K.I.S.S. Finances before Fiancé(e)s
Written By: Nick Nguyen | Read full profile
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“Spend the afternoon picking a simple portfolio that will make you rich.”
Your finances don’t have to be like wedding planning. If you don’t get this reference, find any episode of Friends where Monica is in charge of planning some aspect of a wedding. It becomes hectic. You’ve got a million different things to juggle. Tensions ride high as people don’t take things seriously. And right up until the bride and groom say “I do,” there’s a fire waiting to be put out and someone pulling out their hair, ready to give up and secretly runaway through the backdoor.
This amalgam of emotions is what I see in most people’s faces when I bring up stocks, diversification, and investment portfolios. I mean...I don’t blame them. Our education system failed us when it comes to managing our money. So instead, we hope and pray that we’ll find a partner who can handle it all for us in exchange for the simple price of a kiss.
Ramit Sethi proposes that you K.I.S.S. your finances first. And he doesn’t mean give your wallet a smooch. He means “keep it simple, stupid.”
After the whole Enron fiasco, of course people are skeptical about picking stocks. Retirement accounts are great until you realize that what you put in could vanish in an instant. But Jack Bogle shook the investing world with his development of index funds and in the process, made Ramit millions - not just in his investments but also for giving him content to write about in Chapter 7: Investing isn’t only for rich people.
Some people have a gift and a ton of time and patience to read through a million pages of prospectuses and P/L sheets of 100s of different companies. And there’s a benefit to this - they have more control.
But in the process, they make things way more complicated and take away time from doing other things that make you happy. So Ramit breaks investments down into 3 different options to prove a point that it’s easy even if you’re not rich:
If you want to have that “set it and forget it mindset,” the Lifecycle funds are the way to go. You might have also heard about these as Target Retirement Funds. You have virtually no control, but your returns are a lot more predictable in the long-term. What happens is a fund manager will keep tabs on the stuff in this fund and slowly shift your balance of stocks to bonds as you get closer to retirement. But it’s super easy to pick because you just have to figure out what year you plan on retiring and pick the one with that year in its ame! It’s a one size fits all kind of approach that typically yields pretty decent returns!
For example, in 2020, I’m 25 years old, so if I plan on retiring at 65, I’m going to look for a Target Retirement Fund that’s catering for people who will retire in 2060!
One popular one is the Vanguard Target Retirement 2060 Fund (VTTSX). This one has a track record of nabbing ~6% returns each year with a 0.15% expense ratio, which isn’t bad at all! (To put it into perspective, financial professionals will typically charge around 1-2% to manage your money).
Boom! Everything is taken care of with one ticker symbol!
So I personally prefer index funds because they’re either free (if you go with Fidelity) or dirt cheap (ranging from 0.015% to 0.15%). Mutual funds on the other hand can be quite pricey, getting expense ratios of around 1-2%.
The difference? Index funds are passive. A fund manager will just load it up with a bunch of different stocks that mimic an index (think the S&P 500, Nasdaq, or Dow Jones) and then let it run. Mutual funds are active. There are some highly paid stock traders who make all the calls on what and when to buy and sell in attempts to get the biggest gains possible.
Other than the fact that I don’t trust other people managing my money, that expense ratio is SUPER steep. Ramit’s got a table in his book showing you the annual expenses you’ll pay for an index fund vs. a mutual fund.
But at the end of the day, you get to buy a TON of stocks instead of picking and choosing 3 because you’re broke. And there are a ton of funds out there on a bunch of different sectors, companies, and stocks.
Stocks, bonds, and cash are great if you want to have complete and utter control of everything in your portfolio. The downside? It’s not simple, unless you’ve got an amazing spreadsheet like Andrei Jikh that automatically tracks the sectors you invested in and makes a pretty pie chart. But still, you don’t want to gamble and just buy random stocks. I mean if you’re aiming for the Titans like Amazon, Google, Chipotle, or Microsoft, you might be okay, but this brings us to another problem - you’ve got to have a lot of money.
These stocks aren’t cheap, which is why the ability to do fractional shares with some brokerages is really cool. But then you’ve got to take the added hassle of rebalancing your portfolio each year to have a good mix of stocks and bonds for your age-risk criteria.
Now that last part probably made you freeze up for a moment. That’s okay, rewind and go back to #1 and #2. If you want to sound smart and have everyone in awe that you’ve got your finances in order, go with #2. That way you can drop “cool” terms like “S&P 500, the Nasdaq, Total Market Funds, and Bond Indexes.” If you and money just don’t get along, #1 will be your best friend. Park it in a target date retirement fund and let it live in another space far outside of your mind until you reach retirement.
*Nguyening Lifestyles is not a registered financial service provider and does not give financial advice. All information in these posts are for entertainment purposes only. Nguyening Lifestyles is not liable for any actions or outcomes that transpired after your reading of the following post.
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