Get
Rich
Slowly
The Elements of Investing
Niels Joubert - @njoubert
This is a tool talk
- Tired of living month-to-month, I started actively managing my wealth. A year later, here's the results.
- Informal polling suggests my labmates also want to invest!
- This talk will focus on long-term money management, show my approach
This is a tool talk
- Tired of living month-to-month, I started actively managing my wealth. A year later, here's the results.
- Informal polling suggests my labmates also want to invest!
- This talk will focus on long-term money management, show my approach
- Disclaimer:
- There are multiple ways of accomplishing these goals and I only have 20 minutes! Questions welcome, hold opinions until after.
- For liability purposes, this cannot consist of real financial advice. There's inherent risk, you might lose money, consult a professional
Goals
- Financial Goals:
- Financial Security (don't have sleepless nights)
- Comfortable Retirement
- Goals with this talk:
- Why invest now?
- Argue what and how to invest
- Present an overall framework for financial management
- Show how I do this practically
Why Now?
- We're young and have time on our side.
- We don't make much, so we have tax incentives!
- New perspective on how the world works.
Because Compound Interest
- "Compound Interest is the Most Powerful Force in the Universe"
- - not Einstein
- Simple example that struck me:
- $5000 per year (only 15% of our current salary after tax)
- For 40 years (I'm 25, so 40 years until I'm 65)
- $200,000 overall if I stick it in my pillow
- Compound that at 7% = ?
Because Compound Interest
- "Compound Interest is the Most Powerful Force in the Universe"
- - not Einstein
- Simple example that struck me:
- $5000 per year (only 15% of our current salary after tax)
- For 40 years (I'm 25, so 40 years until I'm 65)
- $200,000 overall if I stick it in my pillow
- Compound that at 7% = $1,181,609 (6x!)
A MILLION DOLLARS!
Because Compound Interest
Huge potential gains!
Because Inflation
- Average annual inflation ("CPI") over previous 100 years: 3.23%
- Compounding works both ways:
- Consumer Price Index indicates the purchasing power of $1
- Inflation: Losing 3% purchasing power per year
- Also explains why 18% APR Credit Card Debt is crazy
Because Inflation
- Average annual inflation ("CPI") over previous 100 years: 3.23%
- Compounding works both ways:
- Consumer Price Index indicates the purchasing power of $1
- Inflation: Losing 3% purchasing power per year
- Also explains why 18% APR Credit Card Debt is crazy
Huge potential losses!
- Rule of thumb: Less than 3% return, you're losing money
Because Inflation
- Average annual inflation ("CPI") over previous 100 years: 3.23%
- So why have inflation? (Complicated Question!)
- Reasoning: "If we had deflation, all I had to do was hold on to my cash to make it worth more, so let's not do anything with it."
- Deflation leads to a stagnant market
- Low and stable inflation leads to investment (Federal Reserve)
Because Inflation
- Average annual inflation ("CPI") over previous 100 years: 3.23%
- So why have inflation? (Complicated Question!)
- Reasoning: "If we had deflation, all I had to do was hold on to my cash to make it worth more, so let's not do anything with it."
- Deflation leads to a stagnant market
- Low and stable inflation leads to investment (Federal Reserve)
- Fundamental driving force: People are incentivized to do something with their money, else it decreases. Basic engine running our society
> 3.23%
- Where do we go to beat inflation, get compounding returns?
- Savings Accounts, CDs, Money Markets: 0.8% (Low Risk, Low Return, Liquid)
- Bills, Notes & Bonds ("IOU"): 1-5% (Low Risk, Low Return, Liquid?)
- Stocks: lose everything to 1000%
- Commodities (Pork Bellies! Gold! Wheat!)
- Derivatives: Options, Futures, Shorting Stocks, etc etc etc (Complicated. Bad?)
- Broader Investments: VC firms, private equity, hedge funds, etc
- Real Estate (many forms)
- Really, anything that appreciates in value: priceless artpieces, rare cars, ...
> 3.23%
- Where do we go to beat inflation, get compounding returns?
- Savings Accounts, CDs, Money Markets: 0.8% (Low Risk, Low Return, Liquid)
- Bills, Notes & Bonds ("IOU"): 1-5% (Low Risk, Low Return, Liquid?)
- Stocks: lose everything to 1000%
- Commodities (Pork Bellies! Gold! Wheat!)
- Derivatives: Options, Futures, Shorting Stocks, etc etc etc (Complicated. Bad?)
- Broader Investments: VC firms, private equity, hedge funds, etc
- Real Estate (many forms)
- Really, anything that appreciates in value: priceless artpieces, rare cars, ...
- Define my terms:
- Bonds: Loaning money for a fixed rate: payments, resell value.
- Stocks: Buying a "share" of the company: capital gains, dividends.
- Rule of Thumb: If you don't understand it, then don't invest in it.
