Skip to main content

Financial Investment Advice

Published: April 2nd, 2023 by Chris McGrath
Last Updated: Nov 7th, 2023

Legal Liability Disclaimer
Reminder: guidescape.com's full liability disclaimer is available on this link.
It basically states that if you choose to follow any advice found on guidescape.com, you do so at your own risk. GuideForge LLC is not legally responsible for any damages resulting from choosing to implement advice.

Investment Advice​

Seek out Financial Advice​

Whenever you have spare money, you have several financially responsible options when it comes to what to do with your money:

  1. Pay off high interest debts
  2. Pay off all debts
  3. Invest in bonds/CDs
  4. Invest in stock market index funds
  5. Invest in real estate
  6. Do X

It's human nature to want to prioritize implementing the option that will best optimize your financial future. In other words, you'd prefer to move towards Financial Independence and Financial Freedom as efficiently as possible. So you seek out advice on what to prioritize.

When it comes to looking for advice, I myself don't trust the majority of financial institutions or financial advisors to give good advice, as there's a risk they could have conflicts of interest. I would trust the advice of a fiduciary, but I figure a good one would need to charge fees to stay in business, so I've never used one before. I prefer to get free advice from netizens who lack a conflict of interest, sound like they know what they're talking about, and seem to be genuinely trying to offer the best advice they can to anyone willing to read.

When reading advice online, it's important to try to check the validity of the advice you encounter. One common technique is to try to cross-reference multiple sources and look for consensus from sources that give you a good gut feel. There's a problem with this technique when it comes to financial advice: it's hard to find consensus.


Here are some examples of plausibly valid financial advice that I've personally heard and read from a mix of both questionable and seemingly solid sources:

  • Never carry a loan balance.
  • Avoid using credit and debit cards. Pay in cash.
  • Save money, try to establish a rainy day fund. Aim to have 3-6 months of living expenses.
  • Prioritize investing in real estate, it's the best.
  • Pay off your mortgage before you retire.
  • Prioritize becoming debt free. Pay your mortgage/student loan debts off early.
  • Young people should aim to be 100% invested in stock market index funds.
  • Retired people should aim to own X% stocks and (100-X)% bonds. (90>X>40)
    (with X=60 being the most common variation of this advice.)
  • It's best to own (100-$AGE)% stocks and ($AGE)% bonds.
    (Convention: $VARIABLE, $ denotes a named variable)

If you have some prior knowledge of personal finance or ability to logically reason through options, you'll probably come to the conclusion that some of the items on the above list sound incorrect while others sound plausibly correct or at least ballpark accurate good advice, but maybe not the best advice.

When I first encountered some of the above recommendations, my first thought was: This person sounds like they don't know what they're talking about and shouldn't be giving advice. Other items made me think hum, this legitimately sounds like it could be the best advice for how to prioritize allocating spare money. It might even be a universal truth that everyone should follow.

"Young people should aim to be 100% invested in stock market index funds," is an example of something I used to think was a universal truth. I've since refined that belief and stopped viewing certain suggestions as universally bad advice after coming to the realization, in the next section, which also helps work as a strategy to evaluate the correctness and validity of Financial Advice.

Evaluate Financial Advice​

The primary reason why there's a lack of consensus about the best financial advice is due to the fact that the most optimal decision in terms of what to do with your money usually depends on personal circumstances and context. Context, about the situational circumstances that advice is intended to be valid/optimized for, is rarely given alongside advice.

Advice that's simultaneously optimized, generalized, and still valid is in fact possible. The trick to coming up with valid financial advice that's widely applicable is to leverage the concept of Stages of Financial Independence as a means of generalizing personal circumstances and context with an acceptable degree of accuracy.

So any time you encounter financial advice that seems like it might be worth memorizing, you should catalog it in your mind as a Tuple.
Tuple: [$ADVICE, $CONTEXT, $CONFIDENCE_IN_VALIDITY]

Example Tuples:
• ["Invest 100% in index funds", "Growth Stage of FI", 95%]
• ["Consider real estate assets", "Growth and Independence Stages of FI", 70%]
• ["Live within your means", "Universal Truth", 99%]
• ["Prioritize paying off your Mortgage", "Independence Stage of FI", 90%]
• ["Slowly pay off low interest debts in favor of investing", "Growth Stage of FI", 95%]

Rather than trying to memorize advice in isolation, you should try to pair advice with the context that the advice seems to be most applicable to in terms of validity or optimization. The Stages of FI work great as mental shorthand representations of Financial Context to pair with Financial Advice. If you adopt this mental framework, you'll find it's much easier to find consensus when cross-referencing multiple sources when attempting to fact-check and build confidence in the validity of advice.

Example:
"Prioritize paying off your Mortgage." and "Slowly pay off low interest debts in favor of investing." can both be considered as the best advice to follow in order to fully optimize your Financial Future. Yet if you view them without context as if they were universal truths, you'll quickly realize they contradict each other. Once you realize they're contextual truths, the cognitive dissonance disappears.


Whenever you encounter Financial Advice, it's worth asking yourself the following questions as a means of helping you generate a tuple of Financial Advice worth remembering:

