How I think about investing money

I can’t tell if this is worth posting, but I wrote it all, so here we go. I don’t know that much; I’ve just managed my own money and read r/bogleheads and a couple books. I guess it’s what I’d tell my younger self. Here goes:

Let’s say you have a little extra money. Congrats! And maybe you’ve heard about “investing” but you don’t know how to do it, but you want to “do something smart” with it. Extra congrats! This is very smart and, especially if you do it now, you’ll get way richer almost-for-free.


this is about “money you have left over that you want to invest for the long term, that you can take some risks on”. If you have a 3-6mo emergency fund set up and no debt (besides perhaps a mortgage), and still money left over, this is for you! If not, follow the reddit personalfinance flowchart. This post is “how to do the bottom left box in that flowchart.” (“max out 401k, consider mega backdoor roth IRA, then use a taxable account”)


you can match wall street, and that’s worth it

If you invest in the stock market, on average, you’ll make 10% return per year. 1 If you invest $1k in the stock market and get 10%, in 30 years you’ll have $17k. If you put it in a 4% interest savings account, you’ll have $3k. If you do nothing, you’ll have $1k. (also, everything will cost more, so your $1k will “only be worth” $550.)

you can’t beat wall street

That’s not the game here. You might think “I have a smart idea; I know Apple is a good company that always grows faster than average” - that’s not true. There’s a term “priced in”, as in “X is priced in”, which means “someone else has already done this research better than you and figured out what the stock should be worth, more exactly.”

For example: say Apple stock is selling for $100, but you are following Apple news and you hear that the iPhone 23, coming next month, will be incredible and everyone will want one, so you think “I should buy Apple.” What you mean is that you think Apple is undervalued - maybe you think Apple should be worth $110, so you’ll get a good deal by buying it for $100. (If it were guaranteed to go up to $110 next month, it wouldn’t be selling at $100 now, it would be selling at like $109.90!) But are you sure it’s undervalued? And are you more sure than a team of financial analysts whose job it is to predict Apple’s price exactly?

These analysts have some model that predicts exactly what they think Apple is worth, and they buy and sell it until it gets to that price. Say that some team at Goldman Sachs thinks Apple is worth $101 - they’ll buy it from people who are selling it at $100, and pretty soon, everyone will catch on and raise their prices until they’re selling it to Goldman Sachs at $101.

So if Apple stock is selling at $100, it’s fair to say that Goldman Sachs and JP Morgan and everyone else think Apple is worth about $100. And that includes their predictions about what will happen next year. Maybe because they think the iPhone 23 is going to sell very well. If Apple surprisingly canceled the iPhone 23 tomorrow, Apple stock would probably go down, because that $100 estimate included their prediction that iPhone 23 would increase sales next month. This means that the iPhone 23 release is “priced in.”

So if you think Apple stock is worth $110 and it’s currently selling for $100, there are a few options:

Note that this is not only Apple stock, but every company, every commodity, every foreign currency, every cryptocurrency, everything. You, in your spare time, are not going to beat Wall Street by buying and selling things.

If you don’t understand this section, please don’t read on. You need to really internalize the fact that you’re never ever ever going to beat Wall Street.

you want to make sure you match Wall Street; or, “variance is bad”

Imagine two funds: one fund that would take in your $1000 now and give you $1100 next year, and one fund that would take in your $1000 now and then flip a coin in a year, giving you either $0 or $2200. In some sense the two funds are equivalent; they both give you the same “average payout.” But one has high variance and one has low variance. With money you can afford to gamble with, high variance is ok; with your retirement, it’s not.

So one of our goals, as individual investors, is to minimize variance. We want to get that 10% a year, but with minimal risk of getting wiped out. So we “diversify” by buying different types of stuff.

Say you start off with plan A: investing $1000 into Apple stock. That’s ok, but any one company is pretty risky. The iPhone 23 might tank, they might pull an Enron, who knows. So you switch to plan B: investing $200 each into Apple, Microsoft, Google, Facebook, and Amazon. That’s better, but they’re still correlated: it might just be a bad year for the technology world, even though the rest of the economy is fine. So you switch to plan C: investing $10 each into 100 different companies across different industries. That’s pretty good, but even better is plan D: investing $0.01 into each of 100,000 different companies! Luckily, there are people who will do that for you: index funds. For a small fee, they’ll split your money among a ton of companies.

no bets are better than Wall Street, but some bets are worse, or “expense ratio is bad”

It’s easy to do worse than Wall Street. One way you can do this is by giving some of your money to a guy who says he can beat the stock market, and who charges you a fee. Assuming he gets “the average of the stock market”, he’ll make 10% but he’ll charge you a fee of 1%, so you’ll end up with 9%. He’ll say he’s making better bets, but remember: you can’t beat Wall Street. So don’t invest with him.

The most common term for his fee is “expense ratio.” If a fund has a 1% expense ratio, then they’ll take 1% of your money every year.

This is the only thing you can manage, in terms of “making more money.” You can’t make more than 10% - but you can make 9.97% in some funds with a 0.03% expense ratio, or 9.00% in funds with a 1.0% expense ratio.

so, our goals:

In one sentence, you want to match the stock market, while minimizing variance and expense ratio.



“investing in a 401k” is a separate decision than “investing in stocks or index funds” - you can own index funds in a 401k, index funds out of a 401k, cash in a 401k, or cash out of a 401k.

But there are tax advantages to a 401k, if you put money in now and don’t take it out until you’re 59 1/2. Plus, your company might “match” your 401k, which means they’ll give you a little extra money if you put money in your 401k. So you should do this, up to the maximum allowed amount ($23k in 2024) if at all possible.

If you’re self-employed, you can make a self-employed 401k - go to Vanguard or Schwab or Fidelity and set up a self-employed 401k.

“taxable/retail investing”

I don’t know if there’s a better term for “just regular old investing outside a 401k”. After you max your 401k, if you have money left over, you want to get it into index funds somehow. There are two ways:

  1. buy your own funds: use an account at Vanguard or Schwab or Fidelity (or others) and buy some index funds.
  2. let a robot do it: open an account at Wealthfront or Betterment or Robinhood and just let them invest it in whatever.

I’d advise everyone do #2. The robot will take an extra fee - like 0.15% - per year, but that’s $150 on $100k, and you don’t have to think about it. Furthermore, if you DIY, you’ll probably have blips where you forget to invest a recent deposit or something, and thereby leave more than $150 on the table. I’ve used Wealthfront and seen it do a pretty good job.

You could also have a financial advisor tell you what to invest in, but they can’t beat Wall Street, and they’ll charge for their time, so you’ll end up with a higher total expense ratio. So don’t do that.

(Financial advisors can be good for different things, like “how do I structure investments so I can comfortably withdraw $x/year when I retire at age Y”. But they are not good for the question of “how can I make my money make more money”.)

which funds

If you do want to pick your own funds, or if you’re stuck with “whichever funds your 401k provider selects”, follow the principles we’ve discussed: minimize variance and expense ratio. So I like to be in all of (domestic stock, international stock, and bonds). Some ways I’ve done this, based on 401k providers etc:

what else

This diversifies your portfolio across stocks and bonds. That’s pretty good. What else do people invest in?

  1. Citation needed and not provided. Sorry. If you have a good citation for this, please let me know and I can make this a more definitive blog post. ↩︎

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