The Personal Finance Podcast - The 10 Laws Of Investing (Andrew's Investing Rules!)

Episode Date: August 21, 2024

In this episode of the Personal Finance Podcast, we're going to talk about the 10 laws of investing. How Andrew Can Help You:  Don't let another year pass by without making significant strides toward your dreams. "Master Your Money Goals" is your pathway to a future where your aspirations are not just wishes but realities. Enroll now and make this year count! Join The Master Money Newsletter where you will become smarter with your money in 5 minutes or less per week Here! Learn to invest by joining  Index Fund Pro! This is Andrew’s course teaching you how to invest!  Watch The Master Money Youtube Channel! , Ask Andrew a question on Instagram or TikTok.  Learn how to get out of Debt by joining our Free Course  Leave Feedback or Episode Requests here.  Thanks to Our Amazing Sponsors for supporting The Personal Finance Podcast. Shopify: Shopify makes it so easy to sell. Sign up for a one-dollar-per-month trial period at  shopify.com/pfp Monarch Money: Get an extended 30 day free trial at monarchmoney/pfp Thanks to Fundrise for Sponsoring the show! Invest in real estate going to fundrise.com/pfp Indeed: Start hiring NOW with a SEVENTY-FIVE DOLLAR SPONSORED JOB CREDIT to upgrade your job post at Indeed.com/personalfinance Thanks to Policy Genius for Sponsoring the show! Go to policygenius.com to get your free life insurance quote. Delete Me: Use Promo Code PFP for 20% off!   Links Mentioned in This Episode:  The Impact Of Investment Fees (and Why You Should Never Touch Your 401(K)!) The EXACT Steps You Need to Take To Research and Choose Your 401(K) Investments The Mega-Back Door Roth IRA (How to Get an Extra $43,500 in Your Roth!) 10 Incredible Benefits of a Taxable Brokerage Account! Should You Contribute to a Roth IRA or Pre-Tax as a High Earner? (By Tax Bracket!) How to Open an HSA (and Why You Should Consider it!) - Money Q&A The 1-3-6 Method For Building & Managing Your Emergency Fund The Million Dollar Money Decisions You Should Be Focusing On Connect With Andrew on Social Media:  Instagram  TikTok Twitter  Master Money Website  Master Money Youtube Channel   Free Guides:   The Stairway to Wealth: The Order of Operations for your Money  How to Negotiate Your Salary  The 75 Day Money Challenge  Get out Of Debt Fast  Take the Money Personality Quiz Learn more about your ad choices. Visit megaphone.fm/adchoices

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Find your advisor at IG Private Wealth.com. On this episode of the Personal Finance Podcast, the 10 Rules of Investing, and these are my 10 Rules of Investing, really excited to dive into this one. Everybody and welcome to the Personal Finance Podcast. I'm your host, Andrew founder of MasterMoney.com. And today on the Personal Finance Podcast, we're going to be talking through my 10 rules of investing. If you guys have any questions, make sure to hit us up on the Master Money newsletter. And you can join the Master Money. newsletter by going to mastermoney.com slash newsletter and you can respond to any of those newsletters

with your questions. If you want to get a question answered on money Q&A, you can also ask it there. In addition, you can also leave a comment on this video for YouTube. If you go to the Andergen Kola YouTube channel, we are answering as many of those YouTube comments as we possibly can. And if you just saw our emergency fund episode, the 136 method for your emergency fund, if you go to that episode, you'll see we're answering comments left and right in there as well. And so make sure you check that one out. In addition, if you want to help support the show, follow us on Spotify, Apple Podcasts, or whatever podcast player, you love listening to this podcast on. And if you really want to help out the show, consider leaving a five-star rating and review

on your favorite podcast player. Can I thank you guys enough for doing all of those things? Now, today, we are going to be diving into my 10 rules of investing. And this is going to be the framework that I want you guys to look at and refer back to when you hear me talk about the 10 rules of investing. And this is basically our 10 commandments of investing essentially and something that we are going to be diving deep into a bunch of reasons why these 10 things need to be in place for your investments so that you can become a successful investor. Because our entire goal here at the personal finance podcast and at master money is to equip you with the tools and the knowledge so that you can be able to build generational wealth. And so that one day you'll be able to retire.

You don't have to rely on a job anymore to work. And that is our entire goal. Each and every single person watching or listening to this podcast is going to be able to do that. And it is a very, very powerful thing once you have the tools in place and the knowledge in place to be able to do so. This episode is one of those pillar episodes. And we're going to be creating a lot of these big pillar episodes coming up here because we want you guys to know our major frameworks.

