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Step 4: Invest

Invest in Index Funds

When we first started out, we invested in all kind of things, businesses, real estate, foreign exchange, cryptocurrencies, you name it. Some of these panned out a few times, but some of them were disastrous. After a few wins and a lot of losses, the only things that I feel safe about sinking our hard-saved money into now are broad market index funds.

Why index funds?

  1. Index funds have been proven to outperform managed funds
  2. They have ridiculously low expense ratios
  3. Their stability and vitality is based upon America itself

When you're looking at long-term investing, I can't think of anything that performs as well with zero active effort on my part.

The funds that I prefer are total U.S. market funds, and I basically follow the advice of JL Collins' Stock Series. He also has a book called The Simple Path to Wealth which I highly recommend reading:

Here are a few funds that I really like. The 3 listed of each type are essentially the same, but I'm listing them all because your brokerage account might not offer all of them, or they might charge a trading fee to purchase specific funds.

Equity Funds
Fund Type Fund Family Ticker Expense Ratio Minimum Investment
Total Market Index Fund Vanguard VTSAX 0.04% $10,000
Total Market Index Fund Schwab SWTSX 0.03% $1
Total Market Index Fund Fidelity FSTVX 0.04% $10,000
Bond Funds
Fund Type Fund Family Ticker Expense Ratio Minimum Investment
Total Bond Market Index Fund Vanguard VBTLX 0.05% $10,000
Total Bond Market Index Fund Schwab SWAGX 0.04% $1
Total Bond Market Index Fund Fidelity FSITX 0.045% $10,000

Portfolio Allocation

When deciding which funds to hold, it's important to first analyze your risk tolerance. If you are in a situation where you can handle risk, and you want to your money to grow as quickly as possible, you may want to be allocated 100% in equity funds.

On the other hand, if you can't sleep at night when your money is at risk, 100% bonds might be the allocation for you.

Most people are somewhere in the middle. Traditional advice says to stay mostly in equities while you are younger and actively contributing to your accounts, then slowly start transitioning to bonds when you get closer to your retirement goals.

Really, it's up to you.

If you want to see how well these funds have historically performed, try this portfolio backtesting tool. You can look back over past years and try to imagine your reaction in 2008 when you lost half of your value because you were 100% equities, or your disappointment when you missed out on the rebound that began in 2009 because you were 100% bonds.

Warren Buffet is famous for saying that when he dies, he's leaving his widow invested in 90% equities and 10% bonds. That seems like a pretty goood allocation to me too.

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