How Dave Invests His Own Money
Considering I’m always telling you how to invest your money, I figured it is only fair for me to show you how I invest my own money.
As you know by now, I believe most people make this way too complicated.
I have three kinds of accounts:
- Liquid Cash Savings (at a bank)
- A brokerage account (an account where you can buy and sell stocks and bonds)
- A 401k
I usually suggest that you have $10,000-$50,000 in liquid cash savings (the amount is relative to your monthly budget). Personally, I need more cash on hand, as I am running a business that has expenses (employees, lease, etc). In the event my cash account exceeds a certain amount, I’ll invest the excess cash in my brokerage account.
Inside the brokerage account I put about half of the money in stocks and half the money in bonds. Stocks and bonds have never gone down in the same year in modern economic history(source). Therefore I know that at any given time at least half of my money should be in positive territory. History shows that on average, this kind of mix has returned between 5-10% per year, over the long term (source).
There are no penalties for taking the money back out, and I have liquid access to my money. Stocks only make up half of the portfolio, because if the stock market goes down and I have a big expense, I have a big problem. It would force me to sell investments that are temporarily down. Selling temporarily down investments is a big no-no.
It’s simple really. If the stock market is up and I need money, I take it from the stock portion of the portfolio. If the stock market is down and I need money, I take the money from the bond portion of the portfolio.
I don’t concern myself with losing a bunch of money, because a balanced portfolio of stocks and bonds has a very long and successful track record. Of course, anything could happen, but I want my money to work for me inside investment vehicles that grow my money. I am not okay with getting 1% at the bank.
This one is simple. I put 100% of my 401k contribution into the stock market. Why? Because I don’t need to touch the money for at least 30 years. And what is the worst 30 year period in the history of the stock market (since 1930)?
From 1954 to 1984, the U.S. stock market had the worst 30 year stretch out of the past 80+ years. During this “terrible” time period, the S&P 500 returned an average annual return of 9.45%.
$100,000 invested in 1954 was worth over $1,500,000 in 1984. If that was the worst example in modern economic history, why would I put my money anywhere else?
Bonds have also done well over the past 80 years, but not nearly as well as stocks.
So, that’s it. That’s how I invest my own money. Of course I am particular about what kinds of stocks and bonds I hold in my portfolios, but I wanted to keep this as a “big picture” discussion.
Once retired, the strategy is quite different. You would have less stocks and more bonds in your retirement portfolio. Similar to my brokerage account, if you are actually living off of the portfolio, you need to be more conservative and balanced.
I hope this was helpful and opened your eyes to how a professional invests his own money.