How to Get Started Saving and Investing (in the U.S. Only) (01/2021)

This page should be looked at more as a smattering of ideas or a reading list than as an authoritative reference. Topics that don't fit with my investing style are neglected, and this page largely represents my own opinions and own limited understanding of investing; so you should not rely on this page as a reference.

This page is applicable only to U.S. citizens living in the U.S. (I have no idea how the landscape is different if you are not in that category.)

The page is divided into these major sections:

Miscellany: notes not directly related to saving and investing—like why you cannot sue me if you follow the advice on this page and it leads you into financial ruin.
Concepts: basic ideas, like how much wealth you are trying to accumulate, why stocks are emphasized, and why it is better to start young.
Brokerage Accounts: what a brokerage account is, and things about brokerage accounts that you should know.
Taxation of Income and Investment Profits / Losses: different tax classes of bank and brokerage accounts, what you must pay tax on, and when.
Investment Choices: a brief description of investment options.
How Stocks Are Priced, How Stock Prices Fluctuate: how stock prices tend to fluctuate, and what makes them fluctuate. Since your goal is to buy low and sell high, it helps to know what is likely to cause your low-priced stock to become a high-priced stock.
How to Pick Stocks: some suggestions for finding low-priced stocks that will eventually become high-priced stocks.
Investing and Trading Strategies: my opinions on what systems and rationale to use when building and maintaining an portfolion, and my opinions on what works well and does not work well.
Actions after Retirement: things you should know and things you should do as you near and reach retirement.
Legal Requirements: how did Ivan Boesky, Martha Stewart, and Wesley Snipes end up in prison? How can you stay out of prison?
Things to Do (and Not Do): a list of things to try and do, in order; comingled with some things not to try or do.

Miscellany

Motivation for This Page

I've often been asked by friends and colleagues how to get started saving and investing. I've answered that question often enough that I decided to put all the information I have on a web page (which saves me the trouble of composing lengthy e-mails once or twice a year).

Assumptions About the Reader

To keep the page brief and meaningful, I have to make certain assumptions about the reader. Most friends and colleagues are ... how do I phrase this? ... mathematically mature². If you don't immediately know the difference between a prime and a composite natural number; if you don't recognize the names Gauss, Euler, and Euclid; or if you don't recognize the identity log a^b = b log a; this page may be somewhat confusing to you (and I apologize for that).

Copyright, License, and Disclaimer

I am not a financial planner or a financial advisor, and the information provided on this web page represents my own personal opinions rather than financial advice.

I do not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.

This web page is not copyrighted. Please feel free to duplicate or redistribute information on this page without any restrictions. Any verbatim redistribution of the information on this page (especially if includes my name or e-mail address) must include this entire section, including the disclaimers in the two paragraphs above.

Feedback, Contributions, and Dissent

My e-mail address is at the bottom of this page. Please feel free to contact me.

If you spot any errors on this page, I'd be glad to correct them.

If you would like to contribute information to this page, I'd be grateful.

If you have an opinion different than mine, I'd be glad to include³ it as a dissenting or alternate opinion (along with your contact information) on this page.

How This Page Is Prepared and Served

I used HTML for this content because I'm old and don't like new or fashionable things, particularly if they involve colors or graphical user interfaces. This page was prepared on emacs, a 1970's text editor.

Simple HTML also has the advantage that it will display well on mobile phones and tablets, and it usually prints well.

Someone will ask if I really maintain references and footnotes by hand. No, I don't. This web page is a PHP script—a mixture of static content as well as code that runs on the server side when this page is served. Some of the more tedious things, like patching up footnote and reference numbers, are done programmatically⁴.

Concepts

What is the Goal of Saving and Investing?

For most people, the goal of saving and investing is to prepare for retirement. Retirement is typically characterized by:

Reduced income: The retiree is no longer working and may be drawing on social security and pensions, with the social security and pensions providing less than employment did.
Different expenses (which may be less than or greater than pre-retirement): The expense of maintaining and operating a car is typically less, the home is typically paid off, and the kids are typically gone. On the other hand, medical insurance may cost more, and the retiree may wish to have expensive leisure pursuits.

For most people, the goal of saving and investing for retirement is to fill the income gap between what social security and pensions provide and the income required for the lifestyle the retiree desires to have. The size of the income gap varies greatly between retirees for many reasons, including the lifestyle desired.

However, even if income from social security and pensions alone is adequate, saving and investing has many other advantages. Living a life with no debt and substantial cash reserves allows an individual to avoid paying interest, and also gives greater peace of mind⁵.

How Much Money Do I Need to Retire?

There are three answers to that question: the ultra-short rule of thumb, the short rule of thump, and the more comprehensive answer.

The ultra short rule of thumb is: you need 10 times your annual salary to retire.

The short rule of thumb is: you need 1 times your annual salary by age 30, 3 times your annual salary by age 40, 6 times your annual salary by age 50, 8 times your annual salary by age 60, and 10 times your annual salary by age 67.

