3635: Investing, Reduced to Its Core by Paula Pant of Afford Anything on Investment Strategy

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[00:01:00] This is Optimal Finance Daily. Investing reduced to its core by Paula Pan of affordanything.com. Myth. Wealth comes from living below your means. Fact. Frugality is the first step, not the last. I'd like to tell you about one of the most interesting couples I know. They were apartment dwellers when we met and I don't mean the New York City variety. Their dark, musty apartment festered in an air

[00:01:30] area where land is plentiful and square footage is cheap, where apartments are synonymous with squalor. I'm not sure when their tables turned or how long they toiled behind the scenes building their family empire. I can't pinpoint the year their net worth climbed into seven digits. Their newfound wealth isn't flashy. They drive modest cars and wear nameless brands, though they've upgraded into a nicer home.

[00:01:55] The main hint that they're moneyed, though, isn't reflected in their purchases. It shows in how they spend their time. Neither have jobs outside the home anymore, nor do they have any sense of urgency about getting one. They travel regularly, ski often, kayak on occasion, and hike like it's going out of style. Occasionally, I'll spend a weekend with them. When we're together at the grocery store, I see them scanning their receipt carefully, checking for errors. Did the milk ring up twice?

[00:02:24] For a moment, I'm tempted to believe that their wealth came from penny pinching. See, I tell myself because I want to believe it. They're frugal. They pay attention to sales and check receipts, and they're millionaires. I bet that's how they did it. Then I slap myself. College students and low-wage workers check their grocery receipts for accuracy, I remind myself. And they're not millionaires. Yet.

[00:02:48] Here's a lesson I wasted years figuring out. Paying attention to sales, scrutinizing receipts, negotiating bills, these are symptoms of attentiveness to money. But they're not the cause of wealth. You don't grow wealth by clipping coupons and turning down the thermostat. You grow wealth by starting businesses and investing. Frugality is the first step, not the last. Why investing doesn't get enough credit

[00:03:15] Most personal finance advice emphasizes saving, saving, saving, often to the exclusion of the limitless potential found in earning more. Earning more while maintaining current spending is the most effective way to build your net worth. It's also the most overlooked. I have a few theories why. Number one, low-hanging fruit.

[00:03:37] Chopping a $35 monthly cable TV bill is easier than starting a side business or buying a rental property that brings in an extra $800 per month. If you're new to the personal finance scene or if you're prone to overspending, frugality provides the quick win, the low-hanging fruit. Number two, simplicity. Avoiding packaged foods and dining at home on Friday night is easy to understand. These articles require minimal research.

[00:04:06] Understanding how a mortgage amortization schedule works and knowing the difference between an appraisal and an assessment, these topics are complex and therefore less discussed on the distracted internet. Number three, accessibility. You need confidence to believe you can launch a business, quit your job, and travel to Italy with a one-way ticket. You don't need as much confidence to believe you can shop at TJ Maxx instead of Banana Republic. Frugality feels accessible.

[00:04:35] There's less risk of rejection, less fear of failure. Number four, instant gratification. Buying a sweater on clearance, scoring a great deal on shoes, these cost-cutting measures provide us with instant gratification. Sweet, I saved $12 on groceries. Buying your first rental property takes months. It's no surprise that people are drawn to instant results, even if these don't move the needle as much.

[00:05:01] The takeaway, however, is not to abandon frugality altogether. It's to recognize frugality as a stepping stone that creates the initial seed money for your businesses and investments. Those businesses and investments create sustainable, freedom-inducing wealth. There are three types of investments. Number one, owner. Like stocks, businesses, real estate. You're the owner. You profit from performance. Number two, lender.

[00:05:30] Bonds, peer-to-peer lending, owner financing. You're the lender. You profit from spread. Number three, holder. CDs, money market accounts, savings accounts. You don't profit. You hope to break even, even with inflation, but you probably won't. We'll focus this article on investments in which you're the owner. Here are four strategies for investing in assets you own. Number one, three-fund portfolio. First, a short vocabulary lesson.

[00:06:00] Broad market is a fancy way of saying gigantic market, like the entire U.S. or every big company in Europe. Index funds are baskets of stocks that mirror an underlying trading index, like the Dow Jones. Broad market index funds represent a huge cross-section of the market. Okay, a few more definitions. Equities, or stock markets, are classified in three ways. Number one, size. Like large, mid-size, and small companies.

[00:06:30] Two, style. Like value, growth, and blend. And three, geography. As Americans, we divide the world into U.S. and international. We break down international as developed markets like Western and Northern Europe, Australia, New Zealand, Canada, and some parts of Asia, like Japan, Hong Kong, and Singapore. Emerging markets like Brazil, Russia, China, India, South Africa, Thailand, and the UAE.