And we want to have them cemented on the podcast so that you have these. episodes to refer back to when you're like, what are the 10 rules of investing? What should I be doing with my emergency fund? What are some of the things that I need to put in place in order to manage my money properly? And so these pillars are going to be available to you. These frameworks are going to be available to you on the podcast and we're going to be doing as many of these as we can until we fill out our frameworks that need to be on the show. So this is going to be something I'm really, really excited about coming up because we are working really hard in these episodes. We worked hours on this episode, kind of filling out our exact framework for these 10 rules of investing. And so I hope you guys can get

a ton of value out of this episode because it's completely for you. We want to give you as much value as we possibly can on this show. And so I think that is where we're going to start off on this podcast. So if you're interested in investing, you want to hear our 10 rules for investing. Let's get into it. Now, these are in no particular order, but this first one is the first thing you absolutely should be doing, which is why we are talking about it at the top of this show. And the number one rule for investing for every single person who is watching this show or listening to this podcast is to automate your investments. If you do not currently automate your investments and you are manually investing your money, maybe you opened up a Robin Hood account and you're taking money whenever

you have a couple of extra dollars throwing it in that Robin Hood account. Maybe you have a 401k or an IRA and you are looking at this and maybe you don't know if you're even, automating your investments. Now is the time to know because money automation is the number one thing that every single person should be doing with their money in order to simplify their life. And the most important thing that we can do with our finances is automate. Why? The number one reason is because it removes willpower from the equation. Your willpower cannot be relied on. You know this over and over and over again. My willpower cannot be relied on why I fail all the stinking time. I'm always failing left and right. I'm failing on my fitness goals. I'm failing on my financial goals. And the only

way to not fail is to make sure that that is automated instead. And so removing your willpower from the equation is going to be the number one thing that you want to do. Automation allows us to invest even when we don't feel like it. A lot of times we're not going to feel like it. We'd rather spend our money on an Amazon shopping spree. We'd rather go to a concert. We'd rather go to the game and take those dollars and put it towards something else. And you can do all of those things. This show is all about teaching you how to build wealth and spend money on things that you want to spend money on. But at the same time, we also need to make sure we are hitting our investment goals so that one day we can have what we all want most, which is financial freedom. Every single person listening to this

podcast, every single person watching this show, every single person watching this show, every single person listening right now wants financial freedom. I know it and you know it. And so to achieve that financial freedom, we have to make sure that we are investing on our dollars. In addition, you know what else it does? It removes the ups and downs from the market. Just recently at the time recording this, we had a big down day in the market on a Monday. Everybody started to freak out. The media caused a frenzy of panic. I got DMs flooded left and right on our social medias. And guess what? The next day, it recovered. covered again. A lot of people on that Monday probably sold off stocks because they were panicking

and they were freaking out. That is the wrong move. And if you're automating your money, you're not worried about what the market is doing if it's moving up and down that day. You are staying steady and just allowing consistent cash flowing into your brokerage account or your IRA or your 401k or whatever accounts you have opened up. And this is going to allow you to have higher investment returns over time because you're just dollar cost averaging into the market. you're taking your emotions out of the equation and you are not stressing as much as somebody else who is manually doing this because they think, oh, shoot, I got to manually pull this out. But guess what? When the market is down, typically stocks are on sale. But do most people have the wherewithal or the courage to invest? Most don't. And so what happens here is because your money is automated, the automation is going to do it for you so you don't have to think twice about doing this. In essence, automation turns investing into a habit. It builds up that habit so you don't have to rely on your willpower.

You don't have to rely on your emotions to make sure you're getting it done. And you don't have to rely on your discipline. Automation does it for you so you don't have to worry whatsoever. This is the way where you can passively invest your dollars, not have to lift another finger, and you could focus on the things in life that you actually want to focus on. A, maybe you want to focus on your career growth so you can earn more money so you can invest more money. That is a way better way to spend your time than to look at investments all day long. or maybe you want to spend more time with your family.

This is the reason why you want financial freedom so that you can spend more time with your family. Automation allows you to do that. I cannot stress this enough. So we are working on a course, by the way, called Money on Autopilot that's going to teach you how to do this in every area of your financial life. But in this episode, I'm going to give you some of the steps that you need to be taking towards automation. Money on Autopilot is going to show you visually how to do this. But I'm going to give you some of these steps so that you can free up your mental energy and not have to worry about investing every single time.

So here are some steps that you need to take to automate your money. The preliminary steps are opening up whatever accounts you need to have. And so I like this order of the HSA, then the Roth IRA, then your pre-tax accounts like your 401k IRA, those types accounts. And then lastly, your tax of brokerage. So if you don't know which accounts to open, we have a bunch of episodes on that. We can link up down the show notes below. And then step one is you need to set up your investment goals for each account type. What does that mean? You need to figure out how much money you want to put into these accounts. Now, the easiest way to do this is if you're doing something like a Roth IRA, for example, and you're trying to max out the Roth IRA, just go figure out what the max out number is for that year.

