The Stock Market is one of the best (though not the only) wealth building tools available. You may think you “have to be an investor” to invest in the stock market, but most people with W2 jobs are investors. How? They invest in their companies 401k/403b plan. Aim to invest >25% in your 401k plan, investing in broad based index funds, such as VTSAX.

Introduction: Investor or not?

Investing is a broad term, and many people are investors without realizing it. If you signed up for your companies 401k plan, this automatically makes you an investor, whether you realize it or not. It is also important to distinguish what type of investor you are. This article will focus on the long term investor, who does not worry about the short term variability of the markets, and lives their life to the fullest, all while investing slowly over time.

Deciding to put money away into a company sponsored 401k is a great step, but it is only the 1st step. The 2nd step is to elect which fund(s) you will be buying with each deposit. If you do not choose a fund, the money will be automatically placed into a money market fund with the brokerage provider! Choosing funds can be challenging, especially if you aren’t familiar financials terms. The terms include everything from target date retirement funds, growth funds, small cap, mid cap, large cap, etfs, index funds, and many more…It is enough to make your head spin!

Target retirement date funds automatically select the funds invested based on your proposed retirement date, and adjusts the risk based on the time remaining until retirement. Growth funds are funds designed to provide above market returns using large capitalization companies.

Small cap means that it invests only in companies that are worth between $300 million-$2 billion. Mid cap means that it invests only in companies that are worth between $2 billion-$10 billion. Large cap means that it invest only in companies that are worth over $10 billion.

ETFs are exchange-traded funds. They are traded on the open market, with the price being paid is the price at the time the trade occurs. Index funds seek to track the entire market and give whatever the return of the market that is tracked. These can be in 500 or total flavors, which means it either tracks the return of the largest 500 companies by market weight, or seeks to track all the companies currently being traded on the New York Stock Exchange.

Gambling versus Investing

Many have said that “investing is gambling”, or “investing is throwing your money away.” These people simply lack the understanding of what investing is. Simply put, when you invest money into a mutual fund/etf, you are purchasing shares of either a single company, a section of the market, or the entire market.

“Investing is gambling” refers to when one buys shares of a company and sells them quickly in hopes of turning a profit. There can be major losses in this strategy including complete loss of principal if the company declares bankruptcy. “Investing is throwing your money away” comes from stories about someone investing in a company, and the company tanks, loosing all the money invested.

With this in mind, let’s review why the Stock Market isn’t as risky as the news media would have you believe.

Investment vehicles and Investment types:

Employers offer investment vehicles to incentivize employees to save for retirement. These include the 401k, 403b, 457b, among others.

Individual retirement accounts (IRAs) are investment vehicles that anyone can open for themselves, and they can come in the flavors of Traditional or Roth.

A 401k is offered by many employers, as it allows the company to write off their contributions to the 401k on their taxes.

403b and 457b accounts are offered by many public sector employers (universities, government agencies, etc), 403bs are similar to 401ks, and allow you to save for retirement. A 457b is an option often given to public sector employees. The distinctions are that you can contribute to both a 403b and 457b at the same time. This allows public sector employees (if the accounts are offered) to contribute up to $41,000 dollars per year! Another benefit is that a 457b does not have the 10% early withdrawal penalty limit of the 401k and 403b. This allows you to utilize the money earlier in life if you need it.

Employer Sponsored retirement plans

These are a great first step in ensuring that you “pay yourself first.” Tax deferral allows money to be sheltered and is only taxed on withdrawal. This does not mean you will not pay a tax on it, but it does mean that you get to invest 100% of that dollar, instead of 50 to 75% if you paid the full tax on it. This is due to the current federal tax structure.

Individual Investment Accounts

Other accounts that can be used include a Traditional IRA, ROTH IRA and Brokerage accounts. IRAs stand for Individual Retirement Account. IRAs (Traditional/ROTH) can be funded for each tax year (currently $6,000 in 2022). Traditional IRAs are helpful for if one is above the IRA income contribution limit ($208,000 for married couple; $144,000 single for 2022). Traditional IRAs can be deducted against the current tax year, with that money being reduced from the tax return income.

ROTH signifies that you paid taxes on the money before you invested it and is helpful if you are in a low tax bracket now (below 15%). ROTH IRAs cannot be deducted against the current tax year, but the principal amount and gains can be pulled out of the account tax free after 5 years.

