Wednesday, February 17, 2016

Everyone Will End Up In The Same Career

"What do you want to be when you grow up?" got that question a lot when I was little. Later on, when I was in high school, that changed to "What's your college major going to be?"

There are probably as many answers to those questions as there are people answering them. Society needs all sorts of people to function smoothly - doctors, front desk clerks, engineers, trash collectors, cashiers, CEOs, bankers, and bus drivers. Some people go to school for years to get the knowledge they need before entering the work force. Other people opt for positions that need little more than a high school education. Either way, people spend decades working in their chosen field. You may think that once you've chosen your field, that's your career for life. Or, if you've hopped around from position to position, that your career is whatever field you worked in the longest. It's not.

In the end, everyone ends up in the same career - investing.

We All Must Become Investors

I came across this while reading the Get Rich Slowly blog:

Like it or not, investing will be your ultimate career. Whether you are an engineer, administrative assistant or plumber, there will come a day when you no longer make the majority of your money from that career, i.e., your labor. When that day comes, you’ll derive most of your income from your investments, i.e., your capital.
It never occurred to me to look at it that way, but it is true. The very definition of retirement is that you stop working for a paycheck. You then live off some sort of passive income, be it Social Security, investments, a pension, whatever.

In order to have a decent life after retirement, you have to become an investor. You have to understand how to use money to make money. Furthermore, the sooner you learn this, the better. The biggest asset in investing is time and the longer your money has to create more money, the better.

Thankfully, It's Not A Tough Career

Becoming an investor is not that complicated. You might think it is because ads for financial advisors and brokerages have been telling you that for years, but they are just trying to sell you their services.

All you need to do is save and invest. I know. It sounds so easy when you say it like that. Of those two, the hardest part is saving and that is something that requires no education. Just spend less than you earn.

I will admit, that isn't always easy. Sometimes, it may seem impossible. But here's the thing - you don't need any special knowledge to do it. Just stop buying things. You don't need a financial advisor to tell you this. You don't need to pay a brokerage to do this for you. You just need willpower. And this is the hard part!

So once you've saved money, how do you invest it? That is the question that scares people into throwing buckets of money at the financial industry.

Index Fund Investing Is So Easy, Even A Caveman Can Do It

In the United States, investing for retirement generally means investing in the stock market. There are thousands of stocks trading on the stock market! How do you know which one to pick?

Hint: it doesn't matter. Buy a bucket of all of the biggest by investing in a mutual fund.

Mutual funds are collections of stocks that trade under a single ticker symbol. When you buy a share of a mutual fund, you get shares of all the companies that the mutual fund invests in. Some funds are actively managed funds, meaning there is a person or team of people who research companies and try to find stocks that they think will appreciate in value. Other funds are index funds, meaning they just buy stocks based on a predefined criteria. The most common of these are funds that track major indices - the S&P 500, the Dow Jones Industrial Average, etc. These funds buy stocks in the same proportion that they are represented in the index. As a result, they almost perfectly mirror the index they are patterned on.

When it comes to mutual funds, the biggest indicator of performance is the expense ratio. As Morningstar discovered:
If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.
And, between actively managed and index funds, guess which have the consistently lowest expense ratios? Index funds.

This Isn't Lake Wobegon

Investment firms like to tout their fund managers. They want you to think they are all stellar stock pickers and can beat the market averages with regularity. They don't and studies prove this out. They can't all be above average. That's not how math works.

What's more, you don't need to beat the market. Just matching the market will provide you with all the returns you need to retire - provided you invest regularly and for a long enough amount of time.

So although we all need to eventually end up making a career in investing, it's not that hard. Start investing early in low cost index mutual funds (with some of the lowest expense ratios out there, I like Vanguard's index funds, myself) and you'll do fine.


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