The Financial Advice One Pager
A simple guide on how to invest money
When it comes to financial planning most people have no plan.
There are the ones who don’t care, and everything seems to them as too complicated and boring. They stick with what they understand, which translates to no investments in the stock market.
And then are the ones diving deep into financial literature, FinTwit or Fibonacci lines trying to optimize everything. Often they end up day-trading the latest fad — also without a long term plan.
I studied Business Informatics with a focus on Banking & Insurance and I followed the financial markets as a hobby my entire adult life. I used to fall in the latter group. Sometimes I beat “the market” but over longer periods I always gave back my Alpha.
Recently, I digested what I have read the last decades in financial advice and came to the conclusion that 95% of it is bullshit.
You’ll see, in Investing, ignorance is bliss. As Morgan Housel pointed out, an illiterate investor can beat an expert any time. This is not true in almost every other discipline.
Then why is there so much ‘wisdom’, tips & tricks to go around? Because there are tons of dollars involved. The business model is pretty straightforward: People love to pay when they think they get more money back.
The advice I will give in this guide is unsellable. It’s too short, too easy and critically not customized to your personal life circumstances. I tried to remove artificial complexity whenever possible. A Financial Advisor would call that reckless.
I — Pay off (high yield) Debt
While Investing will always be speculative, there’s one payment with guaranteed return: Paying off debt.
By Investing while having debt somewhere else you’ll de facto use leverage. Given that we assume rising markets in the long run (we wouldn’t invest a penny otherwise) this should enable better returns. So some amount of leverage is good — but too much can end in disaster (the one scenario we want to avoid).
Where to draw the line? I would look at the effective rate of interest. Now compare to a reasonable lower case stock portfolio return rate over the medium to long term (probably ~2% per year). The resulting formula:
Interest rate on debt > Return rate = Pay off debt
II — Create an Rainy Day Fund
Make a projection of all your spending in the next 12 months. Half of that amount is your rainy day fund. You tap into it in an emergency event so you don’t have to touch your Investment portfolio.
To calculate the number gather all your spending. Look at the last three years (months are not a good estimate because e.g. insurance or taxes are paid once a year). Calculate the growth rate between the years. Use the growth rate for the extrapolation into the coming year.
The Rainy Day Fund sits in the checking account, doing nothing. In the past, you would have moved it to a savings account. Thanks to the current ZIRP-environment the difference is negligible. Factor in the times payments bounced because you got not enough credit on the referenced account, but you would have had the money somewhere else.
III — Invest
Now for the interesting part. Take what’s left from your savings and invest it as lump sum in your newly portfolio.
Again, because of low interest rates it’s easier than ever to allocate. A whole host of options aren’t lucrative any more.
The portfolio consists of the Vanguard FTSE All World. A so-called “passive” ETF that tries to mirror the world economy, basically a slice of capitalism. Unfortunately it’s not the best mirror (see this article for why)— but the best we have right now.
Depending if you’re in a country where the first dollars of earnings are tax-free or not, choose the distributing or accumulating variant.
Each month, invest excess money into the portfolio. Repeat till retirement.
In the meantime:
- Don’t think about timing the market (even experts are wrong all the time)
- Don’t look weekly or even daily into your portfolio summary (paper gains and losses that shouldn’t bother you)
- Don’t try to pick sectors like Growth or Value, Tech or Europe (the index will automatically rebalance in favor of winning parts of the economy)
- Don’t think too much about financial metrics. They lost a big chunk of their meaning (thanks to intangible assets)
IV — Trade (if you must)
If you can, stop here. There is no fourth step. The science is pretty clear: Stock picking and active trading will end badly for your portfolio. It’s like going in the Casino. You can be lucky the first time, but over time the bank will win.
And yet…I write essays outlining why Twilio or Zoom will be good businesses in the future. Then I see Twilio gain 75% in 17 days — that’s before options.
Think about how long it takes to get the same return with the average 5–10% you can expect with our portfolio. How boring. If you’ve bought individual stocks already and you are deep in the subject matter, it’s almost impossible to not scratch the itch.
Don’t get me started on investment titles I owned but sold too early. Doing nothing feels counter-intuitive — yet so far it’s been rewarded by the stock market tremendously.
Looking at smaller markets like Crypto, the gains could be even higher. I would add Venture Capital if it were available for retail investors.
The basic rule of thumb: Low market cap = high volatility = high risk = high potential gains and losses.
Maybe you are looking constantly at the stock market in months of panic. Then Gold can be a good addition. But keep in mind that you add “safe” assets only for volatility and psychological reasons, not better returns.
Either way, before you touch the main portfolio and mess with it, make a separate account with at most up to 25% of the overall portfolio. Then go to Robinhood or else and gamble with that money. At least that’s better than sport bets or the mentioned Casino. The main depot can stay at one of those incumbents with high fees: Sometimes a little bit of friction is preferred.
Of course, this 4 step process is super simplified. But I think this is the superior way to one equipped with thousand asterisks that wouldn’t be read or deemed too complicated.
What moves Homeownership (more lifestyle choice than money-maker) from a lousy investment into a decent one are long holding periods (and leverage).
With a buy & forget like shown here, you’ll (statistically likely) experience the same “magic” with equities.