Note: you can always pull out the principal (original investment) from a ROTH, it is the gains that requires you to hold it for 5 years before accessing (ROTH IRA).

Finally, brokerage accounts are another useful tool for investing. Brokerage accounts offer benefits including being able to access the funds whenever the need arise penalty free. There are no tax benefits with this plan. The money is put in after tax, and when pulled out, the gains are taxed as well. However for high income earners, it can be a final place to store money if they are not too keen on having it sit in a bank account, losing purchasing value to inflation year after year.

Reducing future financial needs

Reducing the amount of take home pay may take some adjustment and require some tough decisions, however it will start creating freedom in your life. Living on less than you make (in some cases 50%), will allow you the ability to determine what spending brings you true happiness, while what spending is superfluous. This awareness will likely reduce your “future” expenses, as it reduces the amount of money needed to reach Financial Independence.

Money as a Tool

Money is a powerful tool. It has the power to improve your life and lives of those around you. But money is only as important as we want to make it.

In the US, we often tie our financial assets to other areas of our lives. However this is a falsehood in our minds. We are more than the work we choose to pursue. Finances are only one part of our lives, and money is a tool to be utilized to improve our lives.

Money was created by humans and is infinite, not in the sense that it will last forever, but in the sense that we can always generate more in some way. Money is a tool that should be used to improve the lives of those around us. But we should not make it the driving force in our lives. It is simply a tool for us to improve our lives. For a deep dive into money philosophy, check out “Money is a tool and Sometimes you need to use it”.

What is a good investment goal for my age?

We all have goals we want to achieve in our lives. One of those goals can be having a net worth goal by a certain age. This can be a good way to check in and see how you are doing in your financial life from year to year.

Your investments + assets (home/properties) – liabilities (loans/debt) = Net worth.

Another helpful thing to remember is that “Comparison is the thief of joy.” When we compare ourselves to others and feel we are behind, this blinds us to seeing how far we have come over the years. Comparison allows a check in, to determine if the actions being taken are helping improve ones life.

Investment Options

Net worth is great, but what options should I invest in? Below is a list of options to consider investing in:

These funds offer exposure to either the 500 largest US companies by market-cap, or the entire stock market, with roughly 3,600+ companies. If your company offers only 1 mutual firm to invest with, go into the investment options and sort the options by expense ratio, then look at the lowest one. It will likely be an index fund of some kind. When you leave the company, roll over the old 401K to your personal IRA.

How much to invest?

Invest as much as you can. This will vary based on your individual life circumstances, and will change as life changes. Want to become Financially Independent? Save 50% of every paycheck. Starting from $0, it will take 16.5 years. Starting at 22, one person can become Financially Independent by 38!

Here’s an example from Networthify:

Want to get there sooner? Saving 64% will achieve FI in under 10 years. Starting at 22, one could become Financially Independent by 32!

If this sounds like a lot, start with saving 20-25%. Then increase the amount being saved by the percent of your raise every year. Starting at 20% and receiving 3% raises yearly, after 10 years you will be saving 50%!

What if you are older and haven’t saved much?

No Shame, No Blame as Vicki Robin, author of “Your Money or Your Life” says. Do your best, and remember, each day is another opportunity to add more onto your side of ledger.

On average the stock market returns 6-8% over the long term? Sounds great, right? It is important to remember that there are years like 2022, where the market returns are flat or negative. Over a 10, 20, or 30 year period, the market will return positive returns. Since 1957, the S&P500 has returned 6% with dividends reinvested.

Remember: Investing is for the long term, not the short term.

So is it Risky or Reliable?

The answer is a little bit of both. It can be a risk if you put all your money into a single company, and it can be reliable if you invest in a broad-based index fund over the long-term. Keep it simple with retirement investments. Choose low fee passive total stock market investment options such as VTSAX, FSKAX, etc. This will give you exposure to the total stock market, and reduce the potential risk of investing in single companies. Only invest money that you are okay not accessing for at least 5 years, to reduce the risk of locking in losses. And of course – Check with a CFP (Certified Financial Planner) to go over any questions and concerns before investing. Ultimately, personal finance is personal, this is not professional financial advice, just our thoughts and feelings after a decade of investing.

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