forgot about it. Years later (15 or so), when my interest piqued again around investing, I happened across these accounts again. I don’t know how much I put in, so I can’t say for sure, but since that time I would say my money has doubled 3 times. That means, if I put in $5,000 for example, it would be (10, 20, 40) $40,000 now. Mine was a little less than that, but the results were right there!
I was able to see first hand how money that I literally invested and forgot about had grown significantly over time. And in 18 years at 8% (2 more doubles) that hypothetical $5,000 would become $160,000.
You can see how this becomes very enticing! And if you are new to this, then this probably sounds like some infomercial hocus pocus. About now is when I make a pitch for you to “act now” and “sign up for my course to uncover all my secrets” and all the rest for this “limited time discount”…
Can I just say that I can’t stand that crap?
No pitch coming. Would I like to make some money off this site eventually? Of course! It’s a lot of work… And if you ever see an advertisement with a fake “x” on it or one that follows your cursor around like an annoying house fly, then you can smile to yourself and know that I’ve finally sold out.
But until that glorious day, I just want to bring you value, thought provocation, hope, community, support and entertainment.
So now I’d like to tell you what this devilishly simple plan is, the thinking behind it, and the masterminds that have devised/vetted it.
The Devilishly Simple Plan for Basic Investing
Honestly I could probably summarize my basic investing plan (that I got from others) in one sentence. If I did, however, I don’t think people would pay it any mind because there would be no context.
With this post I’m giving you the reasoning and the architects behind it, to give it some credibility.
Nevertheless, the following sentence sums up my investment plan:
Buy low-fee, broad based, index funds.
That’s it.
And there are three parts to that sentence worth breaking apart (low-fee, broad based, and index funds) to have a better understanding of what they are.
What is an Index Fund?
Before I get to “low fee” and “broad based” let’s quickly talk about what an index fund is.
Basically, an index fund is a collection of stocks and/or bonds, grouped together, that follow a specific “index”. By buying each stock/bond in that index, there is no decision making. It’s just automatic.
For example, a “total market index fund” will buy every fund on the market (in very small amounts).
Another example would be a S&P 500 index fund. This index fund would have each of the top 500 companies (for the most part) in its fund.
There are no people strategizing or tinkering. It’s just automated. This keeps costs very low and reduces transactions as well.
The end result is that you don’t have to take on exorbitant fees and can keep a much higher percentage of the money for yourself.
In general, index funds outperform a large majority of human run funds. The fact that they cost less and earn more, makes it a no-brainer for me.
Low Fees
Over time, small percentage gains can lead to great amounts through the magic of compounding interest. Similarly, high fees over time, can have the opposite effect. They can sap your earnings.
For a better understanding, I wrote a post called Mutual Funds, Index Funds and ETFs Explained. Give it a look if those are still a little confusing to you like they were for me.
But for this post, we should know that each fund has an expense ratio associated with it. This is basically “the cost of doing business” or how much a brokerage company (like Fidelity, Charles Schwab or Vanguard, to name a few) charges for you to have access to their funds. These expense ratios and any other fees are all pretty easily accessible (though some more than others) for the most part.
Expense ratios typically range from very high (2%) to very low (0%). And at first blush, it’s very natural to think “2% is high? That doesn’t sound all that bad to me.” And I agree that it doesn’t sound bad, but it can have a major impact on your net worth over time. Let’s look.
Using this expense ratio calculator from Nerdwallet. We can see how different expense ratios can impact our long term net worth.
For the sake of simplicity, I’ll invest the same amount ($10,000) each year for 30 years (typical amount of time for a teacher to get their full pension) with the typical market return of 8%, and I’ll only change the expense ratios. (I’ll use expense ratios of 2%, 1.5%, 1%, .5%, .25%, and .05%) and see the impact it has on our net worth.
Below is a table of the results:
| Expense Ratio | Cost of Expense Ratio |
|---|---|
| .05% | $13, 114 |
| .25% | $64,178 |
| .5% | $124,992 |
| 1% | $237,232 |
| 1.5% | $338,049 |
| 2% | $438,633 |
Spoiler alert: The funds I will be recommending will NOT be costing $438,633 over 30 years! Mine are going to be the lowest or even less.
But looking at the table shows the power of these seemingly small differences in Expense Ratios over time.
The difference between a 2% Expense Ratio and a .05% Expense Ratio over 30 years is $425,000!