If it's $7,000, then you're going to go and figure out, hey, what is $7,000 divided by 12? So if it is $7,000, it's $583 and $33 per month that you want to start automating into your Roth IRA. That is the quickest, easiest way. Now, if you don't have that much money to start off with, you can start off with whatever money you have available to you. But the easiest way is to figure out what is the max in that account and how can I contribute that amount every single month towards that max. That is the easiest way to figure out how much you want to invest. Also, it's going to help to work backwards from your financial goal. We're going to talk about later how to figure out what your financial goal is, what your North Star is. But if you do not know what that is, we'll talk about

in a second. But that's another way to do it is to work backwards. Invert, always invert is a famous Charlie Munger quote. And it's basically a quote talking about how to work backwards, figure out what could go wrong. And what could go wrong in this scenario is not saving enough to hit your freedom number. So you got to make sure that you are saving enough towards that freedom number, really, really important stuff. So set up your investment goals for each account type is number one. You're going to try to figure out how much am I actually going to transfer over every single month. Step two is you're going to go to that specific account, whatever account you are starting to automate your investments in, and you're going to set up automatic transfers by linking your bank

account to that account. For some of you, this may sound super simple. For some of you, it's not as simple as it could be. In Muddy on autopilot, we're going to show you how to do that visually. But if you need to do that, and you can Google your bank and say, hey, maybe it's fidelity. Fidelity, how do I auto link my checking account to this so I can just make automatic transfers? Number three, you're going to set up automatic transfers from your bank into that specific investment account. Now, the frequency here is what we need to talk about, because do you want to do it weekly? Do you want to do it biweekly? Do you want to do it monthly? That is completely up to you. Now, me specifically, I do this monthly because for simplicity, it is much easier for me to do this

monthly. But for you, maybe you get paid biweekly. And you just want that off the top so you don't even see that money in your account. So it gets out of your account so you can make sure it gets invested so you don't spend it. And if that is you, there's nothing wrong with going biweekly. There's nothing wrong with going weekly if you get paid weekly. So just figure out what works best for you. For me, it's monthly. Monthly is a pretty easy process. I, know when it's going in every single month so I can check and make sure everything looks okay if I feel like it. So next, you want to select your investments. Now, there's two different options depending on where you are setting up these accounts. If your investment platform allows for

automatic allocation of funds, that's just a fancy way of saying if it allows you to put your money into this account and then invest it automatically in whatever investments you want to invest in, then that is fantastic. 401Ks do that in some of those different accounts. But if you're at broker account does not allow you to do that, you're going to have to go in there and manually make sure those dollars are getting invested. So you're going to have to set up a little alert every single month to make sure that you're at least investing those dollars because you don't want to miss out on some amazing days to get investments done. So just set up a little alert in your calendar, go in there, invest those dollars and then wipe your hands, move on. You're good to go. And then number five,

the last thing I would do is set up dividend reinvestment. So a lot of times index funds, ETFs, a lot of different stocks all have what are called dividends that they spit off. those dividends are sharing the profits with you essentially. You want to take those dividends and reinvest them back into those investments because that's going to allow compound interest to accelerate even faster. So you got to make sure that you set up automatic reinvestment so you don't have to do it and remember to do it. Really, really important stuff to make sure you just click that button. Usually it's just the check box and you can check your brokerage or wherever you have your investment set up and just say, hey, how do I set up automatic reinvestment for X brokerage? And that's the best way to look at doing

net. So those are the five steps I would take. Those are the baseline steps. In Monday Auto Autopilot, we'll dive into some deeper stuff on what you can do to optimize this process. But that is where I would start right there is to track by automating your investments. Now, let's get into number two. Number two is understanding that time is your best friend when it comes to investing. The number one asset that you have in life in general is time. And so when it comes to investing, you need to make sure that you are looking at a long-term time horizon. What does that mean? We here at the personal finance podcast are long-term investors. We are not short-term investors that day trade in and out of the market. We are focused on long-term investing. One of my

favorite quotes from Warren Buffett is my favorite holding period is forever, talking about how he just holds his stocks as long as he possibly can. He's always said, if you're not willing to hold an investment, for at least 10 years, you shouldn't even think about buying it for 10 minutes. And so this is something where most people need to get this in their head, especially new investors, is you want to have a long-term time horizon. Another Warren Buffett quote is, the stock market is designed to transfer money from the active to the patient. And what this means is that for most investors, patience is the number one attribute that I want you to have. Patience is the key to building generational wealth. It's not going to happen overnight no matter what those financial gurus say to you. This is not a get rich quick thing.

