In today’s post, I’d like to discuss a very simple topic. The topic is investing. The topic many financial advisors would lead you to believe is incredibly difficult to wrap your head around. Of course, if you’ve got loads of money and many options for living and retiring, things can quickly become complicated, but if you’re a regular middle class guy or gal and you’d like to live a bit easier in your later years (45+) and not have to work until you’re 80, you may want to continue reading. The entire thing is very straightforward. It’s a favorite subject of mine, this investing is, but trying to get people to listen to me is a chore unto itself. It’s probably for this reason I chose to write this post. Maybe, just maybe, someone will read it.
Instead of explaining the theory and philosophy behind investing, I think I’ll simply tell you what to do. So if you’re 20, 30, 40, or 50 years old, read through this post and then after you’ve finished, go ahead and follow the instructions I give in it. It really is that easy.
First and foremost, you’ll need money. In order to have that money, you’ll need to avoid spending as much of it as you can. If you’re relatively young, remain living with your parents as long as possible as to avoid wasting your income on rent or a mortgage (and all the misery that comes with them). If you decide to follow this advice, don’t fall for the idea of spending your hard earned income on something other than those two things – that would defeat the purpose. People do this all the time. They save their rent or mortgage payments, but decide to go drinking with their buddies instead. They also buy nice new vehicles. That’s stupid. Other things to avoid: Debt, such as car loans and student loans, credit cards for any purpose, vacations of any kind, and generally any other absurd item an average American would waste his or her money on. Simply put, save your money for investing as opposed to wasting it on what might make you feel good at the moment. Have a bit of self control and a forward looking perspective.
Second, begin thinking like an investor. Don’t buy a new lawnmower to mow your own lawn only. Buy one to mow your lawn, your neighbor’s lawn, and the guy’s lawn down the street. Think about how much income any expense might create. That’s just smart thinking. Also, begin considering where you place any extra cash you may have accumulated through the years. If it’s sitting under your mattress, it’s being eroded by inflation, meaning, any cash that’s idle and not working for you is worth less today than it was yesterday. So don’t sit on cash. PS – CDs and high-yield savings accounts aren’t cash. They’re interest bearing investment vehicles.
Third, avoid residing in expensive to live in states and avoid becoming connected to someone who doesn’t share your frugal values. After all, if you’re burning through your income trying to pay for groceries, gasoline, and real estate (+ taxes) in New York or California, as well as trying to make your wife or husband happy through materialism, you’ll lose. You’ll lose every time. Mark my words.
Now that I’ve gotten those basic life lessons out of the way, I’ll discuss the two EFTs I initially intended to write about in this post. They are VOO and VYM (those are the ticker symbols) – the only two you’ll need to know about. I’ll discuss them one at a time.
VOO is a domestic, large blend EFT owned and operated by Vanguard. It costs only .o3% of you entire holdings to own per year. It’s a mixture of some of the world’s largest and most exciting stocks (Apple, NVIDIA, Amazon, Facebook, Tesla) and has been in existence since 2010. It basically tracks the S&P 500. When this EFT was first offered to the public in September of 2010, one share cost $101.78. As of this writing, one share is worth $555.61. You do the math. If you spent around $100 in 2010, would you be happy with the approximately $555 sitting in your account today, plus all the dividends you’ve received through the years? Probably. I’d say that’s money well spent. After all, you’d enjoy a 445.89% return, excluding the dividends.
Purchasing shares of VOO is a good idea if you’ve got a Roth IRA or any retirement account, for that matter. It’s not generally a fund for every day use. Why not? Because it offers a low dividend, relatively speaking, of approximately 1.22% at the time of this writing. That dividend isn’t enough to live off of and the capital growth of each share is perfect for retirement. It’s something you’d want to sit for decades. And I mean that – the earlier you begin investing, the more you’ll be thanking yourself for it later on in life. Decades later. That’s the entire point – you’re investing for later life comfort.
