The Silicon Valley Investors Club is excited to have Kartik Kaipa join us for a talk about a simple way to build wealth. He is a software engineer at Google, working in the Bay area.
There are few things as important as investing. In this article, I will walk you through the psychology of investing and getting started. If you are convinced by the headline and want to take action, go straight to the last section.
There is a glut of investing advice out there in the world. There are many ways to get started and a lot of options. You can invest in real estate, be an angel investor, yet all of these take a lot of work to vet and get going. It’s easy to get analysis paralysis. There is however a way you can begin and receive better results than most investors without putting in any effort. People say there is no free lunch, but index funds may be the one free lunch out there.
In case the article becomes boring or your eyes glaze, go straight to the last section. Take action and remember, “Done is better than perfect.”
The following are a few simple strategies I follow to build wealth.
Psychology and Mindset
- Ask $30,000 questions and not $3 questions. What I mean by this is, don’t waste your time worrying about saving money on lattes or a few pennies on where to find the cheapest gas. Focus on strategies that will make wealth creation as painless as possible for you. Do the following:
- Automate your savings via your 401k plan and checking/savings accounts
- Optimize retirement accounts –
- Check your workplace retirement perks such as:
- 401k matches: For every dollar you contribute to your 401k your employer could match a percentage of that. It’s basically a risk free rate of return that can’t be beat by anything else.
- Pre-tax or post tax retirement savings: There are a multitude of different pre-tax and post-tax savings accounts. The advantages of a pre-tax account is that you’re deferring when you pay taxes on your contributions/gains, which allows you to have a larger amount of funds to accrue a return on. However, you have to pay taxes on those gains when you withdraw them in retirement. The advantages of a post-tax account is that you are paying taxes on your gains now, but when you go to withdraw your funds during retirement they will be tax free. There are cases to be made for both strategies, and I suggest you take advantage of both because you don’t know what tax bracket you will be in during retirement. If you don’t have the time to do this, take a day off work. This is important.
- Check your workplace retirement perks such as:
- Spend money guilt free on stuff you enjoy. Buy as many coffees as you want. Life is about the experiences you have, not saving to a point where you can’t enjoy the present for an eventual future that may or may not happen. You must have a healthy balance between savings and spending so your life is enjoyable and you can experience the joys of sharing your wealth with your friends and family. We all go through tough financial times where we are living on a shoestring budget, I’ve been there. However, I would suggest that you focus on activities that will help you increase your salary or earnings off of investments, rather than focusing on cutting out the simple joys that make life worth living.
- At a personal level, Savings = Profit. People hate saving but everybody loves profit. When you think of your savings as profit, it is easier to weigh the pros and cons in your mind of purchases. The subtle shift in thinking of profit also makes saving fun (or as fun as saving can be).
- Treat investing as seriously as you would paying your mortgage. You would never skip a mortgage payment. You would cut back on other areas of your life to make the payment. Treat investing as seriously.
Now that we have the psychological aspects of savings out of the way. Let’s talk about the art and science of investing.
Related Article: Investing in ETFs and Index Funds
Interesting and Random Facts About Investing
Fidelity did a study and found two kinds of great investors
- Dead people. (Investing so easy that dead people can do it)
- People who had forgotten they had invested.
- It turns out that the dead are better at investing than the living. The deceased never touched their investments, which prevented them from selling low and buying high.
Rule of 72
- This is a rule that Warren Buffet uses to determine how long it will take for investments to double: at a 9% rate of return, your money will double in 8 years (9*8 = 72). At a 6% rate of return your money will double every 12 years(6*12 = 72).
- Essentially the market goes up more than it goes down so you are better off always investing.
- As Baron Rothschild said, “I never buy at the bottom and I always sell too soon.” We all like the idea of market timing, we think we can call tops or bottoms
Related Article: SVIC Guide: How to Invest In Startups With Angel Syndicates
About Mr. Market
The market goes up and it goes down. However even god couldn’t beat dollar cost averaging.
No matter what happens to the market, always be investing. If the market hits new highs all the time, continue buying. The same goes for when the market hits all time lows. By automating investing, you take yourself out of the equation and prevent making psychological mistakes.
If you are actively picking stocks it’s like stepping into the ring with Mike Tyson. When you pick stocks actively, you are going up against the likes of Warren Buffet and all of Wall Street. Even they don’t beat index funds all the time. Most active managers struggle to get the return of the market.
Related Article: The Value of Corporate Stock Buybacks
What is an Index Fund?
An index fund is a market weighted collection of all the stocks in the market.
What’s nice about index funds is that you don’t have to buy each stock individually to become diversified. You can buy a share of an index fund, which then provides you with instant diversification.These funds are traded freely on the stock market. All your wealth should never be in a few companies because even well established companies can fail and lose customers at any time. If you think you don’t need diversification, look up Enron, Nokia, and Blackberry.
Imagine if there were two stocks in the world Apple and Microsoft. Apple has a market cap of $3 Trillion and Microsoft has a market cap of $2T. Apple would be 60 percent of the index and Microsoft would be 40 percent. As their market capitalizations change the percentages in the index will change accordingly and the money you invest will be allocated accordingly. Index funds are always shifting and rebalancing based on the company’s market cap.
It seems so simple and yet it works. It beats active management and most other forms of investing in the long term. I like to think of an index fund as a duck in water, you just don’t see the furious paddling underwater.
Your mission should you choose to accept it:
- It’s easy to fall into analysis paralysis. Don’t. You already have all the information you need in this article.
- Set up a brokerage account. I use m1finance because they make automated investing super simple. You can use any broker you want.
- Automate, buy $100 of VTI every week. (or any amount you are comfortable with). Start small but start. (If you are using m1finance, start with a pie with 100% of VTI)
- There are portfolios that balance between stocks and bonds in various percentages but those just complicate investing. Remind yourself that “done is better than perfect” and get an initial setup done. You can iterate and improve.
Want to become a better investor? Visit our library for the best books on investing.
Okay, Mission Complete, Now What?
- Have a cookie and reward yourself.
- Increase the amount you invest. (When you find something that works, do more of it instead of looking for the next silver bullet)
- You can change the asset allocation but in practice just buying VTI is great.
- Now you can look into angel investing and real estate investing but once you have the above setup, it’s good enough. You don’t need to hustle or do anything else unless you want to.
My hope is that the above article has galvanized you towards action and helps you make the first few steps towards getting started and keep investing.
If you need help with any of this, I would be happy to jump onto a call. Reach out to me over Linkedin here
Related Article: Angel Investments vs. Stocks: A Practical Guide
The content here is for informational purposes only, and should not be taken as investment advice. All views contained herein are my own and do not represent the views of any other organization.
Silicon Valley Investors Club (SVIC) is a global community of STEM professionals interested in making smarter investment and career decisions.
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