    • Questions:
      • Could this person have an ulterior motive?
      • Could their advice screw me over?
      • Do they seem pushy or like they're using fear tactics and emotional appeal in their reasoning?
      • Do I have a gut feel that this person or source of information is shady?
    • If any of the above are true, then:
      • Your confidence in the validity of the advice should be low.
      • Low enough to not bother trying to memorize the advice, or plan to look for more opinions to try to cross-reference and fact check its validity.
    • Questions:
      • Are they offering a conclusion and showing the work they used to arrive at that conclusion?
      • Do they try to explain the logic and reasoning behind their advice?
      • Do they include or, even better, explicitly point out the context to which the advice is intended to apply to?
      • Do multiple seemingly unaffiliated, non-shady sources agree with the advice?
    • If any of the above are true, then:
      • You can increase your confidence in the validity of the advice.
    • Things to be aware of and watch out for:
      • Is the advice being presented as a universal truth?
      • The majority of advice you encounter will lack context, but sometimes you can fill in the blanks with context clues.
      • People have a few common tendencies worth remembering. Having awareness of and recognizing these tendencies can help add context to advice lacking context.
        • People tend to see others as being similar to themselves, and assume other people's lives will play out vaguely similar to their own.
        • They tend to offer advice that they themselves would find useful.
        • This creates a slight bias for a person to give advice that's optimized for someone in the same stage of FI that they themselves are in or have been in the past.
    • Points worth considering if you encounter the above scenarios:
      • Form your own opinion on if you also see the advice as a universal truth, or if it'd be more accurate to classify it as a circumstantial truth.
      • Very few things are true 100% of the time. If you look hard enough, there are exceptions to every rule, including universal truths.
      • Try to theorize what stage of FI the person giving advice is at, there's often context clues that help with this. Then, when reading advice, realize that it might be slightly optimized for a particular stage of FI.
        Examples:
        • I find Mr Money Mustash's and other financial advice blogs tend to have a slight bias towards being optimized for people in the Financial Independence and Freedom Stages of FI.
        • I myself am in the Growth Stage of FI, and am aware the advice I give has a slight bias towards being optimized for people in the Growth Stage of FI.

Consider a Brokerage Account​

If you use it right, a brokerage account can give you benefits similar to a Roth IRA, without the restrictions of a Roth IRA.

Advantages of a Brokerage Account:

  1. If you invest in a growth focused stock market index fund:
    You don't have to pay capital gains tax until you sell your investment. So you can differ capital gains taxes to a future date. (There's a relatively easy technique you can use to make it so you pay 0% in taxes during that future tax year, which results in the same benefit as a Roth IRA.)
  2. There are no contribution limits or penalties to worry about.
  3. There are no age restrictions associated with withdrawing funds.


Here's a scenario to explain how the technique to pay 0% in taxes works:
Let's imagine:

  1. You're married (because the tax code favors married couples.)
  2. You're both 25-59½ years old (Younger than the IRS retirement age.)
  3. You and your spouse are both retired* / unemployed / have zero income from working.
  4. Back when you were both working, you built up your investment accounts, and now you have investments split between a brokerage account and tax differed age restricted retirement accounts.
  5. In your brokerage account, you invested 100% into a capital gains / growth focused index fund. Since you owned it for over a year, selling parts of it would be subject to the Long-Term Capital Gains Tax Rate.
  6. You've decided to move abroad or to a state with no state level Capital Gains Tax.

The US Federal Tax code for Long-Term Capital Gains is 0% for up to ~$89k (for married couples in 2023) and thats after the standard deduction of ~$27.7k, so in theory a married couple could sell up to $116.7k of their Broker Account in a year and pay $0 in taxes on it. Then wait until the retirement age to touch their age restricted retirement accounts.


It's easier than you think to have enough money to retire, before the federally recognized retirement age:
If you start investing $500/month ($6k/year) at age 20, and it earns 10% compound interest a year. Then by age 52 you'd have $1.2m, and by age 59½ you'd have $2.5m. The thing is, you could decide that $1.2m is enough for you to comfortably retire off of and decide that you'd be happier living comfortably vs luxuriously, in exchange for not having to work for another 7.5 years. (Note: It's possible for 1 person to have enough for 2 people to retire. At the same time, it's worth remembering that 2 people can pool their assets, so if both you and your partner were investing, or you were able to get more than 10% interest. Reaching the point of "enough money", could happen even sooner.)

The thing is if you invested 100% of your money in retirement investment accounts with age restrictions, then you wouldn't have the option of retiring early available to you, even if you have "enough money" to do so. (Unless you were willing to get hit with heavy penalties). So if you have the financial discipline / motivation necessary to make early retirement possible, then it's worth considering investing a percentage of money into a non-retirement investment account as well, so you have the option of retiring early.

What if instead, when you were age 52 that $1.2m was divided between both traditional retirement accounts and a non-retirement account. ($400k in a brokerage account, and $800k spread between retirement accounts.) You'd have the option of either retiring at age 52 and living off the $400k for 7.5 years. Then switching to living off the interest of the retirement funds. (After 7.5 years the $800k would have doubled to $1.6m) Or you could wait until 59½ and retire with $2.5m. (If you were willing to retire outside the US, you could probably even retire comfortably off of $590k, which you'd have by age 45.) The point is that using a brokerage account / normal investment account, you'll have the option to retire early (without getting hit by early withdraw age related penalties that are commonly part of retirement focused investment accounts.)

Prefer Taxed Later​

As a general rule of thumb it's better for US citizens to be taxed later:
The majority of people are better off preferring retirement accounts / investments that are taxed later 401k, HSA, Traditional IRA, and Rollover IRA over options like a Roth IRA or Brokerage Account, which are taxed now.

Where does the rule of thumb come from?
The short answer is most people plan to earn less in retirement than they did when they were working, this means they could be in a lower tax bracket during retirement. The delayed income that gets taxed later is then likely to be taxed at a lower rate.

How best to tell if you'd be an exception to the rule of thumb?
If you think you'll retire with more than $2 million / enough money to generate enough passive income to put you in the 22% tax band ($116.7k/year for married couples in 2023.) Then you should consider using a Roth IRA to lower your taxable retirement income.


Let's use 2 examples to see how it's advantageous to be taxed later:
Example 1:
A married couple has a combined income of $127.7k in 2023, after subtracting the standard deduction of $27.7k they have $100k in taxable income.
The bracketed federal income tax rate makes it so:
$0-22k of that is taxed at 10%
$22-89.5k of that is taxed at 12%
$89.5-100k of that is taxed at 22%

If this 1st couple decided to put $10.5k into a taxed later retirement investment, then their taxable income for 2023 would be lowered by $10.5k, so they'd avoid paying the 22% tax rate for that year. When they retire and pay taxes in a future year, it's expected that their retirement income will be under $89.5k. This means they'll be able to receive the differed income under the 12% tax band, in other words, they'll have permanently avoided the 22% tax band for that $10.5k of income. A 10% difference of $10.5k is $1050, and that's $1050 that's able to collect compound interest over time.

