Investing Q&A

For some reason, I’ve recently started getting an onslaught of questions emailed to me (and left in comments), asking for investment advice. While I always enjoy a good email discussion with readers of this site, I also wanted to share my thoughts to a wider audience in case it helps anyone else out.

So I’ve decided to do a Q&A post answering a few of these questions. But before I begin, let me provide my standard legal disclaimer (CYA). I’m not a professional investment adviser,  or professional anything in the financial world. I hold no degrees or certificates in this field, and nothing written below should be taken as direct advice to anyone reading this. To truly advise, so many things need to be taken into account about personal goals, timelines, life priorities, etc. Even with the context some people give me in their questions, it’s only the surface of what I think needs to be considered when giving proper financial advice.

Now that that’s out of the way, let’s get on with the Q&A.

From User199

I am working professional in thirties but have no experience in investments. Have saved up around 50k but its all in saving and checking account.  Just the thought of investments– stocks and  bonds makes me uneasy. but i got to start it sometime.

Can you give some investing basics of how i should go about investing this money.

So much needs to be considered when deciding how and when to invest. Having your first $50K saved up is a great start. The most important part of investing is first stockpiling some capital, as you’ve done. So now let’s ask ourselves a few questions:

What’s your annual budget?

There’s always debate on what’s enough for a “rainy day fund,” but I tend to think 6 months should be a minimum, at least until you have enough capital invested in liquid assets that there’s no reason to keep cash. For example, if I have $500K in stocks and bonds that can be sold in seconds, then why would I want to keep $50K in cash – unless that’s a strategic part of my portfolio? On the other hand, if I was spending $40K/year and had $50K saved up, I’d keep at least $20K in cash for a “rainy day.”

How stable is your job?

No jobs are 100% guaranteed, but some are certainly more reliable than others.  I think it’s important to remember that for the vast majority of people, their ability to earn an income is their biggest asset.  For example, if I have a job where I can reliably make $80K/year – then it becomes easier for me to invest in a higher-risk higher-reward investment. On the other hand, if I work in a field that is always at risk of being outsourced, then it might make more sense to offset the risk of temporary unemployment by having a lower risk investment strategy.

Do you have an investment plan?

If not, you should create one before you begin any investing. Read some books, define your goals, and create a strategy. And remember, your plan can change over time. When I first started investing, I was 100% invested in large cap value stocks. At that time, I had a great income with no wife or kids – so short-term volatility was not a concern. Eventually, I wanted more stability and so I went with a pseudo Permanent Portfolio strategy. Now, as I’ve gotten closer to my planned early retirement, I’ve switched to a mixed portfolio of various income-generating investments.

What’s your timeline?

The reader mentioned having $50K saved up.  If it were me and my goal was to buy a house in a year with the $50K as a down payment, then cash might be the best option. Sure, stocks may rise, but a drop in stocks would destroy the plan to buy the house.  On the other end of the spectrum, if I was planing to save that $50K  for retirement in 30 years, keeping that money in cash would be eaten up by inflation over that timeframe – so I would want to invest the capital in something that gives me returns above the rate of inflation over the long haul.



From email:

If you ever get around to doing a more in-depth post regarding dividend investing, I have a question for you. What is your take on owning a large slew of dividend stocks such as those on the “dividend achievers” list or just owning something like the Vanguard Dividend Appreciation EFT VIG?

Personally, I go back and forth on this, but I lean more and more toward just owning the ETF.  It may yield less than some dividend stocks, but it lets me be “lazy” with my investments, which is a big plus for me since I’d rather spend time either on my mountain bike or with my daughter vs researching stocks. Interested in your thoughts…

You touched upon a few good points in your question. In my opinion, it comes down to several considerations.

First, can I beat the market? Without going into the complex discussion of the efficient market hypothesis, I’ll just say that I do believe the market is mostly (but not completely) efficient. And by that I mean that over a long period of time, one cannot expect to greatly beat the market. But with that said, one likely won’t fall too far behind the market either.

