Investing!

Why invest?

Why is investing necessary? Inflation. If you are young and are saving for retirement and put $1000 into an account, that money will be worth a small fraction of its current value when you retire. Money needs to grow by around 3% per year (more or less depending on the year) to keep its current value. Don't like inflation? Too bad, it exists, and the decision isn't up to you. Even when humans bartered, nearly all materials age, so you had to be actively participating in the economy to keep your wealth. After getting various insurance and saving, beating inflation is the next step.

It's more than inflation. Almost everyone who has invested in the stock market for the long-term and diversified has made incredible gains (assuming they have the appropriately sized emergency fund). I first learned that "money makes money" when I bought my house and could avoid much interest and fees because I could make a large down payment and had good credit. In my lifetime, I will pay less on my house than I would have on rent, yet I get an entire house that people in apartments never get. To avoid being "house poor", I bought one well within my means, which also gave me the slightly-fun opportunity to fix up my house. Now that I am in my career and making actual money, I am shocked to see how the stock market takes "money makes money" to the next level. In fact, growth is exponential! This isn't your father's market; you can now invest in ETFs that automatically buy according to market indices! You no longer need to do what is called active investing with the invention of these passive funds!

When you invest, you become more invested in the future of something much larger than yourself; I want younger people to not make stupid decisions partly because I want them eventually investing too, which helps everyone who is investing. There are plenty of other (better) ways to invest in the future: teaching, raising children, giving to charities, doing well at your job, developing new science, etc., but investing is one of them.

If you are struggling to get by, this webpage is probably not for you. I saved money debt-free for many years on $20,000 a year when I was in grad school, so, if you are able to work, I might have some advice for you (how to be clever, how to not be a boring consumerist, and how to live within your means!), but that advice is not here.

Also, I live in the US, so not everything here generalizes.

One day, I suddenly found myself in a strange situation: earning more money than my family needs. This was after we got a house, got established in our careers, and had a kid. Not as soon as I should have, but, when I got into this strange situation, I talked with a couple very smart people who know a lot about investing. Me not being an investing expert but having access to great information probably makes me a great teacher for investing because I will not go off on arcane technical topics on gaming the system. Instead, I care about doing wise things, which certainly means avoiding lifestyle creep.

If you get a raise and were happy before, do yourself and the world some good and invest the extra amount or give it to charity. Don't fall victim to consumerism. Studies show that our happiness will suffer. Buying more things brings its own set of problems. I like the song Simple Gifts, though please still pursue as much education as possible! Since I am weird, I also love Tool's Ænima, which, for me, is about various types of stupidity such as consumerism.

Principles

Making principled choices is important! Personal finance is personal, but I think the following principles are good for everyone because they are all based on the idea that trying to only optimize financial gains is a bad idea...

  1. Make ethical choices. Fewer gains hurts part of my heart, but I might be happier in the long term not investing in companies such as tobacco companies. I don't want tobacco to be illegal, but it should be regulated, and I don't want to be investing in it and getting their "blood money" (dividends). Investing helps the CEO who owns stock get rich, helps the company get loans, helps the company get media attention, and helps the company merge with other companies. Interestingly, investing in them actually hurts the company if they ever want to buy back shares. ESG funds avoid tobacco, oil, guns, crypto, DJT, etc. Companies that appear in an ESG fund score well on some silly metric that has been shown to not be correlated with good companies because companies determine the metric, and the metric is designed to help companies. ESG funds do not avoid Meta, even though social media is horrible for our culture. ESG also contains Tesla, which I love minus their almost-Trump-like CEO and some of his environmentally bad choices (like making Starlink insanely huge, endangering our ability to go to space via the Kessler syndrome and causing insane emissions, and, specifically for Tesla, making the Cybertruck so unsafe). I am sure that all companies have their evils, but I do not have the inside information to learn about them.

    To really help a company, you need to fund startups, which is difficult and risky. You can then have a voice in their meetings if you care to build an intimate knowledge of that company. Since I decided to not get much involved in active investing (passive funds are the only realistic healthy way!), there is not much I can do.