Notes:

  • The following examples are based on the 2023 US Tax Brackets.
  • The general pattern has held true for decades, there's just slight variations, you can confirm this for yourself by checking this page, which covers historical US Federal Income Tax Rates and Brackets.
  • Similar income based Tax Brackets apply to state level taxes, as well as capital gains and dividends taxes.

Example 2:
A married couple has a combined income of $77.7k in 2023, -$27.7k standard deduction, results in $50k of taxable income.
$0-22k of that is taxed at 10%
$22-50k of that is taxed at 12%

At first glance, it looks like this 2nd couple wouldn't benefit from differing their taxes to a later date; However, there's a retirement technique that can be leveraged to gain an advantage. It has to do with the fact that Americans pay both federal and state income taxes. Basically, if you worked in a state with a state income tax, there's nothing stopping you from retiring abroad (outside the US) or in one of the 9 states without a state income tax. This would avoid state income tax rates of 5-15% on your tax differed income. (So both example couples can benefit from differing their taxes to a future year.)


Example of the Exception:
(Where it's advantageous to prefer taxed now / Roth IRA)
If the married couple in Example 2 plans to earn significantly more income when they're retired than they currently earn, then they should prefer being taxed now / favoring a Roth IRA. Let's say they plan to have over $2 million when they retire, meaning they could potentially generate over $127.7k/year in retirement income. After the 2023 standard deduction of $27.7k, that'd be $100k/year in taxable income, which would put $10.5k of their taxable income in the 22% tax band. By using a Roth IRA, a percentage of their retirement income wouldn't be taxable, which could help keep them out of the 22% tax band.

Let's elaborate on the scenario with numbers to help visualize how it'd work:
We'll say $1.8m of their $2m nest egg is in a 401k. Then $200k is in a Roth IRA. Their Roth IRA is used to generate $10.5k (non-taxable income), their 401k is used to generate $117.2k of taxable income. After the standard deduction of $27.7k, $89.5k of their income is taxable. All of their retirement income would then avoid the 22% tax band, thanks to the Roth IRA keeping their taxable income under the threshold.

Prefer Index Funds​

As a general rule of thumb, you should prefer investing in Stock Market Index Funds.

Index Funds have highly desirable properties:

  • They're passively managed funds that are managed by computers and principles from the field of statistics, like statistical indexes.
  • Since they're passively managed by computers, the fees associated with owning them tend to be an order of magnitude (10x) lower than fees of other funds that are actively managed by humans.
  • In addition to lower fees. Computer managed index funds are free from human error and embezzlement.
  • Total Stock Market Index Funds exist. These have a long history of giving a 10-year average ROI of at least 10% per year.

As a general rule of thumb, you should avoid investing in actively managed funds. Even in the case where it's you who is actively managing your funds.

Funds actively managed by Fund Managers have highly undesirable properties:

  • Relatively high fees compared to index funds (Ex: 0.89% vs 0.04%, 22x higher)
  • Can have scandals where embezzlement or conflicts of interest are detected
  • Have the potential for embezzlement and conflicts of interest to exist undetected
  • They're subject to human error and regularly underperform the 10% ROI benchmark of Total Stock Market Index Funds.
    • If lucky, you might earn 10.89%, but then after fee you earned 10% anyways.
    • If unlucky, you might earn 7.89% ROI, 7% after fees. It's easy to imagine sleazeball fund managers patting themselves on the back about the wonderful job they did growing your funds/pointing out that they made you money. In reality, they likely lost some of your money gambling on the market and made you pay a fee to thank them for doing so.
  • Even if you're actively managing your own funds, where you can trust yourself. There are statistical disadvantages inherently present in the practice, statistical analysis can be used to prove the methodology has fundamental flaws, but it's a bit nuanced, so that proof is covered on another page titled: Investing vs Gambling.

Here's what you should look for when evaluating Index Funds:

  1. The best 10-year average ROI (return on investment) that you can find from the options available to you. If a fund doesn't have a 10-year average, you should skip it.
    I like to use Yahoo Finance for this because they make it easy to edit the URL to quickly find an Index Fund's 10-year average. SeekingAlpha is another great resource for checking 10-year averages. Here are 2 examples, their 10-year averages, and the data source:
  2. If you see 2 Index funds with nearly identical ROIs, check their annual fees/expense ratios.
    For Example: VWUSX & VIGAX both tend to have similar ROIs, but different expense ratios. (So VIGAX should be preferred in this example, because its expense ratio is cheaper)
    • VWUSX's expense ratio (Annual fee) is 0.38%
    • VIGAX's expense ratio (Annual fee) is 0.05%
  3. When investing using a normal brokerage account, you should prefer index funds based on growth stocks over those that pay dividends. (This is because growth stocks result in capital gains, which allow taxes to be differed, whereas dividends are taxed now.)

I'm a fan of Vanguard Index Funds for 2 reasons:

  1. Vanguard is a Fiduciary.
  2. John Bogle, the founder of Vanguard, invented Index Funds.

That being said, the Vanguard Investment Firm and their investment offerings tend to be great options, but not necessarily the best options.

Purposes of Financial Assets​

It's important to know what you own and why you own it. Why you own something is usually tied to a goal. Certain assets tend to be ideal for optimizing the achievement of certain goals. The following is a mapping of asset types that help achieve 3 common financial goals.

