Crippled CEO Blog #115:
You can virtually guarantee that your kid is a millionaire by the time she is your age.
I’m not going to talk about anything you all don’t already know.
This isn’t a secret.
But, after setting this up for myself and realizing how stupidly easy it is, I’ve become an evangelist.
We all pretty much know that investing our money is a good idea.
Oh. Real quick. This is not investment advice. This is for entertainment purposes only. I am not a licensed or certified financial planner. Invest at your own risk. May the Force be with you.
Anyways… Investing is smart. We know this.
But what do you invest in?
Stocks are risky. You have to know which ones to pick. You have to time them right. Doing it right requires research and training, and even then, the smartest experts routinely get it wrong.
Real estate takes a ton of capital to get into and managing tenants is a full time job.
Crypto? I think I like my odds in Texas Hold ‘Em better (though I did make like $7,000 on Bitcoin, but it was pure luck).
So, what is the best way to invest?
In my opinion, the ideal investment strategy for regular people has these prerequisites:
- It’s relatively safe.
- It’s consistent.
- There are no decisions or thinking required.
- You can contribute any amount you can afford, on any schedule that works for you.
- Once set up, it happens automatically. You can just let it go and come back and get your seven figures in a few decades.
As you may have guessed, I have a suggestion that meets these qualifications.
But you don’t want MY suggestion. I just make pool fences. What the heck do I know?
“In the matter of boots, I defer to the authority of the bootmaker; concerning houses, canals, or railroads, I consult the architect or the engineer.” – Mikhail Bakunin
I agree, Mikhail, you zany 19th century anarchist you. Defer to the experts.
So, who SHOULD we listen to?
How about — arguably — the best investor of all time, Warren Buffett?
And what does Warren Buffett think you should invest in?
An index fund.
“I think it’s the thing that makes the most sense practically all of the time.” Bold claim, Buffett.
Now, you might be asking: what in the hecking heck is a hecking index fund?
Firstly, you talk weird.
Second, good question.
Index funds are a form of passive investing. They hold every stock in an index such as the S&P 500, including big-name companies such as Apple, Microsoft and Google, and offer low turnover rates, so fees and taxes tend to be low as well. When you buy one share in the S&P 500, you actually buy a tiny piece of shares of the five hundred biggest companies in the US.
“The trick is not to pick the right company,” Buffett says. “The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently.”
Buffett believes in index funds so strongly that he made a $1 million wager: he’d just plop his money into the S&P 500 index, and his opponent could put their money into literally whatever combination of stocks they wanted. Whoever made more in ten years won the bet.
Buffett crushed them. He won the bet and donated his winnings to charity.
Investing in the S&P 500 index fund fits all of my requirements. It is relatively safe (you’re spreading your money out into the 500 biggest US corporations), it is consistent (it goes up, on average, about 10% per year — this year it went up FIFTY percent, though), you can invest as little or as much as you want, you don’t have any decisions to make, and with an online broker, it can be totally automatic (potentially for free — more on that in a second).
In the beginning, I led that you can use this to “guarantee” that your kid is a millionaire.
I hate to use the word guarantee when it comes to this kind of thing, but at the very least, in my opinion, if you do what I’m about to say, with enough time, it seems inevitable. Again, though, my lawyer wants you to know that this is not investment advice.
So, why do I say this?
As I said earlier, the S&P has an approximate average annual return of 10%.
That means that if you put $400 a month (which is only $13 a day) into the fund of your newborn baby, she’ll have $911,000 when she turns 30. At 40, she’ll have $2,500,000. Age 50: $7,000,000 for an investment of $240,000 ($400 a month for 50 years). That is WILD.
Think about it this way: let’s say you buy an investment property for $300,000. You put $50,000 down and your mortgage is $1,500 a month for 30 years. With interest, insurance, etc., you’ll have spent just over $500,000. And maybe in 30 years that house is now worth $600,000 — and that’s awesome. You now have a paid off rental property that you could sell for $600k if you wanted.
But if you had put that same cash into the S&P, you’d prooooobably have around $4.4 million or so.
Can’t swing $13 a day? How about $7 a day? Even at $200 a month, your daughter will have about $1.2 million waiting for her when she hits 40.
The key to this is that it has to be done consistently for a long period of time, and that’s why the automation might be the most important step.
I haven’t looked into any of the other ones, but I set up an account on E*TRADE that takes money out of my checking account and puts it into the S&P index (stock symbol is SPY) each week automatically. It was about as difficult as signing up for Amazon Prime. I did it once and now I’m just going to let it ride forever. And how much is E*TRADE charging me for this service? Nothing dollars. Zero cents. As far as I can tell, because I’m just doing this one thing, they’re not charging me anything.
But I’m too old. I’m not going to get to see the really crazy gains. It is after the third and fourth decade that this starts getting really bonkers.
But if you have a kid, you could do this for them. You could make sure that they have this massive cheat code in life. If you’re a middle-class American, you can almost certainly afford it. And yet, most of you won’t do it. It’s not hard. It’s not expensive. But you won’t. And that is just so sad to me. My parents didn’t do it. I should have an extra $2 million in an investment account right now. But I don’t. But your kids should. It’s so easy. And if you don’t have kids, do it for yourself. Maybe you don’t have as much time, but you can afford to put more money in. That’s what I’m doing. If I live another 15 years, I should have $1.8 million in there — my brother is going to be stoked when I kick the bucket.
I’m not breaking any crazy news or unveiling any hidden knowledge here. Investing in index funds is pretty widely known. I really doubt that I’m teaching most of you anything. What I am hoping, though, is that maybe one of you is inspired by this to take the action and set up the automatic plan, possibly changing the life of you or your loved one. That would be pretty cool.
If you do, let me know. I would love to hear about it.
Thanks for coming to my TED Talk.
(You know who wants me to put big deposits into her little portfolio? That’s right — your mom. She also gets a text from me every Sunday with a link to the latest blog post. Send a text to 561-726-1567 with the word CRIP as the message to get a link to the blog as soon as it’s up.)