With today’s post, I wanted to introduce the outline for my forthcoming Investing Series. I knew when I started writing that I ultimately wanted to educate in addition to documenting my journey to FI. As I continue along my journey, I am reminded daily through my conversations with friends, family, and co-workers of the general lack of investing knowledge out there. Without a background in business, finance, accounting or related field, many HENRYs are never exposed to personal finance principles, much less investing principles. For this reason, many people are confused or even intimidated by investing, so they choose to pay someone else to do it. You may be in this very boat. Don’t get me wrong, you can still become wealthy and achieve FI without managing your own investments. You can also still achieve FI if you pay someone else to manage your investments and take no interest in the details. However, this route will likely take you much more time to achieve FI and it will likely cost you A LOT more money. For these reasons, I believe everyone should have a basic understanding of not only personal finance, but also investing. For HENRYs seeking FIRE, a solid understanding of investing is essential, which is my purpose in writing this series.
What you get out of this series is dependent upon your current investing acumen and future goals.
– For those with little to no investing knowledge, I hope this series provides you with a better understanding of the principles of investing and how they can be applied to your specific situation. With this foundation, you can then make the choice to manage your own investments if you choose. If not, a solid grasp of investing principles will make you a more educated investor with the knowledge necessary to hold your financial adviser accountable and avoid mistakes that may delay, or possibly even prevent you from achieving financial independence.
– For those with a solid investing knowledge, perhaps this series will provide you affirmation that you can, in fact, successfully manage your own investments if you don’t currently. Perhaps you will discover a new idea or concept that you can explore further in order to further optimize your investing strategy.
Regardless of your existing level of knowledge or predisposition for managing your own investments, I write this series with the goal of educating . The financial services industry wants you to believe investing is complicated and that you should pay someone to do it for you. This couldn’t be farther from the truth. Once you understand the principles of finance and investing, you can really can manage your own investments successfully with minimal effort. You simply need a plan that is tailored to you and then you execute and adjust along the way as needed. It is really that simple.
Series FrameWork
I plan to use the loose framework below for the series noting that it may change slightly as I work through the various posts.
- Types of Investment Accounts
- Types of Investment Vehicles (Cash, Stocks, Bonds, Alternatives)
- A Deeper Dive on Stocks
- A Deeper Dive on Bonds
- A Deeper Dive on Alternative Investments
- Understanding Index Funds
- Asset Allocation and Diversification
- Tuning Out the Noise & Being a Long-Term Investor
- Understanding Taxes and Tax Efficiency
- Behavioral Finance
Each topic is meant to be broad so that I can dive into the specifics over several related posts. Along the way, I also plan to take a deeper dive into topics of further interest to HENRYs including taxable investing tactics, backdoor Roth IRAs, minimizing taxes, etc. Central to the framework is developing a better understanding of the importance of the how, what, when, why, and where.
Where & How You Invest Matters
The first concept to understand from an investment perspective is the difference between types of investment accounts vs. types of investment vehicles. Many people do not have a basic understanding of the difference between an investment account (401k, 403B, 457B, individual retirement account (IRA), taxable brokerage account, etc.) and an investment vehicle (cash, CDs, bonds, stocks, real estate, etc.). Understanding the difference between the two, as well as the options available to you, is the first step in building a solid foundation of knowledge. As you develop a deeper understanding of your options, you can begin to define where you will invest and how you will invest, allowing you to build long-term wealth as you pursue financial independence.
What You Invest In Matters
In addition to understanding the types of investment accounts and investment vehicles, everyone should have a basic understanding of the available options for each investment vehicle. For this reason, I plan to cover the following and more in detail:
- Stocks vs. Bonds
- Types of Stocks (i.e. International, Domestic, Small-Cap, Large-Cap, etc.)
- Mutual Funds vs. ETFs
- Types of Bonds (i.e. Treasuries, Short-Term, Long-Term, Corporate, etc.)
- Bonds vs. Bond Funds
- Alternate Investments (i.e. Commodities, Real Estate, Peer-to-Peer, etc.)
- Active Management vs. Passive Management
- Index Funds
- The Importance of Costs
For many people, these topics may be considered “getting into the weeds”. This may be true for some of the topics. However, most of these topics will benefit everyone including those who choose not to manage their own investments. For instance, everyone should have an understanding of active vs. passive management, index funds, and the role costs can play in your ability to build wealth. What you invest in matters. The costs you incur matter. I hope that by taking a deeper dive into these topics, you come to realize that choosing your investments is not as complicated as some would have you believe. There is a very real cost to investing in actively managed funds and/or having someone else manage your investments and many people do not fully understand that cost. For HENRYs seeking financial independence, a deeper understanding of these concepts can mean the difference between achieving financial independence early in life and working until traditional retirement age or beyond.
When You Are Investing Matters
The unfortunate reality is that no matter how much you understand about investing, you cannot predict the future. No one can predict the future. If someone tells you they can, they are wrong. Despite the inability to predict the future, when you are investing matters. Specifically, there are areas you should understand and things you should consider when investing including but not limited to the following:
- Market cycles
- Long-Term Investing vs. Short-Term Speculation
- The Importance of Starting Early
- Bull vs. Bear Markets
- Sequence of Return Risk
- Common Stock Market Indicators and Valuation
- Risk Capacity vs. Risk Tolerance
- The Importance of Asset Allocation Over Time
Worst case scenario, having a better understanding of these concepts will help you become a more knowledgable, long-term investor. Best case scenario, having a better understanding of these concepts will prevent you from making significant investing mistakes in turn saving you thousands, hundreds of thousands, or perhaps millions of dollars over your investing lifetime.
Why Your Are Investing Matters
As I noted multiple times before including in my last post, understanding your why is arguably the most important part of your journey to financial independence. The same is true for your investments. Understanding why you are investing is arguably just as important as where you invest, how you invest, when you invest, and what you invest in. Consider the following:
- Are you investing for a short-term goal, long-term goal that is not retirement or retirement?
- Are you investing for growth of capital or preservation of capital?
- Are you planning to work until full retirement age or do you want to retire early or start a second career?
- What is your risk tolerance? What is your risk capacity? Do you know the difference?
- What is your current tax rate? What do you expect your tax rate to be when you stop working or formally retire?
- Do you plan to pursue alternate working after becoming partially for fully financially independent?
- Do you prefer to avoid specific types of companies or investments?
The answer to all of these questions will ultimately drive the how, what, where, and when of your investments. For this reason, we will explore all of these questions and more in an effort to better understand your why and how they may impact your investment decisions. Along the way, I will share my why and how that drives my personal investment decisions.
A Change of Pace
In addition to kicking off the investing series, I have also decided to begin providing a recurring update on my journey to FI. I have been thinking about this a lot lately. Many in the financial independence blogosphere regularly share their expenses, savings rates, net worth, etc. I am not comfortable with sharing all of these at this point. However, I do want to begin sharing my journey in more detail. I think this will provide additional context and serve as a continued outlet for my thoughts, feelings, and emotions, as I progress along my journey to financial independence. I also think this will allow you, the reader, to have a reference point as you continue along your journey to FI. You are not in this alone. I am not in this alone. There are others out there. Together, we can go from an average HENRY to FIRE.