Common Purposes of Financial Assets with best fit mappings:

  1. Maintain Wealth
    • Bonds/CDs: Primary Purpose is Wealth Preservation
  2. Generate Passive Income to live off of
    • Fixed Passive Income Generating Assets:
      • Bonds/CDs: They can generate some passive income, but it's best to think of this as a secondary purpose, they're not a great fit for generating enough passive income to live off of.
        Their primary purpose of preserving wealth makes them great for acting as a rainy day fund that can be used to survive market crashes that can last for 3-5 years.
    • Variable Passive Income Generating Assets:
      • Dividend Focused Index Funds of Stocks
      • Rental Properties
      • Real Estate Investment Trusts(REITs: real estate treated like stocks)
  3. Grow Wealth using assets focused on Long Term Growth
    • Passively Managed Autopilot Option that Guarantee Success:
      • Total Stock Market Index Funds
    • Low Risk Borderline Gambling options well suited for passive asset management:
      • Growth Focused Index Funds
      • Aggressive Growth Focused Index Funds
      • Sector Specific Index Funds
    • High Risk Borderline Gambling options well suited for active asset management:
      • Leveraged Rental Properties
      • Leveraged ETFs

The above gives a high level overview of various assets. The following subsections cover the above assets in an introductory level of detail. The last section involves advanced topics: Growth Focused Assets, Borderline Gambling, and Low vs High Risk. They'll be covered in more detail on another page titled: Investing vs Gambling.

Maintain Wealth​

Bonds and CDs (Summarized Description):
Bonds are loans to government and corporate entities. CDs are loans to banks. High quality bonds and CDs can maintain wealth by avoiding loss of principal and generating enough fixed income to keep up with inflation.

Bonds and CDs (Detailed Notes):

  • If you own a (high quality) bond to its maturity date, you won't lose your original principal.
  • Holding bonds that earn at least 3.8% ROI to their maturity date is one of the most optimal ways to maintain wealth, as you'll be able to keep your original principal and keep up with the rate of inflation.
  • Bonds offer ROI in the form of fixed income at a rate of ~4-6%, bonds lower than 3.8% ROI, the rate of inflation, do exist, but you should avoid buying bonds below 3.8% ROI to prevent inflation from eroding your wealth's purchasing power.
  • Bonds have good liquidity (ability to be converted to cash), the only catch is that cashing in a bond early usually involves losing a small percent of its value. Because if you cash in a bond before its maturity date, then you can be charged early withdraw and / or brokerage fees.
  • Tips for Buying and Selling Bonds:
    • Fidelity's Bond Marketplace is a good resource for finding, buying, and selling bonds.
    • Since bonds are loans to governments and corporate entities, they're subject to the corporate equivalent of credit scores. Junk bonds are bonds offered by organizations with bad credit who could miss a payment or go bankrupt.
    • You should only ever buy bonds with a credit score of A or higher.
    • As a general rule of thumb, you should avoid index funds comprised of bonds. Bond Index Funds dilute quality bonds with junk bonds and often result in a yield that ends up under the rate of inflation.
    • The normal advantage of index funds is that they're diversified by definition. Diversification doesn't magically lower risk in all scenarios. Diversification of bonds isn't that important because they're not considered a risky asset to begin with.
    • Using the bond laddering technique often results in a degree of diversification anyways.

Generate Income​

To generate passive income you can live off of, you want a mix of fixed and variable passive income assets:

  • Fixed ROI Assets that avoid loss of principal like Bonds and CDs should be viewed as a Rainy Day Fund for surviving 3-5 year long market crashes:
    • Inflation makes it so you can't live off the 3.8% Fixed ROI that's common with bonds. If you had 10k in bonds, you could spend $380/year indefinitely, but inflation would cause prices to rise over time. If you apply basic math to the 70-year average US inflation rate, 1.038^19=2.03, you'll find the price of goods doubles every 19 years.
    • If you want Passive Income that you can live off of indefinitely, then ROI minus inflation is what you can safely spend. So if you find a bond that generates a fixed ROI of 5% then you can safely spend 1.2% of the bond's principle investment indefinitely. If you wanted to live off of $50k/year. "Is over of equals percent over 100" formula says you'd need $4.17m to generate the equivalent of $50k/year passive income using only bonds.
    • So while it is technically possible to live solely on the fixed income of bonds and CDs, it's inefficient to live 100% off of bonds and CDs. What is efficient is to view bonds as a tool that lets you survive market crashes.
    • It's also worth pointing out that because the purpose/goal of owning bonds and CDs is to preserve wealth during/survive a market crash and not to generate ROI. It can be wise to prefer a 3.8% ROI bond with a AAA credit score over a 4.5% bond with an A credit score, as the AAA credit score is more likely to be reliable during a market crash.
  • Variable ROI Assets are more efficient at generating enough Passive Income to live off of, but they come with risks.
  • What are examples of variable passive income generating assets?
    • Fully Passive — Examples of Variable Passive Income Generating Assets:
      • Dividend Index Funds (Index funds comprised to dividend generating stocks)
        • These can automatically pay dividends of about 3% of the fund's value each year.
        • Because the fund's value constantly changes, the 3% effectively becomes variable.
        • Let's say you purchased $100 worth and at the start of the year you expected to get $3 (3%). If the market temporarily crashes by 40%, your original $100 might temporarily become worth $60. Then 3% of $60 can lead to a $1.60 dividend payment (effectively 1.6%) during a market crash year.
        • The thing is, their value actually tends to go up over time. So if you buy $100 worth, by the end of the year it might be worth $106.80 then your 3% dividend payment happens against the new value. You end up with a mix of income and unrealized capital gains. So if you start the year with $100, then end the year with $110 worth of value. The $10's worth of growth can take the form of $6.80 worth of appreciation in value of the asset and a $3.20 dividend payment.
        • At first glance, it looks like a bond might have a higher ROI, but dividend focused index funds are able to compound their ROI better than bonds, because their value is increasing over time.
        • The stock symbol "VYM" is an example of a dividend index fund with about 10% ROI that pays about 3% in dividends.
      • REITs (Real Estate Investment Trusts)
        • These are basically real-estate properties treated like stocks.
        • They can pay 4% dividends, but their value will raise slower than that of a dividend index fund.
        • "VNQ" is an example of a REIT Index Fund with about 6.3% ROI that pays about 4% in dividends.
    • Semi Passive — Examples of Variable Passive Income Generating Assets:
      • Rental Properties
        • When you personally own real estate property. You have the option of being hands-off. Alternatively, you can be more hands on, enabling you to directly influence the carrying costs and rent. So these have the potential to generate a higher percentage of passive income in exchange for spending time and energy on them.
      • Periodically selling small portions of growth stocks
        • Growth focused stocks don't pay any dividends / they aim to increase in value over time. By periodically selling off small portions over time, you can make them work similar to dividend index funds.
        • Example: Let's say you buy $100 of a growth focused stock. At the end of the year, it's worth $110. Then you choose to sell $3.20 worth of it for cash. At the end of the year, you have $3.20 cash + $106.80 worth of stock.
  • Why are variable passive income generating assets said to be risky?
    • The risk refers to the scenario of a FI person who depends on passive income, having 100% of their assets allocated to owning variable passive income generating assets. Although a fund may have a 10-year average ROI of 10%, markets fluctuate, it's possible to have 1-5 bad years in a row. Let's say someone owned $1m worth of dividend index funds. They expected to earn 3% or $30k in dividends and planned to live off a modest $30k/year in expenses. If the market crashes by 40% then their $1m could temporarily be worth $600k, then their 3% dividend might earn them $18k. They'd have to sell $12k to make up the difference. Then the next year the market could go down by another 12% bringing them to $517k, their 3% dividends minus expenses would put them around $500k by the end of the 2nd year. That's enough loss of wealth that they could fall out of FI status and have to work again.
    • There's actually negligible risk for dividend index funds if you're able to buy and hold the asset for 10 years without touching it. Let's say it temporarily goes down in value by 50% as a result of a stock market crash. After a crash you'll usually have a great years, like 3 years in a row of 26% ROI where the fund quickly bounces back to it's pre-crash value. After which it'll resume growth and still end up with a 10-year average ROI of 10% a year.
    • The risky part is that if you're trying to live purely off of ROI during a crash, you'll have to sell off part of the investment to make up for the deficit caused by the crash. This triggers a negative feedback loop where because you sold some off, you'll earn less, inflation will simultaneously raise your expenses. You'll have a higher deficit and have to sell off more. If that negative feedback loop happens 3 years in a row, you can lose a significant portion of your wealth. The wealth you lost won't be able to benefit from the post crash rebound years that tend to have higher ROI. So your wealth can't recover the same way it can in the scenario where you can leave it untouched.
  • Why is it best to have a mix of Fixed and Variable Passive Income Assets
    • If you want to generate an inflation adjusted $50k/year using 100% fixed income assets like bonds. You'd need to generate $50k using 1.2% spendable ROI (5% ROI - 3.8% inflation) So you'd need $4.17m, which would take forever to earn.
    • If you want to generate an inflation adjusted $50k/year using 100% variable income assets like dividend index funds. You'd risk falling out of FI if the stock market crashed, because the only way to make up for the deficit caused by a market crash would be by selling assets to make up the difference. That can trigger a negative feedback loop that'd erode your wealth to the point that you couldn't generate enough passive income to stay FI long term.
    • By owning 3-5 years worth of expenses in wealth preserving assets like bonds and then 100% of your remaining wealth in variable income assets like dividend index funds. You can live off of the interest from dividend index funds during good market years. Then in the event of a bad year or 3 year long stock market crash, you can live off of bonds, which allows your stocks to stay untouched and recover to their pre-crash values. Eventually, your stocks will have surplus years that will let you then rebuild your market crash buffer of 3-5 years of expenses worth of bonds.
    • If someone wanted to live off of an inflation adjusted $50k/year using a mix of $250k bonds (representing 3-5 years worth of expenses) + the rest in index funds.
      10% ROI - 3.8% inflation - 1.2% error margin would leave 5% spendable ROI.
      So $1m worth of dividend focused index funds could be used to generate an inflation adjusted $50k/year, the index funds would be the primary method of income generation that's long term efficient but risky in terms of short term volatility. The bonds would act as a rainy day fund that can mitigate the short term risk. So a mixed portfolio of $1.25m, comprised of $1m dividend index funds, and $250k bonds, can be used to generate $50k/year in a way that mitigates risks associated with volatility.
    • $1.25m using a mixed portfolio is significantly less than $4.17m using a 100% bonds portfolio, and both should have sufficient tolerance against risks associated with inflation and market fluctuations to last long term.

Grow Wealth​

You can grow your wealth by simply buying growth focused assets:

  • Certain assets are known for increasing in value over time faster than the rate of inflation. So, a great strategy for passively building up your wealth is to invest in assets that rapidly appreciate in value. In other words, you can make it so your wealth automatically grows bigger over time without you having to do anything by simply using a "buy and hold" strategy. Anytime you have spare money, you use it to buy things (invest in assets) that quickly increase in value over time.
  • If you can find something that increases in value by 10.5% every year. Then it's value will double every 7 years you own it (1.105^7=2.01) and your wealth will grow exponentially over time.
  • The trick to using this strategy is to identify assets that have a high 10-year average ROI. Then buy and hold them long term.

Total Stock Market Index Funds are an asset well suited for growing wealth:

  • The US stock market has a 10-year average ROI of at least 10%, and this is a fact that's backed by over 200 years of history:
    • VTSAX - Vanguard Total Stock Market Index:
      • Is a diversified bundling of 4100 stocks that form a statistical index representative of the entire US stock market.
    • S&P 500 - Standard & Poor's Index Fund of 500 stocks:
      • Mimics VTSAX but uses a diversified bundling of 500 stocks to form a statistical index representation of the entire US stock market.
  • You should think of VTSAX, S&P 500, and funds that mimic the S&P 500 like MIEYX as passively managed buy and hold autopilot assets that guarantee you'll earn a 10-year average ROI of at least 10%.
  • So whenever you're making an investment decision where your goal is to grow your wealth over time. 10% ROI should act as a baseline performance metric that you evaluate all other opportunities against.