This is a long-term investment so that you can build your wealth over time in a steady way that actually makes sense. And so this is exactly why we do this. Now, why do we want to make sure that we have a long-term time horizon? Number one is the power of compound interest. Now, most of you should know what compound interest is, but if you've never heard a compound interest or seen the power of compound interest, I encourage you to pull out what is called a compound interest calculator. get these online left and right. There's a bunch of them out there. And I want you to just put in small amounts of money over long periods of time. And to show how powerful compound interest actually is, obviously none of us have 100 years that we are going to be spending and investing money.

But let me just give you this quick example. If you invested $100 over the course of 100 years at a 10% rate of return, so you invested $100 a month at a 10% rate of return, guess how much money that would grow to. And we just talked about this recently. Guess how much money that would grow to? $232 million. $100 a month over the course of 100 years. Your total investment over that time frame, your total investment to get $232 million was like $200 grand. It is absolutely crazy what compound interest can do over the long term. Now, that is a very drastic example. None of us are going to be able to reap the benefits of 100 years of compound interest, unless science really advances and we get really, really healthy. But this is an example to show you the power of what compounding can do.

So for most of you, you have 10, 20, 30, 40, 50 years to allow compound interest to really get going here. And so because that's the case, you have tons of time to allow your money to grow. Your money can grow faster than you could ever make that money grow. And so getting those dollars invested, putting those dollars to work so that you don't have to work anymore is what we want to do. So time allows compound interest to get to work. So we don't have to work. is hard. That is the key that I want you to understand. Number two is long-term investing helps smooth out to volatility. So volatility is just a fancy word to say the stock market moves up and down over time. Long-term investing allows you to smooth out to volatility so that you don't have to worry about it in the

long run. If you take out a stock market chart and you look at it from a day to day or maybe even a week to week of view, you're going to see the market is going to move up and it's going to move down and it's going to move left and it's going to move right. It's going to look crazy on that chart. But if you take out that same stock market chart and you extend it out as long as you possibly can, all of a sudden you have a smooth upward trend. And the reason for this is because long-term investing, typically the market goes in one direction. Historically, it's always gone in one direction, which is up. And continuously reminding yourself of that is one of the biggest keys, especially when you come and face down days or you face recessions, knowing that in the long run,

the market goes in one direction is the number one reminder that I want each and every single person listening to this show to remember. Number three, and this is the one I really want you to focus on, is the longer you invest your money, the higher the chance of success. Your likelihood of success increases drastically the longer you keep your dollars invested. And this is something that there is no right time to start investing. And this data is going to show you exactly why. And so we looked at some Schiller data of the S&P 500. We go back and look at, you know, how long do you have to stay invested in order to reap a positive return? And so typically, if you look at this, if you invest your money for one day, you have 53%

odds of a positive return. So this is basically a coin flip. If you invest your money in one day, this is basically like betting. It's a 53% odds of a positive return for one day. If you invested for one month, you had a 62% odds of a positive return. Now, this is going to make sense because typically over the course of history, the market has been positive. 74% of the time. So over one month, you have a 62% odds of a positive return. So short-term fluctuations are still occurring. All these ups and downs are still something that you're going to have to deal with. Over the course of one year, you have 74% odds of a positive return. So you stay invested over the course of one year. Your odds jump to 74%. Over the course of five years,

you have an 88% odds of a positive return. So you're holding it for a longer period of time. Your chance of success is 88%. Over the course of 10 years, you have a 95% odds of a positive return. Now, those are some really, really good odds to hold for 10 years, which is why Warren Buffett says, if you're not willing to hold a stock for 10 years, don't hold it for 10 minutes. And then over the course of 15 years, and this is amazing data, this actually used to be 20 years, but over the course of 15 years, your odds of a positive return are 100% historically thus far. This is over the course of every 40-year period since 1900. You have a 100% chance of a positive return as long as you hold for over 15 years. Now, this is investing your dollars into the S&P 500. And so this is so amazing.

It underscores the long-term reliability of investing your money over a long-term time horizon. This is absolutely one of the most powerful things that you can do. So this long-term upward trend shows that it's beneficial to stay invested for the long run, which is why we are long-term investors. If you like minimizing risk, long-term investing is the way to go. Day trading is almost never the way to go. I am completely against day trading. It's not something I'm even remotely interested in. I've tried it. I've done it. I understand it. But it's not something I'm remotely interested in because long-term investing is the reliable source to building wealth, especially if you want to retire and get your time back. That is the most powerful way to do so. Let's get into number

three. All right. So number three is to keep your investment costs low. So I am a huge proponent to making sure that you actually contain your investment costs. It is one of the most important things that you need to do with your personal finances. In fact, we did an episode called the million dollar money decisions that you need to focus on. And making sure that you watch your investment costs is one of the most important factors. In fact, it is a multi-million dollar decision. And you'll see exactly why here in a second to make sure that you are watching your investment costs. So first, I want you to understand a couple of things. A lot of people out there are going to see something like a financial advisor and they're going to

