The Couch Potato Portfolio- is a simple, automatic investment strategy. Notice the two terms- Investments & Strategy. Investments are for the long term, holding through the good and the bad. This brings me into -Strategy. A strategy is a plan, keeping the emotion factor out of the mix. Believe me, emotion WILL play a role if you don’t have a game plan to deal with it.
Let’s talk about setting up a fund. What type do you use? There are many options and I use two different types, both utilizing the same setup, set it and forget it strategy. The first one is a ROTH I.R.A (if your in the US) and the second one being a traditional brokerage account. The ROTH I.R.A. – Is like a retirement account, a personal 401K if you will. There are rules with this type of account. Once you place money into the fund, you need to be careful if you are attempting to withdraw the money out of it if you aren’t within the specific age range, or you will incur a penalty/tax. But if you set this account up and fund it each year (limit of $5,500 annually) it will provide you with tax-free wealth when you reach the age of retirement. (Assuming you invested it into the proper funds.) The second type of account is simply an investing account. Think of it like a bank account that allows you to hold stocks, bonds, funds, and cash. There is no limit to the amount you fund into this account each year, but it doesn’t have the same tax benefits as a ROTH I.R.A. does. If you must choose between the two, because maybe you don’t have the funds to fill up the ROTH and still invest into a regular brokerage accounts and selected funds, choose the ROTH, because you investing for your future, not an emergency.
So now on to the different types of Investment funds. Just opening a brokerage account or ROTH account at a brokerage firm, is not investing. That would just be a glorified bank account. Once the money is in there, you must invest it (buy a fund/stock/bond/index) in order for your money to be “invested.” A lot of funds have minimums to be able to invest in them, to begin with. Some don’t. Some funds are bought and sold just like stocks are and those are known as ETF’s (exchange-traded funds.) ETF’s are just fine, but not easily set up for the set it and forget it, model of investing. My suggestion, or at least what I have done, is funded my account, with each paycheck until I was able to reach the minimum to buy into a particular fund.
As I said earlier, watch for fees and the best way to do that, is to avoid them all together. Mutual funds charge a percentage annually ranging from 1%-4%. Think if you will, your fund earned 11% for that year, which is great, but then the fund manager pulls 3% of your earnings out, now you’re left with 8%. This is still good, but what if your year wasn’t that great and you only brought in 7% in earnings, now after they pull their 3% – Your year earnings was really only 4%. That’s not very good now, is it? The funds still get to boast that they averaged 11% or 7% for the year. Doesn’t seem right now, does it? This is why I go with funds known as Index Funds. Index funds attempt to match the market such as the S & P 500, and they charge for a fee less than 1/2 of a percent. That’s 0.05%. Which means let’s say, I earn 9.5% average over the year. When they deduct their percentage, I’ve still earned 9% (This is a simplified explanation, but the result is the same.)
Since the Great Depression, the S&P 500, has averaged 10%. Some years being 20% followed by -5% then by 15%, so on and so on. But its the law of averages over time, utilizing compound interest over that time, that builds the wealth. Let me give you an example: Let’s say you invested 25$ a month into an index fund, that averaged 10%. You did this for your child as soon as they were born, you never had to invest anything else but 25$ each month. When your child was 50 years old, they would be worth over a million dollars. OVER a million dollars. That’s the power of compound interest. Your total investment cost is $15,000 but the payout is massive in comparison. Don’t you think it wise to invest for your child? What if you could teach your child to invest even more than $25 a month? Especially when they are a working adult. Think of even when your old and wrinkled, and your children have their own adult life and family, your still taking care of them and their future even long after your dead and gone.
There is a lot more to dig into, such as what would it take for you to retire? Do you really need as much as they say you will? Will it really take as long? How much do you need to sacrifice? How do I find the right fund for me? Can I afford it? (If you can put $25 a month away, even for yourself, then yes you can afford to invest in your future.)
I will also try to add in an excel spreadsheet tool to show you in a visual way how to achieve the success you want. (I love this tool, can’t wait to add it.)
If you get anything from this post: I hope you’ve at least gotten a small sense of knowing, that you really can change your future in a big way! Just by having the same knowledge the 1% has about consistent investing and time. You need both to build wealth, otherwise your gambling.
As promised, please click the link to get a great investment calculator. Net-worth-calculator. Play around with the calculator and see what it would take you to retire the way, and when you like. Also utilize it to see just maybe, if you can begin investing for your own young ones.