How Do You Personally Invest?

Hi folks,

Today, I’ll be going over how I personally invest. If you’ve read Tangibles, you already know about the investment ladder, which is a bit of what I’ll be explaining today.

Please note: if you are towards the beginning of your career like I am, this might fit your risk tolerance. However, this would potentially be highly inappropriate if you are towards the middle or end of your career due to your portfolio glidepath and sequence of returns risk. Both glidepath and sequence of returns risk are explained in detail in the booklet at the bottom of this page.

When investing, there are more things to consider than simply the investments themselves. There are three questions that we must answer.

1. What are the accounts to invest in, and in what order?

2. What are the investments contained within these accounts?

3. How often do we make purchase orders/invest?

The aforementioned investment ladder only explains the accounts (401k, Roth, HSA, taxable brokerage, etc.) that I invest in. It says nothing about the actual investments in the accounts. One way to look at investing is by thinking of the accounts as a suitcase. The investments are the clothes in the suitcase. The suitcase is not the clothes, and the clothes are not the suitcase. The accounts (suitcase) just holds the investments (clothes) inside of them. Many different kinds of “suitcases” can hold the investments. It could be a mini suitcase, a full-size suitcase, a duffel bag, or even a small carry-on shoulder bag. They can all hold clothes; they are simply containers.

So what are the actual clothes or investments in the suitcase? These are low cost index funds - primarily VTSAX (Vanguard), FSKAX (Fidelity), or SWTSX (Schwab).

Why these ones? I explain that in a video found here: YouTube Link.

If that’s not an option, a simple low cost S&P 500 index fund (like VFIAX) also works.

Now that we mentioned the accounts and investment type, how do we invest?

We do this by dollar cost averaging, which means contributing (buying) a fixed dollar amount of index funds on a recurring basis. Dollar cost averaging is contributing a fixed dollar amount, like $500 every month, to an investment account, like a Roth IRA. I don’t care how overpriced the market is or whether it is crashing. I buy the same fixed dollar amount on a recurring basis. This means that, sometimes, you’ll be getting more stock units, and, sometimes, fewer stock units.

The investment ladder directs us to allocate investment dollars in the following order:

The reason we are using this particular order is because we are trying to not leave free money (401(k) match) on the table and minimize taxes owed to Uncle Sam.

Since I’ll be maxing out the 401(k), I do this in a single step. Basically, I take the annual maximum allowable contribution, which is $20,500 (in 2022), and divide it by my gross income. Then, I multiply by 100. This tells me what percentage of my gross pay I should contribute to 401(k). Specifically, I invest in a traditional 401(k) and not a Roth 401(k). This is because I may want to employ the 401(k) Roth conversion ladder one day, which allows for greater tax savings in early retirement.

Let’s pretend I get paid $140,000 per year. $20,500/$140,000 comes out to 14.6% or 15% of gross pay if we round up. The 401(k) is a container for my investments; it is not the actual investment itself. In my 401(k), I invest 80% of these dollars into the S&P 500, 10% into the S&P 400, and 10% in the S&P 600 because I don't have the option of investing in a Total US Stock Market index fund like I would with VTSAX/FSKAX/SWTSX. The S&P 500 gives me exposure to large capitalization companies, the S&P 400 gives me exposure to middle capitalization companies, and the S&P 600 gives me exposure to small capitalization companies. If you don’t understand what these words mean, you may want to pick up Tangibles, which is linked below. It explains the “why” and what these different words mean in more detail.

After raises go into effect, a 15% contribution may lead to an overcontribution. Therefore, I slightly decrease the contribution percentage to ensure that I don't hit the cap too early in the year.

Let’s say you get paid every 2 weeks, which is 26 paychecks per year. This means to max out your 401(k), you’ll contribute roughly $790 dollars from each paycheck to your 401(k). Since these are pre-tax contributions, this does NOT mean your take-home pay will go down by $790. Your take-home pay will go down by less than $790. The reason for this is because you are being taxed less since you are contributing to a traditional 401(k). Contributing $20,500 decreases your taxable income by $20,500. Instead of being taxed on $140,000, you are only being taxed on about $120,000. Since about $790 are being contributed every 2 weeks, this is automatically being dollar cost averaged.

Next up, we have the HSA, where the annual maximum contribution is $3,650 dollars per year in 2022. This means we will be contributing $140 ($3,650/26 paychecks) of every paycheck to the HSA. The great thing about the HSA is that it is the most tax-advantaged account that I know of. It is triple tax-advantaged since money is not taxed on the way in, on the way out, and growth is also not taxed. Furthermore, since this is pre-tax, this will also reduce our taxable income by $3,650, which means we will be taxed on ~$114,000 even though our gross pay was $140,000. In actuality, our taxable income will be even lower because health insurance premiums are also pre-tax contributions.

With the HSA, some HSA providers require you to have $1,000 in cash with the rest being investable. I invest anything in excess of my "maximum out-of-pocket cost" into index funds. Since my HSA company doesn’t have total stock market index funds, I simply invest this cash into the S&P 500 (VFIAX).

Next, we have the Roth IRA. I do an annual $6,000 backdoor contribution in the first week of the year. If you would like to learn more about this, you can find this here.

Finally, we have the taxable accounts. First is the ESPP, which I would try to max out, if possible. I immediately sell company stock upon issuance and diversify into something like ticker symbol VTSAX. Now I understand this will be a disqualified distribution, but it’s worth it since you will be able to lock in the discount. It generally isn’t worth it to hold company stock for the one or two years it takes for the distribution to be qualified. The only time I would hold company stock is if I believe it will outperform the S&P 500, and I am willing to take that risk. Personally, I believe this is much too risky, which is why I diversify as soon as possible after the stock has been issued.

If you do not have access to an ESPP, then your next step would be to invest in a taxable brokerage account and dollar cost average into VTSAX or similar.

In summary, the answers to our questions above are as follows:

1. What are the accounts to invest in, and in what order?

2. What are the investments contained within these accounts?

Low-cost, market-cap weighted index funds like VTSAX, FSKAX, and SWTSX. If these are not available, VFIAX (S&P 500) also works. If you want to be a bit more fancy, you could split 80% of these dollars into the S&P 500, 10% into the S&P 400, and 10% into the S&P 600.

Please see below for my personal accounts and investments.

Account	Investments
401(k)	80% S&P 500 Index Fund 10% S&P 400 Index Fund 10% S&P 600 Index Fund
HSA	100% FSKAX
Roth IRA	100% VTSAX
Taxable Brokerage Account	30% VTSAX 70% VFIAX Blend of VTSAX and VFIAX due to Tax Loss Harvesting.

3. How do we make purchase orders/invest and how often?

I invest by dollar cost averaging. This means investing a fixed dollar amount over a fixed amount of time ($500 every 30 days, for example). In the Roth IRA, I simply invest in the first month of the year for simplicity’s sake (and also because of the Backdoor Roth IRA contribution).

How can you get all of the battle-tested, tried and true knowledge as quickly as possible? I wrote a book explaining exactly this; it's short; it's cheap, and it's written in plain English. You can find it here: https://amzn.to/32PLB3x. You may also want to consider subscribing to this blog by entering your email on the homepage next to the “Never Miss a Post” section and following the podcast “Nondelusional Investing” wherever you get your podcasts.

Is there anything you found useful or that I missed above? If so, please leave a comment in the comment box below.

Thanks again, and see you on the next one!

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Disclaimer: The article above is an opinion and is for informational/educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. The author has taken care in writing this post but makes no expressed or implied warranty of any kind and assumes no responsibility for errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of the use of this information.