say, hey, I'm going to get you into some of these great funds and they only have a 1% fee and I'm only going to charge you a half a percent fee to choose these funds for you. This is going to be a massive mistake for most people because most financial advisors don't have your best interest at heart and they want to get your money into what is called assets under management, A-U-M. And what this is is they're taking it. percentage of your money that's invested every single year. And I'm going to show you how impactful this can actually be. So typically what we're looking at here is first we're going to look at the

initial investment and how long it would take to grow to $3 million for an initial investment over the course of 40 years if you got a 10% rate of return. And this is just going to sow some key differences on how much you would need invested up front in order to get to $3 million over the course of 40 years. So if you invested this money and you just stopped, how much would you have to invest to get there with various fees. So if you got a 0.03% expense ratio, which is very typical of index funds or an ETF, if you had that very low expense ratio, you would have to invest approximately $202,000. And then you would never have to invest again over the course of 40 years to get to $3 million if you got a 10% rate of return. And so this represents the power of

compound interest. You invest $200,000. It grows to $3 million of the course of 40 years. But with a 1% fee, you'd have to invest about $290,000. So $90,000 more is the initial investment in order to get to the same result. Now, it gets a lot worse, which I'll show you here in a second, when we talk about monthly dollar cost averaging, which is what most of us do. Now, at a 1.5% fee, the initial investment needed increases further to about $352,000. So this is $150,000 more than that first expense ratio, which is 0.03. And then with a 2% fee, you would need $426,000 to be able to get to $3 million, which is significantly more, more than double what you would need with the initial 0.03% fee, which is a massive, massive difference. You need double the amount invested just to get the

same result because somebody had fees in place that were taking away from your dollars. But it gets a lot, lot worse because what I want you to see is we took a scenario where if you invested $500 per month with a 10% rate of return over the course of 40 years, what would happen here? And so if you invested $500 per month over the course of 40 years with a 10% rate of return, your money would grow to $2,797,304. Amazing what compound interest can do. That's just 500 bucks a month over the course of 40 years. So if you're in your 20s, take that to heart because you can have $3 million in that account. Now you may say to yourself, well, what's $3 million going to be worth? you're going to be investing more than $500 per month as you start to make more money and as

inflation changes wages. And so what I want you to just see here is how powerful it is to see your money grow over time. Now with a 0.03% fee, which is typical of index funds, it's typical of ETFs. Your portfolio would be at $2,771,773. So your losses due to fees over the course of that entire 40 years is $25,000. That is a reasonable amount to pay for somebody to to compile 500 different stocks in the S&P 500 for you and keep them all in one big basket over the course of 40 years. Okay. So that is what typically most people should be paying in investment fees. But let's just look and see what happens if you took on a 1% fee. Maybe it's in a mutual fund, maybe it's from an advisor. Who knows where that 1% fee came from? But let's just show how big of a

difference this can be, which is 1% fees. So $500 a month. It doesn't seem like a lot. Doesn't seem like that would just take away much as that 1% fee. If you invested $500 per month over the course of 40 years at a 10% rate of return, your final portfolio value would be $2,070,488. You would lose $726,000 over the course of 40 years to fees just because of a 1% fee at $500 per month. Now imagine if you're investing $1,000 per month or $2,000 per month, how big that number is going to be. It's millions that you're losing to a 1% fee. fees will destroy your portfolio and you need to avoid them at all costs. I repeat, fees will destroy your portfolio. Avoid at all costs. Now let's look at 1.5% because it gets worse.

At a 1.5% fee, maybe they want to put you in a portfolio that has, you know, a 0.75% fee. And then your advisor's like, I take less than 1%. I take 0.75. Well, this is going to add up to 1.5% fee. And when that happens, your final portfolio value would be, 1,786,481. And if you're doing the mental math here, that means you lost 1,010,000 to fees over the course of 40 years. Multi-million dollar decision. Okay. Next one. A 2% fee, gosh, just gets bad. So a 2% fee, the final portfolio value is $1,544,628. And you lost $1,252,675 to that $2.5%. fee. You almost lost 50% of the value of the portfolio because you had to pay a financial advisor assets under management for choosing something that they probably underperform the S&P 500.

This, my friends, is why we need to make sure that we are not getting killed by fees. Because fees will absolutely destroy your wealth. They will destroy your portfolio. And I want each and every single person to understand. There's nothing wrong with having an advisor. Pay them an hourly rate. Do not give them your assets under management. That is the key, because if you give them their assets under management, you are paying a massive amount of money over time to them. And this is something that you definitely want to avoid at all costs. Number four is do not overcomplicate your investment strategy. This is really, really important.

