Build up your Fuck You Fund

This is contractor speak for your savings. When you get a pay increase you should not run out and spend it. All of it should go into savings. You want to build a nice solid level of savings so you can afford to be unemployed. This significantly reduces stress and increases your ability to take risks by job hopping. I personally have several hundred thousand dollars. I can live without working for about 5 years.

I do not recommend putting the money strictly into a savings account. You need to invest in the stock market. The investment book that every technical person should read is "A Random Walk Down Wall Street" by Burton Malkiel. It provides a good overview of how the market works. It dissuades you from silly day trading and gambling on individual stocks. It also shows you data as to why long term investing where you put a steady stream of money in the market provides the best returns with the least risk.

I do not recommend hiring a financial planner. They are con-artists. Their fees are insane. The book backs this up with data. They typically charge 1% to manage your money, 1% to sell your investments, and then they have you buy more expensive mutual funds which charge fees immediately. The market averages 8.5%/year over the long haul. That means they have to beat the market by atleast 25% just to break even with the market due to their fees. They often try to get you to invest in funds that have 3% or greater fees.

Over the last 20 years, 88% of mutual funds have underperformed the market after fees. Financial Planners never keep data as to how they do managing money vs. the returns on the market. When you ask about returns they generally tell you about all their silly services and how much money they manage. All that matters is your return and your risk exposure.

The Capital Asset Pricing Model argues that to a diversified investor, the only risk is market risk. This means that if you sufficiently diversify your investments your only risk is the cyclical nature market. You do not have to worry about Enron or the collapse of the telecom industry. The cheapest and most effective way to do this is with cheap index funds. Index funds track the market. They have very low fees. The cheapest fund I have seen is Vanguard's(vanguard.com) Total Market Index Fund which charges .19%(that is less than 1%) with no other fees. If you invest $100k in their fund, this reduces to .09%. So your investment basically go up and down with the market.

Also, keep in mind that if you hold an investment for 366 days you only pay 15% capital gains tax on it as opposed to your top marginal income tax rate(which for technical people will always be atleast 25%). You also only pay taxes when you sell investments. Index Funds buy and hold. So you do not pay taxes until you need the money. The only taxes you will pay will be on your dividends which you should have flagged to reinvest in the fund. Dividends are taxed at between 15-20%.

Money managers will buy and sell your stocks to "rebalance" your portfolio, this increases your taxes and forces you to pay them before you are using the money you made in the investment. As I said earlier in spite of all this active management, virtually all of them under perform the market, then throw in higher taxes that you have to pay sooner and you are getting totally ripped off.

A simple investment strategy is 80% of your investment in the Vanguard Total Market Index Fund and then 20% in a total international fund. Again I use Vanguard for this. You may find another online company that is better or cheaper, but Vanguard seems to have the lowest fees.

I also have a Tax Free Bond Fund with T. Rowe Price which is only available to residents of certain states. I use this to balance out the market. Bonds funds are very liquid and have lower downside risk, but have lower returns than the stock market. This is a hedge for when the market goes down. How much you put into bonds should be based on your age. As you get closer to retirement you should increase your exposure to bonds(and consider some US Treasury Bonds). However, if you are in your 20s you should be 90% in stocks. Since you can afford the risk of a big down turn.

Many of you will say, wait a second the market may crash and lose 30%. Correct, but these are your long term savings and you should not care. Leave the money alone. If the market goes down 30%, you are still getting dividends. Reinvesting those dividends will get you more shares. Plus the money you are investing in the market is buying more shares. So when the market rebounds you will have more shares. This acts like a multiplier effect and actually increases returns long term. The market has consistently gone up by 8.5% for the last 100 years. This basically means there is a steady stream of investment capital going into the market over the long haul. I believe Warren Buffet thinks the market will only go up by 8% due to "friction costs" (people getting ripped off by financial planners), that is still a good return for the long term.

Do not get fooled by investors who get big returns in the short term. The market has been hot the last few years so 15-20% are not unreasonable. However, these gamblers will under perform you in the long haul since you have a more sound strategy. People often fall for the high short term returns than start gambling and over the long haul either lose money or have lower returns than just tracking the market.

I also recommend using an online savings account. They have higher interest rates. I use ING Direct, but there are others. You can set up an ETF transfer from your personal checkings so you can put money into it. This is plus the money in your bond funds are your short term reserves.

You should start investing money monthly. This is called "dollar cost averaging". This is financial planner bullshit for investing money regularly. This reduces your risk. Since you are following a steady plan for investments, the market may go down one month and may go up the next. This reduces your risk exposure. Since you can't time the market.

Investing seems complicated, but if you simplify it and use market index funds, bonds, and an online savings account you can handle it with little effort. You will beat 90% of the financial planners after fees. You just have to accept that some years the market will go down and simply not care. The bigger your Fuck You Fund, the more freedom you have to tell your boss to fuck off. If you can afford to be unemployed, then you will have alot less stress in your life. I also recommend reading the book "The Millionaire Mind". Most millionaires are big savers. Most people who drive expensive cars have large debts. I'd rather have the piece of mind than a nicer car.