Investing Basics

Investing only makes sense after you pay off all high-interest debts and build an emergency fund in a high yield savings account. Investing in equities is not FDIC insured like a bank account so there is a risk of losing money. You should only invest after researching and planning so you understand the risks and decide on the right investment strategy for your risk tolerance and goals. Consider when you will need the money and how much volatility you can handle.

Investing Basics

Investing can help build wealth when you understand the risks and timeline needed for success. Investments may lose value. If your investments gain value and you sell them and withdraw the money then you will owe taxes. Investing requires discipline, planning, and resisting reactive emotional decision making.

Ongoing Habits for Long Term Success

• Take advantage of employer retirement match, if offered, before investing elsewhere. It is essentially free money.

• Focus on consistent behavior and avoid frequently changing your holdings.

• Do not try to time the market. Stick with your strategy.

• Automate your contributions.

Reevaluate and consider adjusting your strategy every five years or as you are nearing your goals to reduce risk and make sure you have your money when you really need it. Investing in equities is not advisable if you will need the invested funds in the next few years, especially if you cannot tolerate losing value.

Target Allocation for Equities

An example portfolio with average risk tolerance might look like:

• 50% U.S. Core Stocks (e.g., total market or S&P 500 funds)

• 25% International Stocks (to hedge against U.S. specific risk)

• 25% Safer Choices (e.g., treasuries or money market funds)

Fund Selection (Use Low-Cost Funds Where Possible)

Core U.S. Exposure:

• Total U.S. Market Funds (e.g., VTI, SWTSX)

• S&P 500 Funds (e.g., VOO, FXAIX)

International Exposure:

• Total International Fund (e.g., VXUS, IXUS)

• Developed Markets Fund (e.g., SWISX, VEA)

Safer Choices:

• Short Term Bond Fund (e.g., SGOV, VGSH)

• Prime Money Market Fund (e.g., SWVXX, VMFXX)

It is important to select well known and reputable broad market funds with low expenses. Some examples are listed here but there are many other reputable funds available. The funds you pick and doing your best to match your allocation strategy is important, but it is even more important to be consistent, buy regularly based on your strategy, and avoid frequently rebalancing or changing your holdings. The more frequently people trade the less well they tend to do, so setting up automatic investing is helpful as a way to set it and forget it.

Advanced Considerations for Tax Efficiency

If you have multiple accounts (e.g., traditional taxable brokerage, 401k, Roth IRA, or HSA) then you can improve tax efficiency by allocating investments strategically.

• Taxable Brokerage: Use this for investments that you do not need soon but may need before retirement. Reduce your tax burden by prioritizing low-turnover funds, avoiding high-dividend funds, and avoiding frequent trading to minimize paying taxes on realized gains, especially short-term gains.

• Traditional IRA or 401(k): Use this for retirement investments. Hold core positions and anything dividend heavy here because this account is sheltered and tax-deferred.

• Roth IRA: Use this for retirement investments. This account is ideal for your highest growth funds because gains here are tax-free.

• HSA: Use this for cash savings to cover your deductible. Any additional money beyond what is needed for health expenses can be invested for retirement. Health Savings Accounts are triple tax advantaged and are the best place to save for retirement after employer match. 

Reading List: Consider visiting your local library to explore books on investing. You can borrow books for free and reading even one can have a big impact. Our recommendation if you are interested in investing is The Bogleheads' Guide to Investing by Larimore, Lindauer, and LeBoeuf. It explains how to build wealth through low cost funds, avoid common investing mistakes, and stay consistent over the long term with a simple and proven strategy.