    Regardless, I believe that doing moral things with money is very important. Especially when a person has enough money to invest, human beings tend to become stingy if they don't try to do the right thing. Whatever you invest in, the most important thing is what you finally do with your money, such as consuming good products, giving to charity, and allowing you to live a fulfilling life.

    Since technology is so important, after a couple weeks investing in the popular VOO (ETF that tracks the S&P 500), I decided to instead invest in VGT (ETF that tracks technology). What is the human race doing if not trying to figure out technology that can help make fusion, quantum computers, disease cures, and a way off the planet? SpaceX has not gone public, so it is not in VGT, which is probably good because its Starlink is too huge and powerful and bows to serve Russian and Chinese interests. Google, Amazon, Tesla, Meta, and Honeywell are also not in VGT because they are in different sectors (communications, consumer discretionary, etc.). All corporations are somewhat evil, but I would rather not just blindly support companies that only encourage American consumerism. I take on more risk specializing to tech (and get less dividends and have a smaller expense ratio), but, for me, it is very worth it. I want to do something interesting with my money. Other interesting sectors are health research, nuclear power, and semiconductors (SMH).

    Interestingly, you can make a political statement investing in NANC or KRUZ. These funds are actively managed, so these ETFs have a larger expense ratio (though still small).

    Common advice is to "invest in what you know". I think I agree, but instead would change it slightly to "invest in what you care about". Then you are both helping the world and will be more committed to holding your stock for long enough to make consistent profit. When we do things the right way, everyone wins.

  2. Do not gamble. We must invest in the long-term. Do not react to the market going up or down like a gambler would. Just put in money when you can, then let it sit. This also happens to be the best strategy for making money.

    Not diversifying is also gambling. ETFs diversify for you. If you find a couple companies that you really believe in and want to invest in, please do, but make sure that the majority of your investments are diversified.

    Never invest using things like futures, options, or shorting because they make you bet on things while being far removed from actually owning anything. I recommend stocks and bonds because they are you actual things that you own (not some complicated financial trick), and, if owned for the long-term, are not gambling. ETFs are a good way to get started in owning stocks or bonds.

    What is an ETF? The NAV is the price of the underlying securities in your share of the ETF (calculated once per day). As long as the price is very close to its NAV (it almost always is), the ETF is just a bundle of stocks (or bonds). The expense ratio is taken out almost invisibly (I believe by selling some of the underlying stocks in your shares of ETF).

    Stocks are partial ownership in companies that gives you various rights as well as a part of their earnings (called dividends). If a company is acquired, you typically get cash for your existing share. Do companies have to go public? No! But they do and have done so for many hundreds of years, so you can own part of them. Going public greatly helps new startups.

    But what is bond trading? A bond is you giving a loan that gives you periodic interest payments then a final repayment. Since no one wants to get locked in (bonds are illiquid, especially long-term ones), you can also trade the bonds once they are issued. Bonds typically trade near par: read this and this. To me, bonds seem less like just gambling than stocks because you are providing a real financial service.

  3. You can trade a lot of financial freedom for tax breaks, but do not do this because freedom is more important and because being a miser is bad. If we are rich enough for the taxes on the gains of our withdrawals to be a large amount, we need to work extra hard not to become stingy misers, and paying taxes can help us not become misers, especially since those taxes are hardly noticed if we're rich and can help others. As long as anyone but Trump is president, I'd be happy to pay my share of taxes. Also, the accounts that have nice tax breaks breaks have so many rules, so the likelihood of all of your accounts getting all their benefits is low, and the likelihood of them being used is low (and financial people and lawyers then get some of the money). Also, if you just have a brokerage account with all your money that can be used whenever, you no longer need complicated tax discussions!

    Doing things I'm passionate about is very important to me, once causing me to be a poor grad student for many years, which was great. I might give up my pension one day to follow some other passion, which is another reason for me to invest now in a way that freely lets me take it out whenever.

  4. Life is meant to be enjoyed, and money is meant to be spent. FIRE (Financial Independence, Retire Early) is an absurd movement because you trade your youth for miserable work to be followed by a later life of boredom. The goal of generational wealth is also a bad idea because it makes rotten kids, especially if you are working too hard to spend enough time with them. I personally would like to leave my kids some money when I go (though giving them stuff before I go such as education, guidance, and love is much more important), but, if I have a lot left, I would love for my will to donate much of it to charities, though I'm not a strict "die with zero" person.