[00:06:57] And frontier markets like Kwanha, Serbia, Croatia, Jamaica, Ukraine, and Botswana. This elaborate setup leads to the following idea. Invest a third of your portfolio in each of the three broad markets. U.S. stocks, U.S. bonds, and international stocks. Keep a one-third proportion in each. Funds will rise and fall over time, which means you won't hold one-third forever. Rebalance annually to return to one-third.

[00:07:27] Repeat until you're 55 to 60 and then switch to a 50-50 split between U.S. stocks and bonds. I'm aiming this specifically at U.S.-based listeners. Is this the most optimized portfolio? No, it's the easiest. Done is better than perfect. Extra credit. If you want something that's slightly more sophisticated, try this. 110 minus your age equals the proportion in stocks with the rest in bonds.

[00:07:54] Of the proportion that goes into stocks, 70% goes into U.S. and 30% goes into international funds. If you're 30, for example, 80% stocks with 56% U.S. stocks and 24% international stocks and then 20% in bonds. If you enjoy a bit more risk, modify the equation to 120 minus your age. If you lean conservative, modify it to 100 minus your age. Number two, five-fund portfolio.

[00:08:24] Here's a modified version of the strategy I just mentioned. It uses five types of index funds. 20% in U.S. large caps. 20% in U.S. small caps. 20% in international emerging markets. 20% in international developed markets. And 20% in U.S. bonds. If you like to place tiny bets on the market, try a modified version that lets you stick 10% of your portfolio into another alternative.

[00:08:52] So 10% in random, wild, fun investing. 18% in U.S. large caps. 18% in U.S. small caps. 18% in international emerging markets. 18% in international developed markets. And 18% in U.S. bonds. Use personal capital to track your investments. When you log in, you'll see your allocation at a glance. You can also use this to track your net worth. It's free. Number three, real estate.

[00:09:23] Don't spread yourself too thin. If you want to become a real estate investor, choose one niche and one strategy. Niches. Residential, retail, apartments, office, notes, REITs, etc. Strategy. Rentals, flipping, wholesaling, etc. Start with the end in mind. My goal is passive income, so I prefer rental properties thanks to their cash flow. My strategy is straightforward.

[00:09:49] Buy, rehab, put my property manager in charge, and collect payments. Dump the profits into massacring the mortgage and or buying more houses in cash. Number four, launch a business. Many entrepreneurs don't think of themselves as investors. But having your own business is the ultimate investment for reasons that are obvious if you think about it. There are two types of businesses. One, lifestyle. Your goal is a lifestyle that creates freedom and flexibility.

[00:10:19] You're happy as an independent or solopreneur. If you hire employees or contractors, you'll limit your growth to a tiny team. You don't want scale, you want lifestyle. Number two, growth businesses. You're building a company that could be an acquisition target or one that you can take public. You harbor huge ideas. You want to expand to 40 employees by December. You want to scale up, then cash out, or keep scaling.

[00:10:47] So, what should you choose? What does this mean in your life? Here's my challenge to you. Number one, pick one method that we've discussed. Rebalance your portfolio. Buy a broad market index fund. Choose a real estate niche. Number two, write the smallest step required to get started. Start a website for your lifestyle business. Learn more about rental properties. Number three, create a deadline for that small step. Two days? Five days?

[00:11:17] And number four, start. You just listened to the post titled, Investing Reduced to Its Core by Paula Pant of AffordAnything.com. This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks.

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[00:12:14] Listeners of this show will get a $75 sponsored job credit at Indeed.com slash podcast. That's Indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed Sponsored Jobs. Paula makes a great point here about frugality. Living below your means and being frugal is a great way to increase the gap between your income and expenses, but you then need to allow that money to work for you in order to build wealth.

[00:12:42] I think it's much easier to prioritize investing when you recognize that your money is always going to be able to work harder than you ever can. And to be honest, investing is still a pretty intimidating topic for me. I don't consider myself the most savvy investor. So I appreciated the sentiment here that done is better than perfect. When it comes to the portfolio strategies recommended in this article, you might also want to check out the book, The Simple Path to Wealth by J.L. Collins.

[00:13:10] He recommends an approach that's similar, but even simpler. Reading that book will also give you more of an opportunity to understand the recommendations in a way we can't cover in a 10-minute podcast. Also remember that you will improve and get more comfortable with investing as time goes on. So for example, my first investments were contributions to my 401k. I contributed just enough to get the employer match and put it in a target retirement fund.

[00:13:39] Then as I learned more, I switched to a 100% stock allocation with broad-based total market index funds. Then I started fully funding my retirement vehicles and opened an after-tax brokerage. Then I started my own business. And I imagine this will continue evolving as I get even more comfortable because I eventually want to get into real estate investing as well. And that's another weekend edition of Optimal Finance Daily in the books.

[00:14:07] Thanks so much for your support and for listening every day, of course. Have a great rest of your weekend if you're listening in real time. And I'll be back tomorrow where your optimal life awaits.