When I decided to manage my own investment portfolio, I knew it was time for me to study up. After all, this was my family’s future we were talking about here.
I sought out resources, books, voices, and tools that made the investing process as simple as possible. With all the other responsibilities I had in my life as a husband and father, I didn’t have time to spend hours each week monitoring my portfolio.
I’m an amateur personal finance geek.
Your tools have helped me become a smarter investor.
Personal Capital Dashboard User, February 2021
After educating myself and interviewing over 200 money experts, certain smart investing truths continued to ring true. We started to use them for our family’s investments and they have helped us quite a bit. We’ve learned to remain calm in the face of a down market and have now set ourselves up for a comfortable retirement (and potentially an early one at that).
Among others, here are 5 smart investing strategies that help our family keep the process simple, effective, and financially rewarding.
1. Invest with Tax Advantages
Benjamin Franklin once said, “Nothing is certain but death and taxes.” This statement is quite true. I don’t have any advice on that first certainty, but I do love looking for ways to reduce our tax burden each year.
Read More: Guide to Filing Your Taxes in 2021
When it comes to investing for our retirement, we take advantage of as many tax savings opportunities as possible. Here are a few:
- 401k: Through investing pre-tax in our workplace 401ks, we reduce our taxable income each year and pay fewer taxes today. The tax bill will come due when we withdraw the funds in retirement. There is also a Roth 401k option that allows us to invest after-tax dollars that grow tax-free as well.
- IRA: Similar to a 401k, we’ve used both a Traditional IRA and a Roth IRA to invest pre-tax and after-tax dollars for retirement. When we contribute to both a 401k and IRA, we are truly boosting our chances for a comfortable retirement.
- Health Savings Account (HSA): We use our HSA to help us save on taxes for qualified medical expenses and if we’re lucky, a stealth retirement fund.
By utilizing these three tax advantaged investing vehicles, we’re reducing our tax burden (legally) and growing our accounts as well. Over time, our investments will grow and give us a comfortable retirement nest egg and funds to support our healthcare needs as well.
Personal Capital put together a guide for investors who want to tax- optimize their portfolio. It’s free to download and unlocks access to the Personal Capital Dashboard, an all-in-one money management tool.
2. Make Investing Automatic
My wife loves it when I bring her a cup of coffee in the morning. To make her smile on a near daily basis (and to score countless “Awesome Husband” points in the process), I set an automatic timer on our coffee maker the night before. This simple task ensures we have a happy caffeinated wife every day.
Smart investing can be like making coffee. By setting up an automated investment plan, we consistently invest on a scheduled basis so we never forget. Sometimes the hardest thing about investing … is actually remembering to invest!
My wife and I have been automating our investing for the last decade, and it’s helped us to become millionaires in our 30s. Each month, we allocate a certain amount towards our investments. That amount is taken directly out of our checking account, and as time goes on, we get closer and closer to our investment goals.
3. Create a Diversified Portfolio
Diversifying our assets and investment vehicles is another smart investing strategy we utilize. This helps us to feel comfortable knowing we’re not too heavily invested in one certain area.
This diversification occurs in a few ways:
- Asset Class Diversification: Instead of only investing in stocks, we invest in bonds and real estate (through REITs). This gives us coverage in both riskier and less volatile assets. It helps keep the queasiness to a minimum!
- Diversification Within Asset Classes: When we invest in stocks, we diversify the diversification! This is done by investing in U.S.-based stocks (both Large Cap and Small Cap) and international stocks.
- Tax Diversification: Outside of asset classes, we invest with tax diversification in mind as well. Both my wife and I have pre-tax retirement investments as well as after-tax. Depending on our income level in retirement and the amount we’re taxed, this tax diversification will help us to make the most intelligent decisions around our retirement income.
Our investments are mostly made up of index funds so instead of investing in one U.S.-based stock, we’re investing in thousands of them. Diversification on top of diversification … on top of diversification. You get the idea.
4. Rebalance Annually
We’re going for an 80% stocks and 20% bonds portfolio given our age and time horizon to retirement. Depending on the year, this diversification plan can get completely out of sync.
For example, last year was a better than average year for the stock market. Given that, our asset allocation became heavily favored toward U.S.-based stocks (closer to 83% stocks and 17% bonds).
To correct this, we needed to sell some of those U.S.-based stocks in exchange for more U.S.-based bonds. This process was a lot easier with the help of Personal Capital’s free Investment Checkup tool. With all of my investment accounts synched up into one place, I was quickly able to find my asset allocation was out of whack and update it that day.
I set a Google Calendar reminder to do this rebalancing process once or twice per year. It takes me around 30 minutes, and then I go back to my set-it-and-forget-it investment ways.
5. Invest for the Long Term
There are certain days when the 24-hour news cycle is abuzz about the stock market dropping. Big crashes make for big headlines. I get it.
Since we’re committed to investing for the long term, these types of “breaking news” stories won’t break us. We have a plan and we’re sticking with it during the ups and the downs.
Although past market returns don’t predict future returns, the history of the stock market indicates that what goes down eventually goes up. With 20 years left until we retire, we have a long way to go and we don’t want to miss out on any of those incredible gains by jumping ship early.
Personal Capital compensates Andy Hill (“Author”) for providing the content contained in this blog post. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.