Investing in 2022 | tax-advantaged, manage risk, portfolio allocation - YouTube

einstein may or may not have said that compounding  is the eighth wonder of the world um don't know if  

that's a misquote but what i do know is that  if you want to understand value compounding  

is the most important concept and i want to  demonstrate this with two examples in investing  

so for example say that you're 25 years old you  have a hundred dollars to begin with you save 500  

every month until you retire at 65 and the market  compounds or grows at like 7 every year that means  

by the time you retire higher you'll have over  a million dollars now if we take the exact same  

example but you start at age 35 instead of 25 you  will have approximately half as much so how is it  

possible that for only saving 10 years less you  manage to lose half the value that is the magic  

and horror and magic of compounding now one of the  really important concepts to understand is that  

capital so things and investments and assets  and things like that has grown much faster  

than wages in our lifetime actually this is true  across history and it's one of the main causes  

of inequality which is why i want to make this  video about investing so that everyone can have  

a basic understanding of how to do this and how  to benefit from compounding so the first thing we  

have to talk about is tax advantaged accounts now  what does tax advantage means well as you know you  

get taxed on lots of things you get taxed on your  income you also get taxed on capital gains which  

means if you buy some stocks and they appreciate  and then you sell them so you've made money  

the government will tax you on that as well what's  awesome about these tax advantage accounts is it  

helps you avoid both or some of these taxes now  i'm going to recommend the order in which to fill  

your various tax advantage accounts and the reason  why i'm recommending this order is because not  

all accounts are created equal some are nicer than  others because they have less restrictions or they  

help more with taxes so that's why we're doing it  in this order okay so first we have your 401k and  

in particular if your company offers an employer  match then definitely at least fill up your 401k  

up until that match because that's free money  that you are leaving on the table otherwise next  

i would recommend filling up your roth ira or your  traditional ira because again these are great tax  

advantage accounts that can be used very generally  so the difference between a roth 401k or a roth ir  

ira and the non-roth version of it is that with  the roth version you essentially take your post  

tax dollars so you already pay tax on it but then  you let that investment grow tax-free versus with  

the non-roth version you put in pre-tax dollars  but you get taxed when you try to take that money  

out and so if you think that you're going to be  in a higher income bracket when you retire then  

you want to go with the roth version if possible  otherwise you can go with the non-roth version  

there are lots of online calculators to help  you figure out which is the best choice for you  

fourth i would recommend these other savings  accounts that all end in sa they're like a  

bunch of acronyms there's like an lp fsa there's  an fsa there is a dcsa or something like that look  

it up there's various eligibility requirements but  what it allows you to do is put in money pre-tax  

so you save on income tax and then you can spend  it on specific categories now just one warning i  

think all of them or at least most of them have a  limit on how much rolls over you every year so you  

make sure that you keep it at that limit if you're  not going to be spending it and then finally fifth  

is other brokerage accounts so whether that's you  know a robo investing account or an account that  

you personally manage or crypto account or any of  those things the reason why i put it as the fifth  

step is because you don't have tax advantages with  it you have to pay income tax and you have to pay  

capital gains tax um and if you actually add up  the value of just the 401k the ira and the hsa  

it's approximately 30 thousand dollars so to get  up to that amount is already a huge accomplishment  

to save more than that i'm sure is a stretch for  a lot of people um so that's why i recommend at  

first investing in these tax advantage accounts  because they're tax advantaged pro tip one of  

the best ways to avoid accidentally spending the  money you meant to invest is to set up automatic  

recurring investments so for example with your  company you can ask them to take your 401k  

savings as well as your hsa savings for example  and pull it automatically from your paycheck  

so that by the time you see your paycheck you  don't even see the money that has automatically  

gone to investments with your personal investments  you can also automatically set up transfers from  

your payment sorry from your checking and savings  account towards your brokerage's account brokerage  

accounts and you can do it on any set schedule  that you would like it's pretty amazing that when  

you do set up these automatic transfers you can  manage to do all the things you need to do with  

the remaining amount of money you have versus when  you don't set up these transfers it's like oh this  

week i bought a lot of watermelon and clothes  and like somehow i don't have enough money to  

go towards my investment goals i wonder how that  happened another pro tip if you are self-employed  

or you have children there are other tax-free  accounts that you can take advantage of and  

in an article i wrote below i link what some of  those accounts are but you can also just google it  

in addition if you live in other countries  obviously this advice is not perfectly  

applicable but you can just google like canada  tax free accounts and you'll find essentially the  

equivalence of the ones that i'm talking about  for other countries okay so now we're talking  

about investing allocation so where should you  actually put your money and this is such a fun  

topic for me because i am a portfolio allocation  nerd anyways before we begin a philosophy on  

investing which now that i think about it is  also sort of a good philosophy for life is never  

let perfection be the enemy of the good maybe  voltaire said that i'm just misquoting people all  

video long but the point being that if you are  worried that you're not doing things perfectly and  