Another reason you might not want to own VOO in a taxable brokerage account is because it contains real estate stocks, which are taxed differently than non-real estate stocks. It’s not a huge deal at around 2%, but if you’re looking for a more pure option that doesn’t include any real estate, read below.
Simply put, VOO is an excellent option as a retirement EFT. Right now, it contains 503 stocks, which is a nice wide spread of the entire market. The lower dividend percentage keeps it from being something you’d want to live off of during early retirement, but its higher growth is great for when you’ll need it down the road.
If you’re interested in slowing your work life or perhaps retiring early, VYM is a good option as far as ETFs go. VYM includes no real estate stocks, which makes it appealing for owning in a taxable brokerage account. Also, it’s got a fairly healthy dividend of 2.75%, which a person could quite possibly live off of if that person owned enough shares. VYM is a large value EFT owned and operated, again, by Vanguard. Its expense ratio is .06%, slightly higher than VOO. If you were to purchase one share of this EFT at its inception in November of 2006, you’d pay $50.54. It’s worth $131.87 today, which would give you a 160.92% return over the entirety of its life. While this return may seem somewhat lower than VOO’s, you need to remember that the annual dividend per share is higher than VOO’s and has been on an upward trajectory since the beginning. So what you’re not getting in capital appreciation, you’re getting in dividends, which is perfect to fund your lifestyle while you’re not working. And again, this is why you need to begin investing early – to appreciate and spend the dividends you’ll be cashing in later on in life.
VYM includes large, mature companies in its portfolio. Companies that, instead of reinvesting their earnings into themselves, return those earnings to their shareholders in the form of dividends. Of the current 536 companies, Broadcom, JPMorgan Chase, Exxon Mobil, Home Depot, and Procter & Gamble maintain the largest pieces of the pie. So if you were to own just these two ETFs (Voo & VYM), you’d be very well diversified, something you’d have a difficult time achieving a few decades ago. You’d also own a fair amount of some of the world’s most successful companies for very little overhead cost. The expenses are low for these ETFs, which makes ownership nearly guilt-free.
What are the benefit of owning ETFs? ETFs trade like stocks any time the market is open, which is something you needn’t concern yourself with because you’re not planning on selling any shares, right? Please tell me I’m correct. Once you buy, you hold for the long term. The market will rise and fall and all the while, you’ll be buying more and more shares with your monthly additions of $50, $100, $500, $1000 – whatever you can do. But again, remember that the more you buy the earlier you can, the better your life will be later on down the road. I can’t stress that enough. Every single day you wait and put this effort off, you will lose money tomorrow. Waiting is how folks end up working until the day they die. You don’t want to end up like that.
The real benefit of owning ETFs for people like you and me is the diversification of their holdings. Back when I was a kid, I can remember my father talking about owning Nabisco stock. That’s the only one I ever heard about. And my friend’s father owned shares of Boeing. Both my father and my friend’s father were forced to use brokers for their purchases and sales and these brokers cost a fortune in transaction fees. Today, we can open a Schwab account for free, transfer money from our checking account to Schwab for free, and buy shares of most stocks and ETFs for free. There are no barriers to entry anymore. The only barrier is the actions of the individual. And really, if people simply learned to behave themselves and avoid buying their daily coffee from the coffee shop or dinner from McDonalds, they’d have plenty of money to invest for tomorrow.
If you remember nothing from this entire post, please remember this: If you have no employment income and earn less than $48,350 in qualified dividends per year, you pay absolutely no tax. No social security, no Medicare, no federal tax, no state tax, no nothing. So if you sit in a chair on your front lawn and do absolutely nothing every single day of the year and your ETFs earn you less than $48,350 during that year, you’ll quickly learn that, as you complete your tax filing for the year, you’ll have nothing to pay. And as a matter of fact, you’ll likely receive some sort of a refund from the state. This is a very open secret people continuously try to tell others about. Save your money, invest that money, earn your dividends, and retire early. No more breakfast burritos, no more Taco Bell, just save and invest and earn a whole bunch of tax free dividends.
