A Very Simple Investment Strategy


Updated: May 13, 2016
Author: David Beckemeyer

Disclaimer: I am not a professional investment advisor. Use this information at your own risk.

Investing: It Doesn't Get Any Easier Than This.

If you are the type of person who gets a thrill pouring over balance sheets and calculating PE ratios, then this page isn't for you. If, on the other hand, you don't know an annuity from a hole in the ground and you really don't care, then the advice below can't help but improve your financial situation. This isn't a get rich quick scheme; it's simply some sound and simple rules and approaches that don't require an MBA or a degree in econonmics to master.

You can either pay a financial advisor 1% (or more) of your assets so he can annoy you every month to "review your options", or you can follow these simple steps below to get the same, if not better results. There is no magic here, no silver bullet. These are simple investment strategies that will beat the returns of the vast majority of myraid investment options that will be thrown at you by brokerage houses, banks, insurance agencies, magazines, and television. So while your broker is on the golf course, using your money to support his lifestyle, if he is anything like 70%-80% of his peers, he is consistently getting submediocre returns on your investments.

The Simple System for Building Wealth:

  1. Pay off credit cards
    Before you invest a dime, pay off those high interest credit cards (Mastercard, VISA, etc.) and revolving credit accounts (Sears, Macy's, etc.) The interest on these debts is sucking the life out of your financial future. And while we're at it, never borrow to invest. Always pay down your debt before you invest.

  2. Put away at least 15% of your income
    This means for every $100 of gross pay, you should be saving $15. If your gross pay is $10,000 per month, you should be saving $1,500 each month. If you can't do this, then you aren't living within your means and you must cut back your spending, even if you are making $150,000 a year. Get the idea that "spending lavishly shows how wealthy you are" out of your head. The wealthiest people are usually the most frugal; they don't flaunt their wealth. If you just can't find a way to prevent yourself from spending every dime you get, then take the money away before you can spend it by setting up an automatic transfer to a separate savings or investment account, and find a way to live on the rest.

  3. Where to Invest?
    There are as many portfolio allocation schemes as there are investment advisors. Let's keep it simple: Put 75%-80% of your portfolio into a stock index fund, such as the Vanguard S&P 500 fund, and the remaining 20%-25% into cash (savings accounts, money market accounts, and bonds). A lot of professional financial advisors will disagree with this allocation model. Ignore them. Remember, these are the same people that make money by moving your money around and confusing you with questions about your "investment goals" -- they'd love it if you'd daytrade because it's more money for them in commissions! They are desperately counting on your not knowing that only 25% of them deliver better returns than the S&P 500.

    The S&P 500 is an index of five hundred of the largest and most profitable companies in the United States. Simply put, it is the benchmark standard for the stock market. Over the past sixty years it has risen 10.5% annually. That means that if you invested $10,000 into the S&P 500 sixty years ago, you would have about four million dollars today. That's what long-term investing does for you.

  4. Sit back and watch your money grow
    That's all there is to it. The more time you can give your investments to grow, the more money they will make for you.

How simple can it be. Until you have paid off your credit cards, STOP USING THEM and put 15% of your income each and every month towards paying them off. After you have paid off your credit cards and other high interest debt, each month, put about 5% of your gross income into a cash savings account and about 10% into a stock index fund like the Vanguard S&P 500 fund, even more if you can. Your bank can set it up so the money is automatically transfered each month. It couldn't be easier.

How Do I Start?

If you are new to investing, investing in a stock index fund may be unfamiliar to you. I'm assuming you know how to put money into a savings account or a money market account -- any bank or savings and loan will be able to help you here.

Some banks also have financial advisors and investment planners and these people may be able to help you with the stock index fund, but be sure to ask what their fees are. Usually these advisors will try and talk you into a lot of special investment products offered by the specific bank or the instituion they represent. Theoretically, you should be able to print this page out and take it to the financial advisor at your bank and ask them whether they can set this up for you. They will undoubtedly try and talk you into something else though.

Finally, you can simply open an account at a disount broker, such as E-trade, TD/Ameritrade, etc. These are different from so-called full-service brokers. You don't need a full-service broker to implement the investment strategy described here. If you want to make it really easy, simply go the TD/Ameritrade Web-site or google for Discount Brokers.

How Much Should I Have Saved By Now?

A book called The Millionaire Next Door (Thomas J. Stanley, Ph.D., Wiliam D. Dankow, Ph.D., Longstreet Press, New York, NY, 1996, 258 pp.) has a great formula for computing one's expected net worth:

For example, if Ms. Sally Unger is twenty-seven years old, makes $63,000 a year, and has investments that return another $7,000, she would multiply $70,000 by twenty-seven. That equals $1,890,000. Dividing by ten, her net worth should be $189,000. If Sally has less than $189,000 saved up, then she has some catching up to do.

Your net worth is the total of all your assets (the things you own) minus all your liabilities (what you owe). Click here to calculate your net worth if you don't already know what it is.

So now that you know your estimated net worth, how do you know what kind of shape you're in? Given your age and income, how does your net worth match up? You can use the calculator below to see what your net worth should be and to see how you're doing on the wealth scale.

"The Millionaire Next Door" -- Expected Net Worth Calculator

--------------- User Inputs --------------- --------------- Results ---------------
Age Annual Wage
and Salary Income
Interest
and Dividend Income
Inheritance If your Net Worth is less than If your Net Worth is about equal to If your Net Worth is more than
$ $ $ $ $ $
Instructions: (1) You must enter a number or a zero in each of the 4 input fields. Do not leave any blank input fields. (2) Click on the "Calculate" button. (3) Read the results on the right. you are a
(UAW)
Under Accumulator of Wealth
you are an
(AAW)
Average Accumulator of Wealth
you are a
(PAW)
Prodigious Accumulator of Wealth

How Much Do I Need to Retire?

If you're using the above investment strategy and portfolio allocation, studies show that you can safely retire when the total value of your investment assets equals or exceeds twenty-five times your desired income at retirement. For example, if you need $50,000 per year at retirement, then you need a portfolio worth $1.2 million.

That may sound like a lot of money, and it is, but that's all the more reason why you need to be saving 15%-20% of your income. If you are not doing it, you need to start now, not later. If your net worth is below average, based on the "The Millionaire Next Door" calculator above, you need to see if you can save more than 20% of your income. This should be your wake-up call to start building for your future. As the commercial says: "someone will win the lottery... just not you."