that prevents you from investing that is way worse  than if you just get started and you're a little  

bit wrong or you're a little bit not optimized who  cares at least you're in the game you're in the  

market and you're doing something for your future  self okay so now we're gonna go through these  

big categories going from what i would argue  is the simplest um if you and the least  

involved like if you don't want to be involved  to the most involved as well as most risky  

so the simplest uh types of investment is  either target funds or on robo investor  

so what a target fund is is essentially you might  you might find a target fund that's like i'm going  

to retire in 2060 and it will just do everything  for you it will already have a beautiful portfolio  

allocation across many different countries  and different types of risk levels and it'll  

also rebalance it for you on some basis so you  don't have to worry about anything you just put  

money in to one target fund and you never touch it  until it comes out on the other end another really  

really simple option is robo investing there  are a lot of fantastic robo investors some of  

which are even free so for example schwab's robo  investor is free and again you just give it money  

you sometimes have some personalization around how  risky you want to be or maybe what geographies or  

types of assets you want to be exposed to but  from there on out a computer just automatically  

buys and sells things and rebalances and manages  your risk for you and all you have to do is put  

money in and then take money out if you want to be  a little bit more hands-on than those two options  

i would recommend investing in etfs etfs or  exchange traded funds are essentially index  

funds that index into a sector or a geography  or an asset class so what do i mean by that  

the most famous index fund is the s p 500 which  tracks the top 500 biggest companies according  

to the s p in the united states that are listed in  the united states and buys them in the proportion  

that they occupy this list so essentially  because the us is a super diversified economy  

and the us is a very very strong economy this is  a really good bet for something that in the future  

will probably be worth more than it is now  that bet is essentially the same as do i think  

the united states economy is going to be more  valuable sometime in the future than it is now  

but if you want to be even more involved or to  diverse diversify your risk outside of the s p 500  

you can invest in a variety of other etfs one  thing to note that's awesome about etfs is that  

because they're algorithmic so a computer does  the trading they have really low management fees  

if you look at mutual funds the same mutual fund  as an etf has a management fee of like let's say  

two to three percent because you have to pay the  humans and the humans make mistakes but what's  

great is that you don't really have to pay the  computers much and so their management fees will  

be like 0.1 or like 0.3 percent which is awesome  um anyways going back to diversifying across ets  

there are etfs for everything nowadays  and depending on what you understand  

and what you're interested in you can invest  in those as well so for example you might put  

a lot of your money into the s p 500 and then you  also might put money into europe's etf or an etf  

of asia or an etf of different cryptocurrencies  or an etf of social media companies in china  

or an etf of gold or an etf of commodities like  there's actually just so many nowadays whatever  

you think has growth potential you can  find an etf4 which has low management fees  

and is already diversified across many companies  that's the other important thing to note like  

for example you probably can't keep track of 500  companies but luckily the s p 500 does it for you  

within one stock ticker finally the most risky  category is you individually picking stocks or  

picking other assets that you're interested in  now as a philosophy i like to think of picking  

stocks as gambling i'm not saying the risk  is necessarily the same but i'm just saying  

you probably don't know what you don't  know and you want to think about risk  

in that magnitude um in addition it's kind  of important to note that like most of the uh  

training that happens on stock exchanges right now  are done by bots they're not even people so if you  

think that you were going to beat the market or  marry things if i thought that it's just probably  

not accurate um and that is why i recommend all of  these other options but i own lots of individual  

stocks and assets because i think they're kind of  fun like i'm like oh i believe in this company or  

i'm just kind of curious how this company is going  to do or maybe you know whatever other reason it  

is totally okay to own and pick individual assets  i'm just telling you as a philosophy they're kind  

they're much more risky than these other ones that  i mentioned now when it comes to individual assets  

you can just pick any company hopefully you  do some research but you'll probably pick the  

companies if i'm being honest with myself  based on the things that you have heard of  

so you might pick you know household names  and you might pick some crypto things and  

that's all totally fine just be aware that it is  the most risky option on this list a huge pro tip  

is that emotional investors lose money so when  you see all those ads that are like buy this  

now it's time to sell the market's gonna crash  the market is going to rise forever chill like  

it's gonna be okay when you think about your goals  they're probably pretty long term you're like oh  

i'd love to buy a house in 10 years i'd love to  retire in 30 years i'd love to you know buy a car  

many years from now or something like that and so  most of the time your investments will appreciate  

over time and you'll avoid human errors if you  aren't overly emotional about it and one of  

my best tips for that is to not rebalance your  investments very frequently or to not check on  

them very frequently if you know you're going to  be an emotional investor just check it every three  

months every six months every year depending on  your schedule what you want to do okay please like  

subscribe and comment on this video in the comment  section below let me know any other questions you  

have anything you disagree with and let me know  if you like this setup better like on the couch  

versus in the living room maybe it's more cozy  i don't know anyways see you in my next video