I think most people need to understand this rule because most people try, especially if you're into investing, they try to get into every little thing. Maybe they want a dividend portfolio and maybe they want a portfolio that also has, you know, emerging markets and they want a portfolio that has small cap and they want some large cap and they want to go all over the place. Instead, simplifying your investment strategy is the way to go. So my rule here at the personal finance podcast and at master money is you need to stick to one to five funds. Now, we are index fund investors here, ETF investors. And so we want to stick to one to five funds. Anything outside of that, you are overcomplicating your portfolio. J.L. Collins, the author of the simple path to wealth, he talks about one fund, VTSAX. That's all he has is one fund.

It is every single stock in the stock market, and that's all he owns. Warren Buffett puts his family's money in 90% S&P 500 and 10% U.S. total bond market. And that also is two funds. The Bogleheads, which are really famous for following John Bogle's principles, have a three-fund portfolio, a large-cap portfolio, an international portfolio, and then a bond portfolio. Have a three-fund portfolio. Fund one is large-cap. Fund two is international funds.

Fund three is bond funds. some others have one to two more. You know, some people want emerging markets. Some people like small cap, some of those different things. You may have some beliefs in that in any way, shape, or four. One to five is what you need to stick to. Anything above that and you are getting crazy. If you don't know what you're doing, you can look at target date, retirement index funds is another

great option. They're not as optimal, in my opinion. I'd rather just invest in something like the S&P 500 or VTSAX if you're going to go that route. And so there's a lot of different options for you here, but stick to smaller fund portfolios. If you start to add six, seven, eight, nine, ten funds in your portfolio, in my humble opinion, that is just way too many funds. You do not need to go that wacky. It is getting all out of whack and you're getting way too into funds, honestly. And so this is something I think most people need to completely understand. Simple is better when it comes to your personal finances. We'll jump into

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constantly to the people who listen to this show. The first rule of compounding never interrupted unnecessarily. And this is so truly powerful when you understand it. You never want to interrupt compound interest unnecessarily. Why? Because you are truly going to make a major impact to your portfolio if you do that. And so this is why I tell so many people do not ever sell until retirement. You need to stay invested through thick and through thin, but especially through thin.

Another famous Warren Buffett quote. Because selling early can lead to massive, massive losses in your portfolio. So let's look at a study. So a study came out by Fidelity, okay? And Fidelity found that individuals who cashed out their 401k in their retirement accounts before retirement age could end up with significantly less in their retirement portfolio. So for example, a 30 year old with $50,000 in their 401k cashed out, they could lose up to $400,000 in potential retirement savings by their 60s because they cashed out that $50,000. So that $50,000, they're losing out on $400,000 because they cashed. that out too early. And that's assuming a 7% rate of return. And so what they found is most people who

cash out of their retirement accounts lost on average 40 to 50% of their portfolio's value because they cashed out early. This is a massive, massive difference for you. 40, 50% is nothing to play with. So if you had investment fees and you lost out because you cashed out early on 40 to 50%, your portfolio is going to be a microcosm of what it actually could have been. And so this is something I think most people need to understand. Vanguard found from 2000 to 2019, and this number is actually going to be higher now, but they found that the average annual return from 2000 to 2019 was 6.4%. Okay, it's been much higher since COVID because we've had a big, big bull run. However, and this is just to show the example, those who missed the 10 best days lost out on 2.4% annually just because they did not stay

invested. And so your portfolio can even look drastically different. Even if you cash out and put the money back in, your portfolio can look drastically different. You want to, to stay invested as long as you possibly can so your money can grow over time. But then there's one thing that a lot of people don't talk about here. And that is the fact that taxes and penalties are going to come into play, especially if you are selling investments way too early in something like a retirement account. And most of you should be utilizing retirement accounts. We'll talk about that in a second. But most people will be paying taxes on their money and they will be paying penalties, which are typically around 10% of the portfolio's value. These two things alone could be a massive difference. And if you're a high

income earner, your taxes could be as high as 37% depending on what you're selling and what you're doing. And so it is really, really important to make sure that you avoid selling at all costs. You need to hold for the long run. Do not sell until retirement. A lot of people are saying, well, when do I sell some of my stocks? Typically, you only want to sell when you need to live off that money, which is in retirement. So that is the key, and that is number five. Number six, never try to time the market or beat the market. Now, this is one, most of us have to learn over time because I, in my 20s, was one who thought I could time the market and I could beat the market. I tried everything from penny stock investing to day trading to trading Forex. I've done it

all. I've done every single different type of investing that you could think of. You boy thought he could beat the market. But guess what? I realize really quickly that I cannot. In fact, 88% of professional investors, especially active large cap funds, cannot beat the S&P 500. So if you don't know this, people on Wall Street, their entire goal is to try to beat the S&P 500. 88% of them, you're in and year out, cannot beat the S&P 500 each and every single year. And the longer that time horizon goes, the less of them can beat the S&P 500. And so typically, if the market can't beat the S&P 500 and they have an entire staff of people helping them analyze markets, analyze stocks, during this giant high rise, they have Harvard

and Yale graduates left and right around them, and they can't beat the market. Why do you think that you can? It's a serious question. And this is a question I had to ask myself in order to change my investing philosophy. Why would I think I could beat the market? I don't even have a team. All I'm doing is reading 10Ks and looking at financial reports and I'm listening to conference calls and I'm doing all this extra work.