Growth, Aggressive Growth, and sector specific Index Funds are more assets well suited for growing wealth:

  • The idea behind a total stock market index fund is that; while, it's impossible to know which individual stocks will win big or lose big over time, it is well known that the entire stock market as a whole is known to win big over time. So total stock market index funds just invest in a statistical index representation of the total stock market, rather than trying to pick individual winners and losers. A natural consequence of this approach is that poorly performing stocks end up being included in the index.
  • It stands to reason that there should be subsections of the entire stock market that are statistically likely to have a higher concentration of stocks that perform above average.
    • Examples of sectors that tend to over perform the 10% benchmark:
      • Blue Chip Stocks (stocks with a reputation for solid performance)
      • Technology Stocks
      • Growth Stocks (stocks aiming to outperform the total stock market)
    • Examples of sectors that tend to underperform the 10% benchmark:
  • Growth focused index funds are collections of stocks from "hot sectors" and "growth stocks" that are predicted to grow faster than the index of the total stock market.
    • An important thing to remember is that these are just aiming to outperform the index based on predictions. There's no guarantee that they'll outperform the total stock market.
    • The point of growth focused funds is their intent. They're aiming to outperform the total stock market index.
    • Growth focused companies have a tendency to focus more on their ROI being in the form of generating capital gains vs dividends for their investors.
  • Further explanation and examples of growth focused index funds can be found in the "Exemplar Funds" section further down on this page.

High Risk Borderline Gambling Assets also exist:

  • Examples of High Risk Borderline Gambling Assets include:
    • For-Profit Business Ventures
    • Leveraged Rental Properties (Using a mortgage loan to buy a rental property)
    • Leveraged ETFs (Using a loan to buy additional stocks)
  • These are all risky gambles. They can result in gaining or losing wealth relatively fast. There's no need to use these, since passive investment options that guarantee success exist. It's good to know they exist for the sake of a complete mental schema.
  • If you are remotely considering owning these:
    • Some degree of active asset management is useful in helping to minimize risks associated with owning these.
    • Know that most people end up regretting investing too much into these options and end up wishing they put 80-100% of their investments into passive options that guarantee success.
  • This topic is covered in more depth on the "Investing vs Gambling" page.

Exemplar Portfolio​

"Exemplar" is intended to mean ideal example in this context.

Account Prioritization​

HSA, 401k, Roth, Traditional, Rollover IRA, Brokerage Account, and all the other options purposefully omitted because they're not worth mentioning. If there are so many options to choose from, there's got to be a 1st, 2nd, and 3rd best. Some way of prioritizing the best ones to invest in has to exist. That's what this section covers.

1st: 401k match and Rollover IRA​

If your employer offers a 401k cash match, you should contribute enough to max out your employer's cash match. Additionally, in most cases, you should do a yearly rollover from the 401k to a Rollover IRA.

Examples of 401k matches:

  • 100% match for your first $3k, so if you add $3k/year you get $6k/year.
  • 100% match for up to 3% of your income, so if you make $50k/year, and contribute $1.5k/year (3% of $50k) you get $3k/year.
  • 50% match for your first $6k, so if you add $6k/year you get $9k/year.

Should you contribute beyond the match?
In most cases: no, at least not at first. Once you max out your 401k cash match, you should temporarily pause contributions that year until after you've contributed the optimal amount to other accounts.

Why not contribute beyond the match? Why mention "and Rollover IRA"?
Here are 4 scenarios with concrete numbers to add evidence to claim highlighted above:

  • Scenario 1: 401k without match
    • $6k contribution 100% immediately investible in the 1st year
    • Limited choices results in 14% ROI being the best you can find
    • $6000 • 0.14 ROI = $840 expected 1st year gains

  • Scenario 2: Traditional IRA
    • $6k contribution -25%(taxes) = $4.5k investible in the 1st year
      (Since you have to wait 1 year for tax return refund of $1.5k)
    • Lots of choices means you can find at least a 20% ROI
    • $4500 • 0.20 ROI = $900 expected 1st year gains

Scenarios 1 and 2 show that it's possible for a Traditional IRA to beat a 401k, this is why I suggest only contributing up to the match.

  • Scenario 3: 401k with match
    • $6k contribution • 50% match = $9k investible in the 1st year
    • Limited choices results in 14% ROI being the best you can find
    • $9000 • 0.14 = $1260 expected 1st year gains
Scenario 3 shows that due to the immediate match, a 401k match is unparalleled.

  • Scenario 4: 401k with match and Rollover IRA
    • Scenario 4 achieves the same outcome as Scenario 3 for the first year
    • But by rolling over in the 2nd year your $10260 can grow at 20%++ ROI instead of being limited to 14% ROI
    • $10260 • 6% difference means is a $615 difference, even if it took you 8 hours to figure out how to roll over the 401k to the Rollover IRA, that would be like making $76/hour, in other words, it'd be worth your time.

Scenario 4 shows that if you don't have good investment options in your 401k, then you're always better off doing a yearly rollover into a Rollover IRA. (You could ignore this if you were lucky enough to have a great 401k, but there's a high probability that the Rollover IRA will offer enough additional investment options that you'll be able to get a higher ROI. So it's usually in your best interest to roll over your 401k once a year.)

