Everyone is investing their time, money, and energy into something. Usually you hear the term “investing” in relation to financial investments. The truth is that “investment” can refer to one’s career, reputation, family, spiritual life, community — anything we expect to grow for some future return is an investment. The problem with viewing investment solely in financial terms is that we ignore the opportunity cost of our financial investments, all of which require time, money, and energy.
I do not believe that the purpose of life is to make money, but to rather to make enough money so I can accomplish my goals. For that reason, my preferred financial investments minimize the time, money, and energy required to maintain them while still providing consistent long-term results. By “consistent long-term results”, I am referring to at least a 5% annual return. By comparison, the US stock market, on average has returned 10% annually, though this value is highly inconsistent for any given year. That’s why we’re interested in a long-term strategy that isn’t crippled by short-term fluctuations.
Active And Passive Investing
If we’re going to achieve a sound long-term strategy that provides consistent results with minimal effort, we need to understand the difference between active and passive investments:
- Active investments require you to actively involve yourself in that investment. Your regular job, playing the stock market, flipping houses, improving your own house, restoring cars or furniture, and maintaining rental properties are examples of this. Some active investments require more participation than others, but you cannot simply “fire and forget” like you can with passive investments.
- Passive investments do not require you to actively involve yourself in that investment. Owning real estate that you do not maintain (either because its not developed or you’ve hired a property manager) and holding index funds are good examples of passive investments, or holding some other long-term asset like gold.
The fundamental difference between active and passive investing is this: when actively investing, you are working for your money. When you are passively investing, your money is working for you. Practically, this means that you should limit your active investments to that which is essential for you and your family, or that which doubles as a hobby, or that which benefits other people. Anything beyond this is arguably a waste of time. Only you can decide whether an investment is waste of time, but I will give you this piece of advice to consider as you make that decision:
Only active invest in that which you can control and can understand. Otherwise, you aren’t actually investing, you’re gambling. I’ll give you a very common example of investing in something that you can’t control and probably don’t understand: playing the stock market. By this I mean the attempt to buy and sell stocks at precise market timings in hopes of making a profit off of “buy low, sell high”. Studies have repeatedly shown that even professional traders rarely beat the returns of passively managed index funds (more on these later). The allure of active trading comes from the potential of making a lot of money quickly. Of course, its also easy to lose a lot of money quickly.
Its possible to make a living off of day-trading, but you must maintain extremely strict rules, keep extremely calm at times, and invest quite a bit of time into researching stocks. In short, to succeed you must become something like a robot. Even if you succeed at becoming this robot, I don’t day-trading is adding much value to society, so I don’t think it is a meaningful long-term career. Nevertheless, I have some friends who day-trade seriously and my hope is that they gain financial wisdom in the process, including the wisdom to transfer their knowledge into a better career.
An example of actively investing in something you can control and understand is starting a business in a sector you have lots of experience in. This may seem obvious, but you’d be surprised how many people try to start businesses that a target a market that they think needs something, rather than targeting a market they belong to that they know needs something. As a specific example, I started my business in 2011 in response to a very specific need I had in my industry — a need that I knew others had as well. I am using this same approach to the second business I am starting as well.
Lastly, do not ignore the opportunity cost of having too many active investments. Even if you do play the stock market and win, that came at the cost of not investing that time and money into another investment. In my case, I’m well aware that I could probably be making money by actively buying and selling on the stock market, but that is time, money, and energy that I’m not investing into my business. Whether you rarely click the Buy or Sell button in Robinhood is irrelevant — what matters is how often you are spending studying stocks and watching stock prices. This is where the real opportunity cost comes into play.
My Investments and Portfolio
I invest my time, money, and energy primarily in my business. Everything else I invest in passively. My portfolio, which represents the allocation of all of my financial assets, looks like this:
- Cash. This is the cash in my bank account, mostly. You should have enough in there to live off of for a few months. I only have a checking account because the interest on money in savings accounts is next to meaningless (0.01-0.02% for my bank). If a savings account helps you organize your cash or keep a budget, more power to you.
- Index funds. I would recommend everyone who qualifies for a Roth IRA have one, and I would recommend they get it through Vanguard and put most of their IRA contributions in one of Vanguard’s passively managed stock market index funds. If you can buy the index fund as an ETF then you may be able to lower the expense ratio even more. The reason I recommend investing primarily in total stock market index funds is that the US stock market has consistently produced a 6% return for the past 70 years. The older you are, the riskier stock market index funds become, however, so if you want to take the passivity of your investment to the next level, you can choose to invest in Vanguard’s Target Retirement funds instead, which will automatically shift the allocation of your fund from mostly stocks to mostly bonds over time.
- Gold. I own a small amount of physical gold and also own a decent amount of gold ETFs. I do not recommend owning primarily physical gold unless you’re concerned that the world’s economy is going to collapse. ETFs are a much simpler way to own gold. The main reason you should own gold is that it is a hedge against the US dollar. If and when the US dollar starts to fall, gold tends to rise. This makes gold a good hedge against inflation in the long-term.
- Property. I own a small amount of property in West Virginia. The only reason I’m willing to own it is that I don’t manage it. I think owning property is mostly overrated, but it can act as a hedge against inflation, which is essential in any portfolio. Although it does provide a type of security that index funds and gold can’t provide, it usually requires active management of some kind. Moreover, even though you do technically control it, what you don’t control is the overall real estate market in that area, thereby making your property more of a gamble than you might care to admit.
- Bitcoin. I own a small amount of Bitcoin through Coinbase because I believe in the vision behind “distributed ledger technology” and think it holds a lot of potential as a hedge against inflation and fiat currencies.
I’m not here to tell you what your investments or portfolio should look like, but I do strongly believe that every portfolio should contain index funds and at least one hedge against inflation / fiat currency. I think these two types of assets form the foundation of any wise long-term investment strategy.
I would also recommend that you invest at least 20% of your gross income each year. At the very least, you should try to max out your Roth IRA contribution each year.