I don’t think I can beat the market by much, but I do think that given the right strategy and planning, I can beat the market slightly in the long run. As Warren Buffet stated, “Rule #1: Never lose money. Rule #2: Never forget Rule #1.” Of course, we all lose money sometimes. But there are stocks out there that, to me, look like guaranteed losses over the long run. Unfortunately, many ETF’s still own some of those stocks. By picking my own stocks, I can apply the filters I’m comfortable with and, hopefully, avoid some of the “guaranteed losses” aforementioned.  (Admittedly, this could also mean I miss a big winner).

Second, can I get a higher and more consistent income and income growth than the ETF?  VIG is somewhat new, so it lacks a track record that I can study. If you look at it though, it’s yield is not much higher than the S&P, but the income growth has been pretty good.  Unfortunately, it’s also had one negative growth year, which would be bad if living on a fixed income.  I do like the idea of mostly investing in the Dividend Achiever’s list, so that my income goes up every year, regardless of capital growth. (Of course, capital growth is also required for dividend growth, otherwise either the P/E gets impossibly low, or the payout ratio gets dangerously high.)

Third, do I enjoy researching stocks? Like you, I enjoy my mountain bike and time with my daughter. But I also enjoy researching stocks, reading financial reports, studying business models, and reviewing the quality of a company’s management team. Time is limited, but the good news is that generally I only re-balance my portfolio once per year (sometimes twice). And when I do, I generally just review the stocks where something looks amiss. I always document why I bought a stock, and I make sure that the reasons I liked the stock are still true. For example, if I bought a stock because I found it to be a good company with a solid competitive moat, but some short term incident had driven the P/E from a long-term average of 15 all the way down to 9, I write that down. When I review the data annually, if the P/E is now at 16, that’s a pretty big red flag (and hopefully it’s because the price rose, not that earnings are down!)

If the idea of reading an earnings report and a balance sheet makes your head spin, I couldn’t recommend picking individual stocks.


From email:

I’m looking to start saving to buy a house. To do this I need to be able to invest my money properly and get a pretty good return on my investment. Currently I have a financial guy that handles my retirement account but he’s lackluster at being proactive and I dont really feel he’s really on top of his game. I’ve spoken to a few other folks to get other options but when I tell them I want a return of at least 5-8% they always give me the same response of, thats not realistic in this economy blah blah blah. So my question(s) is(are) do you have a firm or company you recommend that I can explore my investing options with or will they all give me the same response at which point I need to do this on my own? I’m super interested in financial investing and the whole industry but it feels so overwhelming, at which my next question would be, what would I need to do to get started learning and immersing myself in all this? Are there any good books or etc that can get me up to speed quickly and give me enough knowledge to start navigating these waters?

Personally, I like managing the money myself rather than paying a money manager.  Not so much because they rarely beat the market long-term, while still charging a fee, but also because they rarely take the time to truly understand your personal goals and priorities (i.e. It’s not always about making the most money).  If you want to learn to invest for yourself, then I can recommend a few books that helped me the most.

The Intelligent Asset Allocator

The Little Book That Beats The Market

Rich Dad, Poor Dad

The Intelligent Investor

These books range in what they offer with regards to the technical vs. strategic parts of investing, but I found those 4 to affect my investing more than any others.  I’ll also recommend the list of books that MMM recommends. I’ve read almost all of the investing books on his page over the years, and mostly agree with him on that list.

I also recommend to everyone that they should read Warren Buffet’s letters to shareholders.  I’ve literally read every one.

One last thought: the biggest mistake I see in people’s investment strategy is that they don’t define their goal, and treat their investments like a business. The goal shouldn’t be limited to “make as much money as possible.” Everyone should consider their time frame (saving for retirement in 20 years? saving for a house next year? etc), income (dividends) vs. capital gains, volatility (which plays into time frame), and so on…

[Follow Up Email] I’ve heard that financial advisors can get access to certain funds or what not with lower fees that I’ll be able to buy. Should I expect an account with higher fees, but maybe that can be offset with higher returns? Currently I’ve got an ING account for my mutual funds and a scottrade account for some stocks. I try not to buy too many stocks until I’ve got a reasonable amount to offset the trading fees.