2nd: HSA​

HSA tends to be the 2nd best investment option to prioritize:
You don't have to pay any taxes on your HSA contributions or earnings as long as you use the money for medical bills. Not paying taxes has a similar effect to a 401k partial cash match. If you normally pay 12% in federal taxes, 5% in state, and contribute $7750 to your HSA. The tax savings would be the effective equivalent of a $1317 cash match. If you're in a higher tax bracket, the "401k cash match equivalent" effect is even greater. If a married couple jointly made more than $89.5k in 2023, they'd be in the 22% federal tax band, and they'd pay around 5% in state taxes. In that scenario the cash match effect would be more like $2092. Although the cash match isn't as high as a 401k, you have the benefit of being able to use it immediately without having to wait until retirement age.

Medical bills in the US's for profit healthcare extortion system are terrifying; thankfully, HSAs can significantly help in dealing with them. Doctors never tell you how much something will cost. They also never tell you that you have 5 different options on a spectrum of relatively cheap to stupidly expensive, and they always give you the expensive option. When it's life-threatening, you won't have a choice. When it's not life-threatening, they'll neglect to inform you that you have a choice or make it seem like you don't have a choice. (Note: "never" is intended to be read as rarely in this context.)

Here are a few example medical bill horror stories:

  • "Hey doc, I'm low energy." "You have low iron. Let's do an Iron Transfusion." They never tell you how much it costs, and they never give you options. You get a bill for $3,000. You then find out there's 5 different versions of Iron Transfusions, and the $400 one is just as effective as the $3,000 one. Hell, buying 60 $50 steak dinners at restaurants might have been a more effective alternative.
  • Your medical insurance says you get 1 free physical a year, so you try it. You learn it's only free if it's less than $200, but they charged $350. So the "free" yearly physical was $150. Turns out you have an elevated hormone that's associated with brain cancer, so they demand to do a brain scan. You don't have brain cancer, but you now have a bill for a $5,000 brain scan. Your insurance company says you shouldn't have let the doctors scam you into an unnecessary expense, they refuse to pay for any of it, saying you'll have to pay all of it out of pocket.
  • You go in for a routine blood work visit that you've done 100 times before. Your doctor randomly decided to order additional tests without asking your permission, you call them about a random $600 bill. "Yeah, we have records of your family members, and they have x, so we figured we'd test you to see if you have x." Your insurance deemed the tests weren't necessary, so they won't cover them. O no one informed you or asked for your permission? Sucks for you, but we're a for-profit health care institution.

Here's how maxing out your HSA can help with surprise medical bills:
HSAs allow you to pay 0% taxes both from a now and later perspective. You get a tax break on the original contribution and the compound interest. If you were able to contribute $35k to an HSA over a 5-year period, and you normally got taxed around 25%, not having to pay taxes would result in $8750(35k•0.25) of "free money". It'd be feasible to encounter $8600 worth of surprise large medical bills over a 5-year period. By using an HSA, all or most surprise medical bills could be paid using "free money" (tax savings).

3rd: Depends​

The 3rd best option is likely one of the following 3 options:

  • Max out your Traditional IRA
  • Max out your Roth IRA
  • Max out your 401k (and plan to do a yearly rollover to a Rollover IRA)

Traditional and Roth IRA are mutually exclusive, so we'll start by narrowing them down:
If you plan to retire in a high tax bracket, prefer a Roth IRA. If you plan to retire ASAP on an income that's comfortable but not extravagant, prefer a Traditional IRA. (The reason why was covered in an earlier section: Prefer Taxed Later)

IRA vs 401k is the next question, the best depends on:

  • The best option offered by your 401k. If your 401k has tons of good options, it'll be best to max it out first.
  • If your IRA offers significantly better options than your 401k, and you have the willingness to look for options with high 10-year average ROIs. Then maxing out your Traditional IRA will probably be best.

Scenario where a 401k could beat a Traditional IRA:

  • Your 401k has an option for 14% ROI and although a Traditional IRA might also offer higher ROI options, you plan to invest your Traditional IRA in a 14% ROI investment option. (Due to perceived risk of higher ROI options or because you're not ready or willing to take the time to find something better than 14% ROI.)
  • Since your 401k has the advantage of allowing 100% of your funds to immediately grow in the stock market during the first year.
    The 401k could make $840 in first year profits.
    ($6k • 1.00 investible until tax return • 0.14 ROI)
  • A Traditional IRA could only grow ~73% (1 - ~27% federal and state income tax rate) of the investment for the first year, as you'd have to wait 1 year for the ~27% taxes to be returned.
    The Traditional IRA could make $613 in first year profits.
    ($6k • 0.73 investible until tax return • 0.14 ROI)

Scenario where a Traditional IRA (or even a Brokerage Account) could beat a 401k:

  • Let's say the best option you can find in your 401k is a total US stock market index fund, and it offers 11% ROI. You diligently look through over 10,000 investment options available in a Fidelity Traditional IRA or Brokerage Account and find a 16% ROI index fund and a 20% ROI ETF.
  • The 401k could make $660 in first year profits.
    ($6k • 1.00 investible until tax return • 0.11 ROI)
  • The Traditional IRA could make $700 to $876 in first year profits.
    ($6k • 0.73 investible until tax return • 0.16 ROI)
    ($6k • 0.73 investible until tax return • 0.20 ROI)
  • If you've maxed out your Traditional IRA and you have poor 401k options. Then, even if you don't plan to retire early, a brokerage account could be a better option than a 401k for the same reason that a Traditional IRA can be better than a 401k: more choice means you could find a higher ROI.