And for what? The chance to beat the market when I don't even have a team in place and most people don't beat the market? So my chances are I'm going to work really, really hard and underperform the market when I could just automatically invest in the market every single month. And so this is why none of us should ever be trying to time the market or be trying to beat the market because it's not going to happen. Now, here's another crazy thing about those who try to time the market or beat the market is if you look at the returns to the S&P 500, and these numbers are from 1990 to 2001, okay? If you look at the returns of the S&P 500, if you stayed fully invested over that time frame,

your rate of return will be 10.76%. Okay. If you missed the 10 best days, your return would drop over 2% to 8.09%. It is a million dollar difference if you missed that 10 best days, even if you're just investing small amounts of money over time. If you miss the 20 best days, 6.32% is what your returns are going to be. So you go from 10.76% by just staying and invest. and just letting your money ride, and you drop down to missing 20 best days, 6.3 2%. And you don't know when those 20 best days are going to be. This is why we dollar cost average every single month in the market. We keep our dollars invested over that time frame. If you miss the 30 best days, your returns go to 4.83%. 40 best days, 3.5%. And if you missed the 50 best days, 2.26%. And if you miss the

60 best days, 1.12%. 60 days is the difference between having a normal. portfolio and having the same returns as your money in a brick and mortar savings account. In fact, it is way worse than a high yield savings account. This, my friends, is why we don't get involved with compound interest. We don't interrupt it unnecessarily. We don't try to time the market because we don't have a crystal ball. And that's why most money managers can't beat the market because they don't have a crystal ball. And so overall, we need to make sure that we stay invested in the long run, which is why we never try to time and or beat the market. These numbers do not lie when it comes to these stats. Number seven is to use tax advantage accounts

whenever possible. So tax advantage accounts are going to help you significantly in your long-term returns. And we talk about them all the time in this podcast. And so the order I like is, number one, getting your employer match. If your employer offers a 401k or if it offers a Roth 401k and they offer a match, always get that employer match because it's a 100% rate of return of your money. No matter what, no matter what your investment strategy is, always get you. your employer match because it is the highest rate of return that you were ever going to get. Number two is the HSA if you're eligible. You have to have a high deductible health plan, but the HSA is a great option here. We're not going to dive into each of these accounts on this

episode, only because we've talked about it in a bunch of other episodes that you can check out. We can link up down below. Number three is the Roth IRA or the backdoor Roth IRA if you're a high income earner. And then four is pre-tax accounts. Now, quick note on these. When you put money into these accounts, make sure you actually invest those dollars. A lot of people will open up a Roth IRA, for example, and they'll put money in the Roth IRA thinking it's invested, but you still have to choose your investments. You have to choose your index funds or your ETFs or whatever you're going to invest in. And so make sure you're actually investing the money in these accounts. A lot of people, when I say that, they're like, oh, shoot, I've been investing for three years and my money's just sitting

in that account at a zero percent rate of return because I didn't invest in my dollar. So make sure you have to take that extra step and invest those dollars once you do that. Now, you may be saying to yourself, well, how much money can I actually save using these accounts? Can I just open an account at you know, some random brokerage or Robin Hood or wherever else and just put my money in there in a taxable account. Sure, you can do that. And taxable accounts actually allow flexibility. But here's the big difference from a taxable account to using a tax advantage account. So say, for example, you invested $6,000 with a 7% rate of return over the course of 30 years. The tax advantage account would grow to about $567,000. While the taxable account, because we're assuming it has a 15% tax on

gains, which is what most people have, unless you make over 400 grand a year, is going to grow to around $484,000. So the difference is about $83,000 in that scenario with $6,000 a year. And so what you need to understand is that is a huge, huge difference in the long run, especially if you get to 40 years and that money is really, really compounding. So you got to make sure that you are utilizing these accounts. They're going to save you six to seven figures, depending on how much money you're investing and how much time that you have. So always make sure that you are using tax advantage accounts, they're going to make sure that you have way more money in retirement. Number eight is to know your freedom number and know your why. So your freedom number is what

we call the North Star. It is your guide. It is your compass. It is your trusty light and the dark world of finance. But the beautiful thing about your freedom number, it is very simple to figure out. And so the math is super easy. Anybody listen to this podcast could do it. You could pull out your old trusty calculator on your phone right now and be able to do this calculation. So what you want to do is you want to figure out what your annual expenses are going to be in retirement. Okay. So say for example, you want to spend $80,000 per year in retirement. You're going to take $80,000. You're going to multiply it by the number 25. Okay, 25 is the key number here. And $80,000 times $25 in this example is going to come out to $2 million.