Also what are the big things I need to watch out for, learn from now before I do anything too crazy? Maybe these kinds of pitfalls will be covered in the literature you recommended, but maybe there are some things you’ve learned along the way that I need to be aware of before I get into this. I’m a big fan of learning from people who have gone before me, rather than make the mistakes myself, if at all possible.

To my knowledge, there’s really not much access lost when investing yourself. In fact, for anything lost I’d say there’s much more to gain. You might miss out on an IPO or other “special” situation but, personally, I stay away from those special situations anyways.

What you gain is control. You’re broker might customize your portfolio based on your established goals, but they aren’t going to consider everything. They may want to know some basics like whether you’re saving for a house, when you hope to retire, if you’re going to pay for your kids college education, etc. Then they create a simple portfolio for you (usually using funds that they get commission on!), and they occasionally re-balance.  They’re less motivated to consider tax implications than you would be, and they aren’t as dynamic with changing things up as goals change. They also don’t always consider your outside investments (real estate, treasuries, etc), which should absolutely be part of the total equation. There’s risk in doing it yourself, but there’s risk with giving up control too. This is why I choose to do all the investing myself.  I won’t claim that there aren’t great financial advisers out there, it’s just not easy to find them.

This brings up one last thing I forgot to mention – you should probably read some books on studying company finances. You asked what big things you should watch out for, I’d say: If you can’t read a balance sheet and cash flow report, and understand the pitfalls and how bean counters can manipulate annual reports, then you probably shouldn’t be buying individual stocks. One book I found to be a good introduction to this was (believe it or not) Reading Financial Reports For Dummies.

Regarding brokerage accounts, I have used many institutions.  The ones I like the most are eTrade, Vanguard, and Wells Fargo.  Here’s why:

  • eTrade – In my opinion, they have the cleanest user interface.  Trades are a little high ($7 for stocks, bonds, and ETF’s, $20 for mutual funds), but if your transactions are rare and all in the 5-6 digit range, then that’s pretty insignificant.
  • Vanguard – For the mutual fund investors, Vanguard has the lowest annual fees.  Also, there are no transaction charges if you are trading Vanguard funds.
  • Wells Fargo – If you have at least $25K in your account, then you get up to 100 free trades per year.  This is great for a relatively small amount of money where you want to invest in individual stocks, but want to diversify across 10+ stocks because you won’t pay anything to buy, sell, or re-balance.


Hopefully, some of this information will be useful to some readers.  If you have follow up questions, or comments on what I said, please add a comment below.  I’d like to leave this post open for more investment questions, and hopefully feedback from some of the readers that are a whole lot smarter than me.

Happy investing!


10 Responses to Investing Q&A

  1. Mike says:

    I’m investing a pretty nice chunk into Lending Club loans and I’m enjoying an 18 percent return. I expect that’ll go down over time, but for now it is really nice!

    Good post!

  2. Mr1500 says:

    It always seems to me that people over-think investing way too much. Since most fund managers can’t beat the indices, people are fools to believe they can. Buy an index fund (VFINX) and forget about it.

    For variety, throw in Lending Club and a rental property.

    • My point is that you can’t beat the market by much, but keep in mind that most fund managers have a different incentive than doing what’s best for you.

      Regardless, I still only recommend moving away from mutual funds if you enjoy the research and find it worth beating the index funds by a small amount.

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  4. Shannon says:

    very interesting read…makes me want to save more so i can invest in something for my futcher, and if not mine my sons…

  5. aspen says:

    I’m curious – do you have any thoughts on Betterment? recommends it to me regularly, and it seems like an interesting concept. Would be interested to hear your perspective.

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