    Instead of possibly giving a larger amount later, I think it's better to give to charities while alive so that you can make sure the money actually goes there, so that you can enjoy the good feelings of helping out, and so that those charities can do their good work soon enough. Charities I like are the Gates Foundation, my local United Way, and Big Brothers Big Sisters of America. Depending on the situation, I also like the Red Cross, Wikipedia, and, if Trump is running, the Democratic party.

    I am not completely against active investing because someone needs to do it (passive investing largely follows the lead of active investors), but, since I don't work in finance and have no desire to become so slimy, I'll choose financial simplicity and having a life. I will only look into active investing if I feel that it will improve the world. If you are interested in active investing, you first have to realize that the human brain is stupid so that you can possibly not lose at the game.

  5. You don't need someone managing your money! Some people are needed to setup the ETFs that you invest in, but you never interact with them, and a single financial person can manage multiple ETFs because they are so modern and cool. If you are an extrovert and think with your mouth, then talk to someone without having them manage your money, but make sure you only pay a fiduciary. Financial people can push you into playing chess with your money and setting up complicated systems to either give them some money or have you save a tiny amount. They will market something like a 403(b) instead of a 457 because they profit more from a 403(b) by taking more of your money. However, a fiduciary will look out for your interests.

    You'll be fine as long as you (1) manage your risk (perhaps decreasing it as you get older), (2) understand that "time in the market beats timing the market" (trying to time the market is mostly quackery giving random results, and gives typically bad results if you don't have access to professional immediate information), and (3) have an emergency fund that prevents emergencies during recessions from wiping out all your savings. ETFs in something like the S&P 500 (such as VOO) are great and have given incredible growth over the long term! Dividends are not included in this S&P 500 graph. ETFs like VTI have even more diversification.

    VTI has moderate risk (same for VOO, VT, and VXUS). To lower risk as retirement or your kids' college approaches, start switching to more bonds (note that selling an ETF is a taxable event if not in a retirement account). VTEB or BND are good ways to invest in bonds. As the need for the money approaches, 3 or 4 years worth of money in bonds should probably be fine to get through stock recessions mostly unscathed. Use the 4% rule when withdrawing money from bonds (look it up).

    Especially if you are young and are investing long-term, don't look at your account often (maybe every 15 years?), and certainly never pull out in response to a recession. If you have money during what you think to be a recession (you never know if it's a recession or depression or whatever until afterwards), you might think that you should invest it, and this is perhaps the one time that timing the market can win, but the statically better choice would be to have invested your money earlier rather than waiting for a recession that may not occur. If wanting to try to bet on single companies (active investing), keep in mind that there are full-time very smart analysts who try to predict when to buy or sell stocks, and you often have to beat their predictions to make a profit by timing the market. But feel free to invest when the ignorant or poor masses start to pull out their money in response to a recession because they will put it back in eventually. But keep in mind that "the best day to invest is yesterday", so don't wait for a recession which may never even come. Never listen to the latest schmuck prophesying doom just because of a couple of the thousands of factors are indicating something, and keep in mind that the market may correct itself from time to time, but these corrections mean very little in the long term. Just set up rules in advance for yourself to follow such as "never move the investments when the market fluctuates". There may be slightly more optimal but vastly more complicated rules, but so what? The cost to your soul for making more rules is becoming a gambler. Just make sure that your rules are almost completely based on your situation rather than the stock market's situation.

    Of course, the world could run out of resources (used up in a world war?) and stocks might greatly lose value, but then there are bigger problems than your bank account, and you probably should have become a survivalist. Of course the world could easily just start slowing its growth as the end of resources approaches, but I feel like new technologies will lead to growth for a long time, though bonds might sooner become a better choice than stocks. If robots do most of the work and make capitalism unnecessary, then most stocks might become crap, but then who cares about your savings? If you feel that the overconfident US will falter sooner than capitalism, feel free to diversify more by getting international exposure, though those foreign governments might also tax your gains, there is more risk, and there are possible ethical concerns (China for example).