Stock Market
- "Everyone ought to be rich"
- - John Raskob, GE Financial Exec, 1929
Beat the Market
- Strategy 1:
- Pick a great company that's cheap now and will become hugely valuable
- Buy lots of stock!
- ???
- Sell at a profit!
- Individual Stocks:
- Extremely volatile: large changes, difficult to predict.
Stock Market Overall?
- Get Rich Slowly: ~7% overall return
Track the Market
- Can't buy 6000 companies' shares... Too expensive!
- Index Funds passively tracks market, issues partial shares
When to buy?
- Take 2 days in 2012 for VTSMX: Big difference in return!
- Buy at Green: 22.38% return
- Buy at Red: 4.5% return
When to buy?
- Take 2 days in 2012 for VTSMX: Big difference in return!
- Buy at Green: 22.38% return
- Buy at Red: 4.5% return
- Idea: Invest Constantly!
- Dollar Cost Averaging (DCA):
- Investing $x?
- Invest $x/n over n time periods
- Trades off potential growth for lower risk
- Good n? Empirical studies: 0.5 to 1.5 years
DCA and volatility
- Volatile Market Scenario:
- Starts at $100, stock dips to $60, shoots to $140, comes back to $100
- Stable Market Scenario:
- Starts at $100, stock steadily rises to $140
- Which one is better for the investor?
DCA minimizes volatility
- With $5000, buy $1000 once a year
- Volatile Market Scenario: 60.48 shares total, final value $6048.
- Stable Market Scenario: 42.25 shares total, final value $5915.
- (Underperforms in ideal market, so some investors don't DCA)
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Two Big Tools
- Diversify: Average over all companies
- Dollar Cost Average: Average over time
Taxes & Fees
- These also erodes your wealth (like inflation!)
- Hedging against Taxes:
- 401(k), 403(k)
- IRA
- Fancy stuff when you have more money
- Hedging against Fees:
- Automated computer-driven systems are cheap!
- Low-Cost Index Funds
Roth IRA
- Government-supported tax-free investment account:
-
- You get to pick an "IRA-Approved" index fund.
- You are allowed to invest $5000/year into it
- All capital gains and dividends are tax-free!
- Only available if your income is less that $137k/year
My Roth IRA
- Vanguard Target Retirement 2050 Fund
-
- Automatically changes from a stock-based index fund to bond-heavy as it gets older. Helps with less volatility as you get old.
- Expense ratio is only 0.3% (They take 0.3% every year)
- $3000 minimum to open
Let's Get Practical
- As a Stanford CS Ph.D. Student, every month:
-
- I'm paid ~$2800 on average (assuming you stay over the summer)
- I spend ~$1100 on rent
- Thus I have ~$1700 to work with
- Invest $96/week or $416/month into IRA
- I can spend ~$1280 on anything we want (awesome!)
- What if this isn't enough? We're all high value computer scientists, you can get a gig on the side!
Let's Get Practical
- As a Stanford CS Ph.D. Student, every month:
-
- I'm paid ~$2800 on average (assuming you stay over the summer)
- I spend ~$1100 on rent
- Thus I have ~$1700 to work with
- Invest $96/week or $416/month into IRA
- I can spend ~$1280 on anything we want (awesome!)
- Step 1: Have a monthly budget, track it, stay inside it.
- I use Expenditure on my iPhone and Mint.com
- For big purchases, I put money away month-by-month until I have enough
Let's Get Practical
- As a Stanford CS Ph.D. Student, every month:
-
- I'm paid ~$2800 on average (assuming you stay over the summer)
- I spend ~$1100 on rent
- Thus I have ~$1700 to work with
- Invest $96/week or $416/month into IRA
- I can spend ~$1280 on anything we want (awesome!)
- Step 2: Have an emergency fund.
- I keep $3000 in a savings account. Usually ~3 months salary.
- Any unforseen expenses comes from here.
My Strategy
- Every month, my income waterfalls down this list:
- Pay off my expenses - keep my credit card at $0 debt
- Top up my emergency fund
- Automatically contribute $96/week into my IRA - vanguard index fund
- Any Left? Manually put into low-cost index fund or saving for big purchase
- This is easily expandable!
General Strategy
- Every month, income waterfalls down this list:
- Pay off my expenses - keep my credit card at $0 debt
- Pay off any and all debts
- Top up my emergency fund
- Max out 401(k) contribution
- Max out IRA contribution
- The rest then depends:
- College fund for kids? 529 plans has tax-free gains
- Save for Mortage Downpayment?
- More investments?
- Savings for vacations, cars, boats, motorcycles, computers?
- Money goes into the top, filters to the bottom
Vanguard
- Vanguard cornered the market on automated index funds
- Cheap (low expense ratio) and easy
Resources (Bibliography)
- "The Elements of Investing" - Malkiel & Ellis
- "Stocks for the Long Run" - Jeremy Siegel
- "Jubak's Picks" - Jim Jubak (targeted index funds)
- Vanguard.com account
- reddit.com/r/personalfinance
- The Couch Investor