That's how much money you need to have invested in order to be able to be free, financially free, where you can spend $80,000 per year. and still be able to preserve your wealth throughout the course of retirement. And so then math is super simple. The hard part about this equation is figuring out how much do I need to spend in retirement. So we have a future episode coming up that's going to teach you exactly

how to figure out this number because it's a lot harder for people to figure out than most understand. And so I want you to make sure that you know how to do this. So we have a future episode coming out that's going to be talking about this. Rule number nine is to invest a percentage of your income

when you get paid. So one thing I want you to do is every single time you get paid, I want you to pay yourself first, meaning that you are going to put your money into your investment accounts, into your freedom accounts, so that you can pay yourself first, and then you're going to spend what is left over. This is how you build wealth. This is how you get to the next level with your money, is you make sure that you are paying yourself first. But the key here is, you might be saying to yourself, well, how much do I actually start investing? We want you to be investing at least

20% of your income if you're just starting out. Now, if you've been listening to us for a while, we want you to be at 25 to 30% of your income is what we want you to get invested, but you got to build out your emergency fund, you got other goals, you got to get into place first. And so we want you at least to invest 20% of your income. Now, you may be saying to yourself, how on God's green earth am I ever going to be able to invest 20% of my income? Well, let me help you here because we have something called the 1% investment framework that's going to help you get to that 20% number. It may sound daunting to do that up front right now, but the 1% investing framework is going to help you through this process.

And so here's exactly how the 1% investing framework works. So the first thing I want you to do, I want you to figure out how much of your income you can actually start investing. And so let's take an example. You can invest 10% of your income. Okay. So if you can invest 10% of your income, in month one, invest that 10%. In month two, I want you to figure out a way that you can invest an additional 1%. So maybe it's cutting back on some expenses. Maybe it's just increasing your income. maybe it's just kind of adjusting where your money is going and then being able to invest that additional 1%. This is not going to be a huge deal for most people. And it's going to be something that you can make that slight adjustment, that 1%. And then the next month, I want you to increase

it another 1%. And by making these slight adjustments month over month, what's going to happen here is over the course of the next 10 months, you'll be investing 20% of your income. And it's making these slight adjustments. So you're not just ripping the Band-Aid off all at once and it's really painful and it's something that's very difficult to do. Instead, you can figure it out along the way. Maybe you need to earn a little more income. So you decide, hey, I'm going to start negotiating my salary. I'm going to earn a little more income so that I can invest a higher percentage of my income in order to achieve my financial goals. This is the key to building wealth, is doing it in small incremental phases month over month progressing so that you can hit your financial goals. And so that's

what I want for each and every single one of you is I want you to just get through the process slowly. 1% investment framework will help you do that. It'll help you increase your investment goals every single month until you get to the point that you need to get to or whatever your financial goals is. Now, if you've been at 20% for a long time and you're trying to get to 25, do the same exact exercise. If you've been at 25 for a long time and you're trying to get to 35 or 40 because you're trying to achieve financial independence, do the same exercise. Doing it slowly over time in figuring out where your next 1% is going to come from is the key to being able to get to that point. And so if you make this your ultimate goal, I know you can achieve it. The last one, number 10, is to invest in only what you

understand. And so this is one of the most important things overall is you don't have to be some sort of financial guru or financial whiz, but you do need to invest in what you understand. So if you're going to invest in individual stocks, you need to understand each and every single one of those stocks, understand how the business runs, understand their financials, understand their management. This is why I don't invest in individual stocks. I don't have time for all that. Instead, I invest in index funds. But if you invest in index funds, you need to understand what index funds are. You need to understand why you're investing in index funds or ETFs. You need to understand what the purpose is and you need to understand what the expected outcome should be for index funds and what the conservative outcome should be as well. And so this is the key is you've got to at least invest only in what you understand. Because if you don't understand your investment, you're just gambling. And so you need to have a full understanding of those investments. Now, if you want to invest in index funds in ETFs, we actually have a course called Index Fund Pro. that teaches you exactly how to do that. It's shameless plug. But if you go to mastermoney.com slash courses, you can check that out.

But I want each and every single one of you to make sure that you fully understand what you're investing in before you dive deeper into some of those investments. Listen, I hope you guys enjoyed this episode of the Personal Finance Podcast. Our entire goal is to bring you as much value as possible. And thank you so much for investing in yourself, because that's exactly what you're doing by watching or listening to this show. I truly appreciate each and every single one of you. We'll see you on the next episode.

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