The more comprehensive answer is:

The determination of how much you need to retire assumes:
- In retirement, you will withdraw a certain amount of your retirement savings per year as income.
- The retirement savings that you have not withdrawn continues to appreciate in value.
- Assuming the planned rate of withdrawal, your retirement savings will not be exhausted before the end of your life.
The answer isn't the same for all situations. Obvious considerations that may affect the determination:
- The lifestyle that you'd like to lead in retirement, and how much supplemental income would be required to have that lifestyle.
- How much income you have in retirement from other sources (social security, pensions, annuities).
- The age at which you retire.
- Your likely lifespan.
- The likely rate of appreciation of your remaining retirement savings.
- The likely rate of inflation.
There are many excellent retirement planning calculators online that enable one to evaluate the effect of the variables above. A financial planner likely has similar tools. Using these tools should give a more meaningful answer than a rule of thumb.

If you are behind in your retirement savings, don't fret, for two reasons:

Retirement saving is not a pass/fail endeavor. Even if you don't have the recommended savings at the time you retire, having some savings is better than having no savings. You should still save and invest all you can.
You have no control over actions you've taken in the past or things you've failed to do in the past. Since you can't control what happened in the past, don't give it a second thought. Start saving and investing now.

Things to Do (and Not Do)

Read Peter Lynch's Classic Book, One Up on Wall Street

I recommend that anyone who is new to investing in stocks read Peter Lynch's classic book [2].

Mr. Lynch makes the following important points (and many others):

Stock prices are most strongly driven by earnings and earnings growth.
The best investing strategy is to invest in companies with steady earnings growth.
Day trading and trying to time the market, as well as investing in options and futures, does not work for most investors.
A "hands off" approach is best. Most investors are tempted to trade too often, and the easy availability of stock prices makes this tendency worse. Generally, an investor should ignore stock price fluctuations and make hold or sell decisions based on whether the fundamentals of the company are still favorable.

Eliminate Most Types of Debt Before Investing in Earnest

If you've never had a brokerage account before and are curious, it isn't harmful to open a brokerage account with a nominal amount in each tax classification. Curiosity is natural, and trading stocks or mutual funds for the first time may be exciting.

However, before starting to invest in earnest, it is better to pay off all debts with an interest rate higher than the return you can reasonably expect to earn in the stock market (10%?). This means that all credit cards should be paid off before starting to invest seriously. Very likely the only debts you have with low interest rates are student loans, car loans, and mortgages.

Track Your Net Worth

It is helpful to have a graphical representation of how you are progressing. This helps you to determine if you are progressing, and at what rate.

Net worth is, of course, assets minus liabilities. Paying off debt will give a graph with a positive slope, which may be encouraging, even if your net worth is temporarily negative.

Microsoft Excel has good graphing capability. I've found that entering data to recalculate net worth once per month is the right frequency (for me, anyway).

The image below is a graph generated by Microsoft Excel in response to data in a spreadsheet. Note that the net worth shown fluctuated slightly as a result of stock market fluctuations.

Open Brokerage Accounts in Each Tax Classification

TBD.

Footnotes

[1] Usually for retirement. But there are many good reasons not related to retirement to save, invest, and lead a cash-positive life.

[2] In French, mathematically mature is pronounced the same as nerdy.

[3] The only restriction is that the opinion be, in my sole judgment, credible. I won't include an opinion that the earth is flat, that the stock market is being manipulated by aliens on the planet Kluton, that one should not save for retirement and instead just "let life happen", or that one should construct a meth lab to get higher returns than the stock market can offer.

[4] If you are curious about the script, I can e-mail it to you or otherwise make it available electronically. If I get enough requests for the script, I will modify the script so it is able to serve out its own source code.

[5] For example, a job loss or serious health problem is less likely to have adverse consequences to a person who is debt-free and has a substantial reserve of cash.

References

Reference Number Type Title / Description / Link(s) Author

1 Book I'm a Shareholder Kit: The Basics About Stocks Rick Roman

2 Book One Up on Wall Street: How to Use What You Already Know to Make Money in the Market Peter Lynch

3 Book Beating the Street Peter Lynch

4 Book Learn to Earn Peter Lynch

5 Book Beating the Dow Michael B. O'Higgins, John Downes

Local time on the server (at the time this page was served) is 7:13:46 am (America/Detroit) on October 14, 2024. This page required approximately 0.01s (0.00s system, 0.01s user) of CPU time on the server to generate. This page is maintained by David T. Ashley.

Reference Number	Type	Title / Description / Link(s)	Author
1	Book	I'm a Shareholder Kit: The Basics About Stocks	Rick Roman
2	Book	One Up on Wall Street: How to Use What You Already Know to Make Money in the Market	Peter Lynch
3	Book	Beating the Street	Peter Lynch
4	Book	Learn to Earn	Peter Lynch
5	Book	Beating the Dow	Michael B. O'Higgins, John Downes