How To Be A Kickass Investor: The Most Boring Way Possible

imagesWe’ve been having a lot of fun around here so far, poking fun at some cultural norms that promote wastefulness and overworking. Learning to look at life from funny angles makes it easy to see how silly we really are, floating around on this tiny grain of sand we call earth, hurdling through what we perceive to be infinite space.

Every time you stop and get a good look at where you sit in the grand scheme of things, it sure does make working for money seem like a weird thing to focus so much of your limited time and energy on. Why not spend your time exploring this big wide world you know approximately none percent of?

Anyone who has read more than a few posts of this blog will understand that it is easy to live a rich and fulfilling life on significantly less than what typical western society thinks. Although you can easily cut out the senseless consumption, you cannot live for free (Unless you have very generous parents and no social life). Because you will always require some money to get by, are you doomed to always have to do at least some paid work?

Not necessarily, there are two ways to have a sustainable living for yourself with paid employment being completely optional. You can save up a large enough lump sum in your bank account to live off the rest of your life, or more sensibly, you could build up a passive income until it is large enough to cover all of your living expenses.

Creating passive income does not necessarily mean inventing the next widget or hoodad. You don’t have to start a business either, although if either of these options are your thing, go for it! As for the rest of you, there is a simple way to build a passive income to the point where you can reliably live off the proceeds forever. It is called investing, and you can start today, even if you only have $50.

Some of you are yelling at your computer screens right now “finally! An article on how to make money off the market!”

Yes, we are past the introductory change in mindset mumbo jumbo and now we will start going into nuts and bolts. Just don’t forget that step one will get you 90% of the way there. As far as the intricacies of investing go, well, there aren’t any.

Seriously, many people have investing mixed up with ideas of picking breakout companies and analyzing charts for hours on end. This is not investing, this is playing a game. Some people are good at this game and make money doing it, however the vast majority lose money and waste their time.

This game is part of an enormous industry that likes to market investing as extremely convoluted. While many people focus their attention to this game, there is another group of people who just let their money sit in the market as a whole. These people invest in widely diversified index funds that mimic the movements of the entire stock market. With this, they take advantage of the time-tested long term upward trend of the economy.

The market goes up and down in a way that is almost impossible to predict in the short run. However it holds its promise in the long run of delivering annualized returns of about 7% per year. This means that for every $100,000 invested will kick back $7,000 to you each year!

Below is a spectrum of investors, where do you currently stand?

Returns For Different Investors

14%+     Warren Buffett investor extraordinaire

10%        Select Few who have the expertise to beat the market (Way less than 1% of the population)

7%           Passive Index and Mutual fund investors (Like the Money Mechanic)

4%           Long term Bond holders

1-2%      Risk averse Money markets and CD’s (wimps!)

0%-0.5%          Brick and Mortar Banks (Bigger wimps!)

-3%         Typical Stock picker

-10%+   Hmmm, this stock feels right, gotta go big to win big!

The select few who can actually play the market and pick stocks only earn slightly more than market returns. It is very rare to see an individual come out ahead of the market on any kind of consistent basis. This is why you hear so much about these individuals when it does happen, making it appear more common. This suckers more people into the game. These select individuals also could have saved themselves the effort and just earned 7%, so all of their work only earned them 3% more when you count opportunity costs.

When you choose to pick stocks instead of trusting your money to index funds, you are betting that you can outsmart the hundreds of PHD’s in finance, economics and business who are behind the scenes of an index fund. Before you start playing that game, ask yourself, do you have a good reason to be so cocky?

Also, index investing is truly PASSIVE income. No ongoing research or analysis necessary. It takes less than a half hour to set an account and start investing today. So as far as nuts and bolts with investing…well, there isn’t much to talk about, other that the fact that I recommend Vanguard.

As mentioned before, Vanguard is client owned and have some of the lowest expense ratios in the industry. An expense ratio is just a fancy term for the fees charged to you as a percentage of how much money you have invested.

So you see, the most effective form of investing is also the least flashy, most boring form of investing. Just old man style dollar cost averaging.

This early retirement stuff isn’t to hard is it? Earn some, spend little, earn 7% on the difference. Easy peasy.

So get investing! The earlier the better, even if you start with just $50, it will be the best $50 you ever invest. Also make sure you choose the ‘reinvest my dividends’ option when you start up. As time passes, the magic of compound interest will begin to snowball in your account. Once you have 25 times your income, paid employment is optional.