Today’s question comes from Henry. He asks:
“I got my first job out of college just over a year ago, and I’ve spent a lot of time reading finance materials. I finally like what I’ve got set up (and I’d been saving for a few years before graduation, I worked several jobs – although I just put it all into a savings account. better than nothing): 3% pay match to company 401k; max contribution to vanguard ROTH; 6% pay to aspiration redwood fund; other cash to aspiration bank (1% interest checking); random sentimental deposits to robin hood (free stock trader app). I have some money in wealthfront but I no longer contribute.
I finally have my 6 month safety net in my checking account and I don’t know where to go from here. I’ve looked at the ‘crowdsource REIT’ type things, I’ve considered buying property here in Nashville, buying a drone and selling survey services on the weekends, other ventures, or just plowing more money into the 401k. I can decide what’s best for my situation – but I want to know what ALL my options are first.
So what are all the options after the classic ‘401k match, roth, liquid safety net’? I don’t want to know what’s going to potentially give the best return – because everyone’s situation is different. I just want confirmation that I’ve considered all the alternatives.”
When you’re trying to figure out what to invest in these are your options:
- Buy rental property
- Start or buy a business
- The stock market
And actually, there’s a fourth:
- Yourself (education, workshops, seminars, books)
So you’re not missing anything, but what you’re finding is that each of these options leads to more options. I mean, you’re only investing in the stock market and I’m counting at least five different investment accounts.
And in those accounts you’re probably investing in all kinds of different things because you can choose from thousands of different stocks, bonds, mutual funds, index funds, REITs, MLPs, and so on.
When you have accounts all over the place invested in all kinds of different things you end up with a complicated portfolio, and when you have a complicated portfolio it’s harder to manage, and when it’s harder to manage you’re more likely to be tinkering and tweaking and adjusting things.
And what you’re really doing when you do that is destroying your future wealth.
Here’s why. Over the last 30 years when the S&P 500 returned 10.35% the average investor returned 3.66%, because the average investor is tinkering and tweaking and adjusting things. When you have a simple portfolio you don’t do that.
For example, in my 401(k) account I have an S&P 500 index fund. That’s it, there’s nothing to mess with.
This is the same approach you can take with all these other investment options. You have a full-time job meaning you don’t have the time to be learning more about the stock market, plus buying and managing rental property, plus starting a side business.
You need to pick just one thing, because that way you’re focusing your limited time and energy on just one thing. That’s how you become successful. Once you’re successful you can put it on autopilot and decide if you want to pick the next one thing.
I know at the beginning of your 20s it’s difficult to imagine you have decades ahead to invest in all these different things, but I’m telling you that you have decades ahead to invest in all these different things.
You can spend your 20s learning how to invest in the stock market. So, you’re setting up your accounts and choosing your investments and getting everything streamlined. When you get to the point where you’re only spending a few hours a year managing your investments you can move on to the next thing.
Okay, now you’re in your 30s and you’re buying rental property. You’re deciding if you should buy commercial or residential, learning how to assess properties, navigate financing, screen tenants, and calculate cash flow. Once you know how to do all this you can offload it to a property manager and move on to the next thing.
Now you’re in your 40s and you’re starting a business. This is probably the best time to start a business because it doesn’t matter if it fails because you have other investments. And when it doesn’t matter if it fails it has a better chance to succeed because you’re just trying to be useful to other people, and money is a side effect of that.
And guess what? After all this you still have decades ahead.
What I just described is multiple streams of income. The people that like to tout multiple streams of income never say it takes decades of insanely hard work to develop multiple streams of income, because who wants to put in decades of insanely hard work?
But I’m saying that’s how multiple streams of income really works. Pick the one thing you like doing the most, and just do that thing for now. Because when you take this slow, methodical approach to investing you won’t get distracted, and when you’re not distracted you get better results.