In my last post I laid out step-by-step exactly how I manage and invest my money.
Most of my investment portfolio is in passive, diversified index funds. This means I don't choose any specific stocks myself, I simply invest in the world markets as a whole.
By definition, this means that I won't beat the market.
What?! Isn't the point of investing to beat the market.
No, it's not.
The point of investing is to build your resources so you have the time, energy, and attention to focus on living the life you want.
People will go to great lengths to gain an extra percentage point or two of return. This is called chasing yield.
BEWARE of chasing yield!
Or more specifically, beware of chasing financial yield.
Money is neutral arbiter of value. More of it is not inherently good and less of it is not inherently bad. What matters is how more or less of it affects your life at the margin.
The question you have to ask is: What is the average cost of generating additional personal financial return?
For example, with a passive investing strategy you will yield X% returns, and you only have to spend a couple hours a year doing quick financial checkups.
So how much is X+1% worth to you?
Is it worth 5 hours a week? What is the opportunity cost?
You may be able to get slightly higher yield ...but what's the trade off?
Stressing during dinner with your family?
Spending 8 hours a week actively managing your investments instead of 30 minutes per quarter?
Time you could be spending producing value for the world, hanging out with your family, or exercising your body.
Chasing yield may even lead to extremely poor decision making, and potentially unethical behavior:
In the financial world this is the infamous "chasing yield" problem. The idea is that there is so much investment capital out there that investors are willing to ignore warnings such as high debt levels, lack of collateral, poor credit histories, accounting malpractice, fraud, state intervention, default, theft (both white- and blue-collar), and some things that might even be considered serious in order to get a couple more percentage points of return. -Fareed Zakaria, The Accidental Superpower
Don't fall into the trap. Even if you beat the market (which is unlikely) it probably won't be by enough to properly compensate you for the time, energy, and angst you spent on the chase.
Automated Index Investing
I use Wealthfront to passively manage my personal investments - both my brokerage account and my IRA. All you have to do is set up an account, and Wealthfront will automatically invest your money for you in a variety of index funds, and then continually rebalance it for you. They also offer a number of other arcane but helpful benefits such as tax-loss harvesting, and direct indexing depending on the size of your portfolio.
I have recommended Wealthfront to young people who are just starting to invest, to older people with big portfolios, and to people all the way along the spectrum. So far, everybody I know who has signed up has been happy with it.
Your first $10,000 is managed for free, but if you want you can use my referral link to get an extra $5000 managed for free (and so will I). If you don't want to use the referral, you can just signup at their normal homepage.
Also, if you want to shop around for other similar services. I know people who are also very happy with Betterment.
I am not a financial advisor. You should not take anything I say as gospel or even advice. I share what works for me and my hope is that you learn new things and find some of those things to be helpful and applicable to your own life. I encourage you to think independently, question assumptions, and to figure out what will work well for your specific life.
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