Yes! You read that correctly! I want to keep that money for myself thank you very much. Fidelity, Charles Schwab, Vanguard, etc. make plenty as it is…
The next thing you might be thinking is “Well, maybe the 2% Expense Ratio is because that fund is better.”
This too is natural to think. We typically think that more expensive products are better (and sometimes this is true). But in this case, it doesn’t bear out.
Index funds generally have lower expense ratios because they are not managed by humans. They are passively managed by computers. Because actively managed funds require humans they cost more and this manifests itself in the expense ratio.
The statistic I keep seeing is that index funds outperform 80 – 90% of actively managed funds.
So, chances are the index fund will cost you much less AND do better. Sign me up for that!
Broad-Based Index Funds
The next part of the investing concept for, low-fee, broad-based, index funds, is this term broad-based.
This essentially means that the index fund will be covering A LOT of different companies rather than only a few.
In the past I have owned mutual funds that only have 40 or 50 different companies (or stocks) under their umbrella. This is a narrow base. And if one company does poorly, the whole fund can suffer.
In the broad based fund that I now use, it will cover between 500 and thousands (all) of the publicly traded companies. It will have very small portions of each company. That way, if one does poorly, it will not bog down the whole fund.
JL Collins, who is on the Mount Rushmore of Personal Finance figures (IMHO), also talks about the “self-cleansing nature” of these broad-based “total market” funds. If one fund tanks, it can only lose 100% of its value. It departs and makes room for a new fund.
However, if it excels, it can far exceed 100% growth. By owning this “total market” fund you own a very small piece of this company and thus reap the benefits of its success.
JL Collins has a blog and a website that I will write about shortly. I really like his fearless, no-nonsense style. He calls it like he sees it and in no uncertain terms. If you are interested in his work, head over to his blog and check out his stock series for his ideas on investing.
Here’s a link to the stock series, but the whole site is worth a look if you find time. Much of what I do is based on the ideas of JL Collins and others in the Financial Independence Community.
So, getting back to it, for me, broad based mostly equates to “total market” funds that cover nearly every publicly traded company there is (in very small portions).
I also own some index funds that only deal with the fortune 500 companies as well. I’ll get into that next.
Fortune 500 Index Funds
“I recommend the S&P 500 index fund and have for a long, long time to people.”
That is not a quote from me. That’s Warren Buffett in an interview with CNBC. He is widely considered to be one of the greatest investors of all time. But he doesn’t recommend that you pick stocks like he does. He recommends an S&P 500 index fund.
So, by my logic, if it’s good enough for Warren Buffett than it’s definitely good enough for me.
Simple as that.
For this reason I also incorporate some S&P 500 funds in my portfolio.
So, let’s get into some names of these funds.
Simple Investing: Total Market and S&P 500 Index Funds
Because I only recently came across this strategy, I am still gradually phasing out other, more expensive mutual funds I already owned. I am doing it gradually for the purpose of reducing costs.
However, if I were to start fresh today I would just invest in the following funds:
Total Market Index Funds:
VTSAX – This is Vanguard’s Total Market Index Fund. This is the one that nearly every Financial Independence (FI or FIRE) person recommends. Vanguard is the gold standard for low cost index fund investing. They have built a reputation to be trusted and that is why they always get the nod over other brokerage companies. The expense ratio for VTSAX is .04%
FSKAX – This is one of Fidelity’s Total Market Index Funds. With an expense ratio of .015% it is even lower than VTSAX. However, people in the FIRE community warn that some companies sneakily take money elsewhere. To test this, I am doing an experiment which you can read about here. I already owned Fidelity when I discovered FIRE so it was much lower maintenance to transfer funding to FSKAX than transfer to Vanguard. I am also trying another Fidelity Total Market fund with an even lower expense ratio.
FZROX – You cannot get lower than zero when it comes to expense ratios! This one, FZROX, is a loss leader for Fidelity (which means it attracts clients with the hopes that they will buy other funds as well) that it presumably makes zero dollars off of. The expense ratio is 0.0% and it is also a total market fund that is also part of my personal experiment.
SWTSX – This is Charles Schwab’s Total Market Index Fund – I do NOT own this one. But Charles Schwab is a major player and if you already use them it may be easier to get this fund than starting anew with Vanguard. The expense ratio for this fund is .03%. This puts it right in line with the others and I see no reason it wouldn’t have very similar results. But, as you know, I’m not a financial expert and have not done any real research on this one either.
