This is the third article in a series of personal finance and investment articles mainly for American expats, though domestic residents and non-Americans will find it useful as well.
101 is a foundation for everyone, but particularly useful to those with student loans or other debt
201 is a primer to investment for those with no debt, or with savings of less than $10,000
301 is a deeper examination of stock investment options for those with savings of at least $3,000 and preferably more than $10,000
302 is an examination of bonds for anyone
EF 301: Intermediate Stock Investing
Every portfolio has a high risk, medium risk, and low risk component. 301 deals with the high risk component, which are stocks.
Expenses aside, you should always invest in stocks with the intent of high-risk, high-reward. If you want to putt, use a putter. 9-irons are made for teeing off, so that's what we'll be doing today.
If you have more money to play with and don't mind spending a lot more time learning about investing, this article is for you. I will warn you, money is a pretty dull topic and your time could be better spent telling a racist joke, learning how to give a decent blow job, or oppressing Palestine. For all new investors, I recommend Betterment.
For people with more time and money to play with, you have a few good brokerages like ING Direct, Charles Schwab, Vanguard, and Fidelity. They've all got thousands of stocks, bonds, funds, ETFs and other investment vehicles to pick from. Schwab and Vanguard have amazing customer service, Schwab might be slightly better. However, I use Vanguard because I like their clean interface, concise descriptions.
Vanguard was founded by Jon Bogle, who popularized humility in a field plagued by arrogance. the whole “Don't try to beat the market, invest in index funds and say fuck you to fund managers!” Vanguard specializes in these long-term investments, which is why they can offer slightly better prices than a broader brokerage like Charles Schwab.
Most of Vanguard's funds use this system: You can buy a minimum of $3,000 worth of shares, and you will reap the profits minus the operating costs of that fund, called the expense ratio. If your fund is worth more than $10,000, it will upgrade to its Admiral version, which reduces the expense ratio substantially.
How to read:
Why you would buy this
Ticker symbol of fund, Expense Ratio, Minimum Investment
Ticker symbol of corresponding admiral version, Expense Ratio, Minimum Investment
*Remember the fundamental rule: High Risk, High Reward
Entire US Stock market
Bet on the growth of USA
VTSMX .18% expense ratio, $3k min
VTSAX .06% expense ratio, $10k min
Entire Stock Market excluding the US
Bet on the growth of the rest of the world (somewhat more volatile, but also more tax-efficient than US stocks)
VGTSX .22% expense ratio, $3k min
VTIAX .16% expense ratio, $10k min
If you believe that nobody can pick stocks, then you believe that nobody can beat the market. You should also believe the corollary, which is that the market gets the highest return in the long run. That's why we buy low-cost funds tracked to an entire market, or an index.1
There are many index funds, but these two are popular for their rock-bottom expense ratios. You can't predict if other funds will outperform these, so go by the only thing you know- a lower expense ratio is harder to beat. Compare VFWIX to VGTSX for example. VFWIX used to exclude Canada, but now, the top 9 holdings are the same, yet the VGTSX's expense ratio is 30% less. And for some reason, the admiral version of VFWIX has a lower expense ratio than the VGTSX. What the fuck sense does this make at all? When it doubt, keep it simple.
You can bet on funds that track developed markets, emerging markets, small-cap, large-cap, blends, etc, and I won't waste your time making the distinction between these. There's even a fund indexed to the entire world, but you would be better off investing in Betterment than that.
One Stop Shop Funds
If you have less than $6,000 but you want a well-diversified portfolio, Vanguard's Lifestrategy funds are one option.
There are four Lifestrategy funds which have a proportion of US and international stocks and bonds according to how much risk you are willing to take. VASGX is the riskiest one with 80% stocks and 20% bonds, and VASIX is the safest one with 20% stocks, 80% bonds.
Their expense ratios are 0.17%, but there is no admiral version.
Putting $3,000 in VASGX is 'safer' than putting $3,000 in VTSMX. However, in additional to the fundamental principle of less risk = less reward, 20% of that money will be getting hit harder by taxes.
My opinion: VASGX is OK for risk-averse people with less than $10,000 to invest in. I wouldn't buy any of the others without an IRA, and if I had more than $13,000 to invest I wouldn't buy VASGX either.
If after all that, you are still interested in LifeStrategy funds, read more about them here.
How Taxes Work on Stocks:
Taxes are collected only, and always when you gain cash. Gains come from sales and dividends. The more you sell at a profit, the more taxes you pay.
877-662-7447, 2, SSN, 3 for Vanguard customer service.
Why I don't invest in Non-US stocks
People like international index funds because they have higher growth potential. Remember China in 1980? Grew faster than my dick in a bumfight.
I don't touch that shit because
The expense ratio is twice that of corresponding US mutual funds.
They are more volatile
Theoretically, they are less predictable. You never know when any of these countries are going to start a war (Lookin' at you, North Korea), end a stable regime for no good reason (South Africa) or whatever other dumb shit poor countries do (What are those sneaky Russians up to these days?) With the US, you can be damn sure we're bombing some motherfucker 365 days a year.
1Even if you did get lucky and buy stocks low and sold them high, you're going to end up with a lot of cash, and consequently, a lot of taxes. If you think double 00 roulette gives you bad odds, wait until you play the stock market against Uncle Sam.