4th: Brokerage Account​

Note: Even if you plan to retire before age 59½ and plan to split your investments between retirement accounts and a brokerage account. You'd still want to prioritize funding tax advantaged accounts over a brokerage account, as the retirement accounts have better ability to differ taxes to a later date for tax generating scenarios like:

  • Earning dividends
  • Owning funds that auto reallocate your holdings over time
    (Reallocating implies selling one thing to buy another, which triggers capital gains. In the case of automatic reallocation, only a fraction of your holders are reallocated, that helps minimize both short and long term capital gains.)
  • Manually reallocating your holdings

Vocab and Wisdom​

  • Index funds intended to track the average of the total stock market as a whole make for a great baseline from which to judge a "true growth fund" from a "wannabe growth fund".
  • The definition of a growth fund is one that "aims" to outperform the average of the stock market as a whole.
  • Never blindly trust that a fund with "growth" in its name will automatically be a good long-term investment.
  • Remember, the definition of a growth fund is one that "aims" to outperform the stock market as a whole. Aim in this context might as well be a synonym for wish, and it'd be foolish to invest based on wishful thinking. You should always look up a fund's 10-year average ROI to distinguish a "true growth fund" from a "wannabe growth fund".
  • "True Growth Fund": A fund with at least 10 years worth of performance data that can offer factual evidence that it has a high probability of achieving its aim to outperform the total stock market.
  • "Wannabe Growth Fund": A fund that aims to outperform the average ROI of the stock market as a whole, but its 10-year average ROI, shows it has a history of failing to beat the market. You should avoid this type of fund entirely as it has the negative combination of both short and long term risk. If you discover you own any, you should plan to replace them with better options.
  • "Aggressive Growth Fund" these are similar to growth funds in that they aim to outperform the stock market as a whole, and it's critical that you validate that their track record matches their aim.
    These differ from Growth Funds in a few key ways:
    • They aim to significantly beat the market in terms of 10-year average ROI
    • When they crash, they crash hard.
    • They're best suited to investors who:
      • want a long-term growth optimized asset
      • are willing to hold their shares for at least a decade before selling
      • have proper diversification to manage both short term and long term risk
      • use techniques like dollar cost averaging when buying and selling
      • have a deep understanding of different types of risk
      • understand the difference between investing and gambling
  • ETFs that are worth investing in tend to be Growth or Aggressive Growth Funds.

Exemplar Funds​

These particular funds are intended to be ideal examples of funds for anyone interested in a fully passive growth focused investment portfolio. (Assets with high ROI and minimal long term risk.)

  • Note: The 10-Year average ROIs of various items in this section were last looked up on March 19th, 2023.

Average of the Stock Market as a Whole:

  • S&P 500 Index Fund
    • The 10-year average ROI is about 11.19%
    • It had 3 down years since 2008 (-36.80%, -5.93%, and -21.31%)
    • The index is made up of roughly 500 holdings, intended to reflect the stock market as a whole.
  • VTSAX (Vanguard Total Stock Market Index Fund)
    • The 10-year average ROI is about 11.15%
    • It had 3 down years since 2008 (-37.65%, -5.52%, and -19.64%)
    • The index is made up of roughly, 3992 holdings, intended to reflect the stock market as a whole.

Examples of Growth Focused Index Funds and ETFs:

Where to Invest​

401k through Employer:

  • I have 24 options to choose from. (You too will likely have slim pickings.)
  • LGSPAX (Legal & General S&P 500 Index Fund) was the best option (ROI wise), it should have similar performance to MIEYX (another S&P 500 Index Fund).
  • Remember: If you want more options, you can roll over a employer provided 401k into a Rollover IRA once every 12 months.

HSA through Employer:

  • I have 32 options to choose from (you too will likely have slim pickings)
  • SEEGX (JPMorgan Large Cap Growth Index Fund) was the best option available.
  • Remember: If you want more options, you can roll over a employer provided HSA into a Third Party Provider HSA once every 12 months.

Brokerage Firms:

  • They allow you to open multiple types of accounts within the same investment firm:
    • Brokerage Account
    • Roth IRA
    • Traditional IRA
    • Rollover IRA
    • Third Party Provider HSA (Rollover HSA)
  • Fidelity and Vanguard are both great brokerage firms. They're trustworthy, have low fees, and offer plenty of good options.
  • Overview of Vanguard:
    • Vanguard is a great fit for people interested in investing in foolproof set it and forget it autopilot options that guarantee long term growth.
    • Vanguard offers ~379 of their own Mutual funds & ETFs, as well as many external funds. Vanguard purposefully doesn't offer as many options as Fidelity because Vanguard is a fiduciary trying to act in people's best interest and protect them from themselves. They purposefully limit their options to include only a reasonable number of solid time-tested offerings. They also ban a few dangerous offerings like leveraged ETFs and are taking a wait and see approach when it comes to crypto investing. (This is an extremely sound decision, as most cryptocurrencies represent a gamble: They're scams at worst and wannabe growth funds at best. They have high short term and long term risk, full of bubbles, scams, and lack 10 years of historic data which is a requirement for making ballpark accurate predictions.)
  • Overview of Fidelity:
    • Fidelity is a great fit for people interested in borderline gambling / finding options with potentially higher ROIs than what Vanguard offers.
    • Fidelity offers over 10,000 investment options to choose from, including all of Vanguard's options. This should be viewed as a double-edged sword because in addition to more opportunities, Fidelity will happily sell you metaphorical footgun investments that a novice investor wouldn't realize are more of a gamble than an asset.
    • Although Fidelity Investments is not a fiduciary like Vanguard, they're similar to Vanguard in terms of low/no fees and general trustworthiness.
    • Fidelity has a unique offering where they allow you to buy and sell fractional shares of ETFs.
    • Here's why fractional ETFs are important:
      • If you were using Vanguard and you wanted to buy VIGAX, they have a $3k investment minimum.
      • If you wanted to buy VITAX from Vanguard (A tech index fund with a higher 10-year ROI than VIGAX), Vanguard imposes a $100k investment minimum.
      • Fidelity has their own version of VITAX called FSPTX. FSPTX has 89 holdings as of July 31st, per seekingalpha.com, compared to VITAX's 378 holdings. Although Vanguard is safer it can be hard to save up to the $100k minimum investment, FSPTX offers a $0 investment minimum.
      • VGT is an ETF that mimics VITAX. You can buy it through Vanguard at ~$370/share, or if you go through Fidelity, you can buy fractional shares of VTG. So if you only have $10 you can still buy $10 worth of fractional shares of VTG.