My situation

I got a brokerage account through Vanguard! They have no fees (if you only receive electronic mail). If my employer would match my contributions, or if I knew that I was a slave to lifestyle creep, or if I didn't find investing fun at all, or if I knew that I was impulsive and liked to gamble and therapy wasn't helping, I would instead lock my money away safely into a retirement account (and maybe a college-savings account for my kids). Locking money away in accounts breaks principles (1) and (3), but investing is better than not investing.

My brokerage account lets me trade stocks including VGT, VTI, VOO, VT, VXUS, VTEB, and BND (mutual fund versions of these ETFs are VITAX, VTSAX, VFIAX, VTWAX, VTIAX, VTEAX, and VBTLX, respectively, but, unlike ETFs and stocks, I don't think they work well at non-Vanguard places like Fidelity, whereas ETFs and stocks do, and ETFs can even transfer to places like Fidelity without being taxable events). My brokerage account lets me control "how the sausage gets made" and control the effects I have on the world. I will get my pension (hopefully), social security (hopefully), inheritances (possibly), and will eventually pay off my house, so some nice ETFs should do the trick for paying for kids' college or my retirement or whatever! Who knows what my pension fund is investing in (probably crap like Meta), but at least I can control my brokerage account.

To be safe, I could follow the "three-fund portfolio" strategy, but just VGT seems good initially! Vanguard has minimal fees, and is great for the passive investor. Vanguard's brokerage account also has a settlement fund that my wife and I will use as a savings account as an emergency fund. Each month, we'll add any money over $5000 from each of our checking accounts (in increments of $1000) to VGT. This is similar to dollar-cost averaging.

Note that if you include the word bogleheads in your Google search regarding Vanguard, you will typically get good results from bogleheads.org.

When I start doing bonds, since a brokerage account is a taxable account (unlike retirement account), I might get VTEB. It gets less dividends than BND (and less than BSV, BIV, and BLV), but the federal government does not tax dividends of municipal bonds. If it is very easy to not pay federal taxes, who can say no? Perhaps I might directly own bonds (not in an ETF), in which case I would want to own non-callable municipal bonds, avoiding cities that might go bankrupt, keeping in mind that Vanguard charges a small fee for secondary trades.

My wife and I could also each add up to $7000 a year (in 2024) to IRAs through Vanguard to get those tax benefits, but this would just complicate taxes and would lock away that money. There are various retirement calculators online that let me enter a conservative 5% interest with an annual contribution of $7000, then, assuming a Roth IRA and no huge changes in US tax code, I can calculate the tax savings (using the approximately 15% tax on capital gains that I would pay from using my brokerage account). It was not a large percentage, and was negligible compared to the difference between investing and not investing. The important thing is to invest. If you don't want to invest, at least save money. If you are rich enough so that the $7000 is nothing, then who cares about an IRA? If $7000 is a lot for you, then don't lock it away in a retirement fund! Either way, principle (3) is wise.

To contrast my approach, I came across this website: https://www.madfientist.com/how-to-access-retirement-funds-early/. It fails my principles (3) and (4). The idea is to convert pretax (traditional) retirement accounts to a Roth retirement account, but do it after you retire early so that the tax on the conversion is in a lower bracket, then you can access your retirement early with minimal penalty. Yes, this might work, but I have a soul and a life, so I'll pass.

Fidelity has more options than Vanguard like credit cards, checking accounts, and more investment options. Also, Fidelity might allow you to withdraw money faster when selling from the brokerage account. I chose Vanguard because I only want buy-and-hold investing, and I don't even want the choice to do all the complicated stuff.

My mistake

I bought my house during the COVID pandemic. My mortgage has 3% interest per year. Shortly after and for several years, I was paying off my house faster than necessary even though even the CDs I was getting through my bank were giving 5% (very good for CDs). I thought that it would just feel good to pay off my house, so I didn't just put everything into CDs, even though 5% minus 3% is growth. My largest mistake was not realizing that if CDs are 5%, the banks are giving you this money because they are making much more with it! If I had invested in VTI instead of CDs and instead of paying off some of my mortgage, I could have been making 13% (instead of VTI's more typical 7%) for many years after the pandemic! To ease the fear of risk, I could always take that 7% (or whatever gains) and pay off the mortgage with it (don't do it, but it would be nice to know that we can). Another large mistake was paying off my house especially fast in 2024 when CD rates started to go back down.

