Tue 05 October 2021


Introduction to Long-Term Investing

My grandfather was an immigrant. He worked as a welder, and when he retired, the factory presented him with a plaque and a gold-plated watch for his decades of service to the company. Aside from that watch and his Social Security contributions, I don’t believe he had any savings to speak of.

It is because of sacrifices made by people like my grandfather that many of us have better opportunities than our forebears to build wealth. But how can we best take advantage of those opportunities?

Delayed Gratification

One of my finance professors at Wharton, Franklin Allen, began his first lecture of his “Intro to Finance” course with the following insight:

Life is a series of choices between consuming today or consuming more in the future.

Life is probably a bit more complicated than that, but even though many years have passed since I heard Professor Franklin speak those words, his insight nonetheless rings true. Saving is dependent on forgoing some portion of present-day consumption, and saving money today should ensure you’ll have even more to spend in the future.

Start Early

$10,000 invested today with an 8% return will yield $21,589 in ten years.

But if left invested for 50 years, that $10,000 will turn into $469,016. That is the power of compounding. The only way to take full advantage of that power is to start investing as early as possible. I made my first investments when I was around 20 years old, and that early start has served me well.

Use Tax-Advantaged Accounts

Governments are good at imposing and collecting taxes, and they offer precious few breaks from those taxes. Tax-advantaged retirement accounts are one of the few breaks you’ll get, so it’s best to take advantage of them if they are available in your country. Such plans serve two important purposes: they encourage you to save for your retirement, and that incentive reduces your taxable income.

In the USA, this could take the form of a Roth or traditional individual retirement account (IRA), Simplified Employee Pension (SEP) plan, or 401(k) plan. If you are self-employed with higher-than-average income and want to maximize your contributions, look into “one-participant” 401(k) plans, which are sometimes called “Solo 401(k)” or “Solo-k” plans. Assuming high income, you could contribute as much as $58,000 (!) per year. That is considerably higher than other plans allow.

Time in the Market

Instead of trying to time the market, it is time in the market that counts.

One of the biggest mistakes one can make is to save money in cash (bank savings account, certificates of deposit, money market account, etc.) instead of investing it in asset classes with higher rates of return such as stocks and bonds. Over a long-term investment horizon, the power of compounding will growth wealth in a way that parked cash never can.

ETFs Versus Mutual Funds

ETFs are almost always better than mutual funds due to slightly lower fees and the ability to buy and sell at market prices instead of trading at a given day’s closing net-asset value (NAV) price.

Getting Started

The first step is to decide how much you can afford to invest per year. Let’s say, for example, that you can afford to invest $4,000 per year. You could start by investing $4,000 in an all-world ETF such as these:

These ETFs track the entire world, covering nearly 100% of the world-wide stock market. They should represent one of the safest long-term, buy-and-hold ETF choices available.

Then, set a recurring reminder in your calendar application to invest another $1,000 every quarter (every three months), for a total of $4,000 per year. (Obviously, you can adjust these amounts depending on how much you have available to invest.)

Investing on a regular schedule like this will give you the benefits of unit cost averaging (also called “dollar cost averaging”).

Once you have a decent base in an all-world stock ETF, and after getting a better understanding of the different investment options at your disposal, in the future you can start making contributions to other ETFs, if and when you decide that makes sense. Those could be ETFs focused on bonds, real estate, commodities, or a myriad number of other potential investments.

Investment Tools

Because capital growth estimates are dependent on the assumed rate of return, use a compound growth calculator that can show a range of values for varying rates of return in order to understand what is possible in different growth scenarios.

Another handy tool is this financial independence calculator.

Further Reading

Following are some other investment resources you may find helpful:

Reach Out

I am not a financial advisor, and this is not financial advice. That said, I enjoy talking about investing, so please reach out! 😁