Tuesday, January 19, 2021

How I Approach Investing

Kate Spade Polly Wallet (affiliate link)

How I approach my investments is a topic I've alluded to a few times over the years - see for instance here and here - although I don't think I've ever discussed it in great detail. Accordingly, I thought I might as well write a full post about it. Though, spoiler alert, nothing here will be at all new or novel to anyone familiar with what many Financial Independence, Retire Early ("FIRE") related internet forums and bloggers generally recommend! It's also mostly consistent with the recommendations in the two beginners' personal finance books I've mentioned over the years. 

One quick and important disclaimer before I continue: I'm definitely not a qualified investment professional. Please do your own research elsewhere before making any investment decisions.

Investing History

Because I didn't really start investing - whether in tax-advantaged retirement accounts or anything else - until I graduated law school, I got my start on the later side of early adulthood, at age 27. Before then, I briefly had up to ~$2,000 in a Mandatory Provident Fund ("MPF") retirement account in Hong Kong, but didn't even really know I needed to proactively select my own investments - not just let them sit in the settlement fund - much less how to actually select said investments. So my money in my MPF only really ever stayed in their equivalent of a money market account, until I eventually cashed out and used it all to help pay my living expenses in law school. (Given what I've explained, the money obviously didn't grow much. It was the equivalent of roughly two months' rent in my law school student housing.) 

My first contribution to a tax-advantaged retirement account in the US was at the tail end of December 2015, when I first became eligible to contribute to a 401(k) - with no employer match, as is somewhat standard in the industry - at my first biglaw job. And then because of the timing of my clerkship and the pay cut I took that year, I still wasn't able to invest much in the beginning. I never even got remotely close to maxing out my 401(k) or backdoor Roth IRA for any year until 2018, once I'd returned to the private sector for a while. 

Since 2018, though, I've been maxing out on contributions to my 401(k) - still no employer match, because my workplace takes many of its benefits-related cues from biglaw - and backdoor Roth IRA each year. These are the only types of tax-advantaged investment accounts I currently invest through. (Because my workplace doesn't offer a High Deductible Health Plan or "HDHP", I cannot invest through a Health Savings Account or "HSA".) On top of that, I also started investing a bit in a post-tax brokerage account beginning in early 2019. Since then, I've also budgeted to continue adding more to those post-tax investments every month. 

Because the stock market has generally been strong since I started investing in late 2015, I've been able to grow a bit of a nest egg even though I only managed to invest ~$14,000 total before the end of my clerkship in late 2017.  Between that initial ~$14,000; maxing out my tax-advantaged retirement accounts since 2018; and investing a bit in a post-tax brokerage account since early 2019, my total balance across my investment accounts is now solidly above the ~$150,000 mark. (As explained further below, I invest exclusively in low-cost mutual funds, and mostly in something like a S&P 500 index fund or VTSAX.) 

All my current investments - and everything I'm currently on track to invest in the near future - are ones I intend to hold onto for the very long term, probably at least until I reach a standard-ish retirement age. While I credit FIRE-related sources with teaching me much of what I know about personal finance management and investing, I wouldn't consider myself an actual FIRE adherent. I don't have a particular "FIRE number" in mind, and it's difficult to even begin to try calculating one. To start with, I simply don't know how much K and I would need to support our hoped-for future children to the extent we believe is important (hopefully in full through their undergraduate studies, and maybe also in part for some of their graduate studies, should they choose that). 

What I Invest In

I currently invest exclusively in low-cost mutual funds, focused mostly on low-cost index funds like a S&P 500 index fund or other large-cap US stock-focused index funds. I also have some of my investments in a relatively low-cost target-date fund, where the fund manager rebalances the asset allocation to be lower-risk (less invested in stocks, more invested in bonds) over time, as my target retirement date (2055) draws closer. 

By "low cost," I mean ~0.16% is about as high an expense ratio as I've ever seen for something I'd pick for myself, I'm also heavily invested in VTSAX at ~0.04%. Through my workplace-sponsored 401(k) plans, I've sometimes also been able to access even lower expense ratios for "institutional shares" in similar index funds. In other words, I never pick my own stocks, I just pick from a  list of low-cost mutual funds that fit my general criteria. 

And it's not like I could freely trade individual stocks, even if I wanted to. In biglaw and some biglaw-like  jobs - including mine - there are policies requiring employees to inform their employer before buying or selling individual stocks. The employee must wait to receive permission before proceeding with the transaction.* I've never gone through the process myself, nor do I have any friends who've really talked about it, so I don't know how long it typically takes to receive permission. In any case, it puts a serious damper on the prospect of trading individual stocks if one needs to file paperwork and await permission every single time one makes a trade! 

Essentially, I'm more or less one of those "VTSAX and chill" investors, to borrow a joke from some of the FIRE-centric spaces on the internet. And when one invests primarily in total stock market-type index funds, one's realistic long-term goal is necessarily to keep up with the stock market, not to beat it. 

With this approach, there's no real rocket science involved in selecting investments. The hard work for the investor comes from trying to save and invest as much as is possible right now, as early in one's career as one can, trusting - based on historic stock market performance - that time in the market will do the rest. Luxe has a great post that gets at this idea, and I think that may be all a person needs to understand the general principles. Back in the day, I got my first similar lesson from On my Own Two Feet by Manisha Thakor and Sharon Kedar (affiliate link), the first personal finance-focused book I ever read and which I'd still recommend. (Though overall, I now prefer Ramit Sethi's I Will Teach You to be Rich (affiliate link), if I had to pick only one personal finance beginner's book to suggest.) 

* Particularly at larger firms that do transactional work, there's a possibility the firm has access to nonpublic information, including about upcoming corporate transactions, from some of the firm's clients that could affect stock performance. Even if the vast majority of the firm's employees have no direct knowledge of this nonpublic information because they're not part of the team working on the matter, the firm still needs to make sure a proposed transaction won't have the appearance of insider trading.

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