When I made the mistake of paying off my house, I was thinking that paying off my mortgage sooner might prevent me from getting $25,000 or so in the end, and I don't really care since I could always do some odd job for a year to recoup that, which would also probably give me some interesting life experiences. If I cared too much about money, I could quickly be making $25,000 more each year if I chose a career that I did not enjoy. The least number of accounts (especially complicated low-freedom accounts) is a good goal. However, I may have lost out on well over $100,000 by paying off my house sooner than later rather than investing. The best use of my time is investing in family, hobbies, and a meaningful career, but getting a moderately-risky $100,000 without much effort is worth it.

The true cause of my mistake was a lack of knowledge. I didn't know anything about ETFs or passive investing, and I was in no rush to learn about investing because I still had a house to pay off and I was investing (in CDs through my bank). Do I respond to this mistake by stubbornly sticking to my old way of thinking hoping that it will prove to be the correct way in the end? No! Do I feel bad about the mistake? Not really, since there are good things in my life too, like getting a great price on my house. It's just money, and I feel very lucky that I made wise decisions in my youth to allow to be in this situation where I can worry about stuff like investing.

One way of looking at this is that my mistake was the (poorly timed) low-risk thing to do. Paying off a good amount of my mortgage does feel good because my investments could fail completely. And now, I feel more free to make riskier (more interesting) investments, such as stock in a couple US nuclear companies (not in VGT). Looking at CRSP stock performance, I see that investing in specific tech stocks is truly is risky since the legal and technological landscape can quickly change. I am investing in nuclear not because I think I know more than the experts or want to gamble. I am investing because I like nuclear.

US taxes for a brokerage account (in 2024)

What if a fund closes? Then you are stuck with a lot of capital gains taxes in a high tax bracket! That's why you get a fund that controls many assets (I don't expect VTI or VTEB to close any time soon) or get more than one fund! Keep in mind that funds that control more assets typically have a smaller expense ratio (since many people can help pay for the expense of running the fund). Note that expense ratios can change at any time, so periodically checking can be wise.

As long as all the stocks and funds are in the same brokerage account, tax forms should be minimal.

The tax rate on capital gains for most assets held for more than one year is 0%, 15% or 20%. It depends on your taxable income and filing status: https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates. They are tax brackets, where the first ~$100,000 per year (if married) is not taxed at all! That is, if you have $50,000 as non-capital-gains taxable income, then only ~$50,000 per year (if married) is NOT taxed at all. Since I'll have pensions and other, probably much of mine will be taxed at 15%. Capital gains from stock sales are usually shown on the 1099-B you get from your bank or brokerage (or on a K-1 for IRAs). The tax rate on short-term capital gains (for assets held for less than one year) is the same as your regular income tax bracket.

There are generally two kinds of dividends: non-qualified (box 1 of the 1099-DIV) and qualified (box 1b of your 1099-DIV). The tax rate on non-qualified dividends is the same as your regular income tax bracket. The tax rate on qualified dividends usually is lower: it's 0%, 15% or 20%, depending on your taxable income and filing status (matches capital gains brackets). I'm pretty sure the dividends I will get will be qualified (https://www.acapam.com/blog/qualified-dividends-vs-non-qualified-dividends/), except for any dividends from my Vanguard settlement fund.

There is also the NIIT for rich people: https://www.schwab.com/taxes/investment-related-taxes#panel--text-38646. Also sometimes the AMT, UBTI, and stuff related to foreign taxes.

If you want to keep your own records, you can minimize your capital-gains taxes (https://www.investopedia.com/terms/s/specificsharesmethod.asp), but this seems like a pain in the butt for little gain, and the Internet won't tell me what type of records I would need (would a text file where each line is a trade be enough?).

At Vanguard, ETFs default to first-in-first-out when selling shares of a fund (for mutual funds, the average method is the default), which seems fine.
https://investor.vanguard.com/investor-resources-education/taxes/cost-basis-methods-available-at-vanguard
https://investor.vanguard.com/investor-resources-education/taxes/cost-basis-specific-identification-method