Investing Basics: S&P 500 Index Funds
These are the ones that Warren Buffet recommends. I have some of these as well because, who am I to argue with Warren Buffett? Basically though, these will only follow the top 500 companies being traded on the market. It will not follow all the companies like a total market index fund. Here are some of the options.
VFIAX – This is Vanguards version of the S&P 500 index fund. The expense ratio is .04%.
FXAIX – This is Fidelity’s version of the S&P 500 index fund. The expense ratio is .015%.
FNILX – This is Fidelity’s loss leader in this category. It has a 0.0% expense ratio.
SWPPX – This is Charles Schwab’s version of the S&P 500 index fund. The expense ratio is .02%. I do NOT own any shares of this one.
All of the funds listed above will carry the same stocks but they might have slightly different amounts of different companies. For this reason, their results can vary slightly as well. In my limited experience, I have not seen a variance that is remotely noteworthy between the different funds that I carry. In other words, in my unprofessional opinion, these are all pretty much the same.
A Word on Bond Funds
I have already noted JL Collins and his influence on so many of us in the personal finance community. Among other things, he has the blessed benefit of experience. He has worked in the field nearly all of his adult life and was able to distill his investing strategy down to 2 simple funds.
The first fund he invests in is (noted above) Vanguards Total Market Index Fund (VTSAX).
The second fund that he invests in is VBTLX. This is Vanguard’s Total Bond Market Index Fund.
Basically, at the end of each year, he balances his portfolio so that he has a certain percentage in VTSAX and the rest in VBTLX.
I believe, for most of his adult life, his personal balance is 80% in VTSAX and 20% in VBTLX. However, he talks about how people might want to change those percentages (in favor of VBTLX) as they near retirement.
And basically, for your purposes, if you like that strategy, you can alter your percentages for the level of risk you are comfortable with.
If you want higher risk, you can have a higher percentage of VTSAX. For a lower risk, you can raise the percentage of VBTLX (bonds).
He explains it way better than I ever could (and in gradated levels (easier to harder)) in this post right here, so go ahead and click on it for more information on bonds.
But basically, he says bonds are a hedge against deflation and, because they are less volatile than stocks, bonds tend to smooth out the investment journey.
So, if this is of interest to you, I recommend you click on his post AND, if you are still sold, you can determine a percentage of bonds that works best for you.
So Why Bother with TeacherDouble?
I can hear the thoughts now: “If these other sites are so great, why should I bother with yours Mr. D?”
Well, I certainly can’t compete with the likes of JL Collins. He has decades of experience in the field of finance and more knowledge than I could ever hope to attain.
BUT, (Hold on! There’s a “but” here!) hopefully in the back of your mind, you are also thinking “if Mr. D. gives it to me straight on this one, he’s going to keep on giving it to me straight moving foward…” That is partly why I think I provide value.
I am a curator of information. I find the best stuff and present it to you so you don’t have to do the hours and hours of research that I did during my deep dives.
Also, if you are a teacher, then I am going to give it you from a teacher’s perspective. I plan to wax philosophical on the field of teaching along the way. I not only want to give teachers the best financial resources, but some of the best resources to keep them happy and healthy in their careers as well.
And maybe I can splash in a little entertainment from time to time along the way…
One of my general missions is to keep teachers secure in their futures, so they can focus on the important work that they do. I mean that sincerely and I hope it comes through.
So, that’s my general argument and I’m very thankful to have you aboard!
A Summary of Simple Investing
Index funds, because they are passively managed, generally outperform actively managed funds. One reason for this is because their expenses are significantly lower
Earlier, when comparing expense ratios, we saw that, over time, an elevated expense ratio can have a very significant impact on your total wealth.
By keeping costs low, you keep far more of that money to yourself (in one of our examples it was a difference of $425,000!).
Most people in the Financial Independence Community recommend total market index funds (namely VTSAX from Vanguard).
Warren Buffett recommends S&P 500 index funds.
I have both.
Finally, as a hedge against deflation and a means to manage risk, VBTLX, (Vanguards Total Bond Index Fund) could be a consideration for you as well.
In the end, I hope you’ll agree that dispensing funding between 2 or 3 different index funds is a very simple plan for investing.
Thank you for reading. If you have any comments please feel free to enter them below or you can always reach out and contact me individually.
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