He's been burned by the market before, so I wanted to explain what kind of extremely conservative investments I have made.
As a kid I was never taught to think about money. In primary school we ran a shopping simulation: we learned how to cut checks. My parents never discussed their finances in front of us.
Thankfully over the past decade, my Uncle RR taught me not just methods, but a philosophy for managing money - that it can be used and directed like a force to do work. I am very grateful for his wisdom.
I enjoy the ongoing discussions Sara and I have about money, since it enables us to move toward realizing our dreams with our family. I started to do my own taxes last year, it was a big step toward understanding where my money flowed.
My friend can begin making his money work for him, in a rather secure, rather sustainable, rather non-volatile manner.
1. Set up an account with a low-cost brokerage house.
- Try Fidelity or TDAmeritrade, I have tried both.
2. Buy $10K worth of shares in the Vanguard Total Bond Market Index Fund Investor Shares (VBMFX), or similar.
- Since it is an index fund, it is not actively managed. In other words, it automatically follows a "market benchmark:" "a group of securities whose overall performance is used as a standard to measure investment performance."
- 70% of the holdings of this fund are in US Treasury bonds; hence you will be helping out the US in buying this fund.
3. Hold it for ten years minimum.
- Forget about cashing it out unless it's a true emergency. Unless you are a professional, no one profits in the short term.
4. Discuss the monthly statements with your partner.
- What changed between now and last month? (It probably hasn't, by much).
- How does it change with regard to the Dow? (It is not nearly as volatile as the Dow).
- Look at the monthly dividend the fund yields and allow yourself a modicum of happiness, since it is cold cash and will be taxed at 15%, provided you are not making at or over 400K/year.
- Consider automatically re-investing the dividend back into the same fund.
5. At the end of ten years, re-evaluate.
I believe the fund will have kept up with inflation at the very least, and you will have earned a small but consistent dividend income. It'll probably look like the past 12 years, see chart below.
Play with the graph.
No doubt readers have differing opinions, I would love to hear your comments. In a later post I'll write about investing in a riskier stock index fund to help diversify.
DISCLAIMER: I do not work for Vanguard. I am not a licensed investment advisor, so please consult with an investment professional before you invest your money. This page is for educational use only - any opinion here should not be treated as an investment advice. I am not liable for any losses suffered by any party because of recommendations published on this blog. Past performance is not a guarantee of future performance. Unless your investments are FDIC insured, they may decline in value.
As you would love to hear comments:
ReplyDelete"Extremely conservative" translate probably into "mündelsicher" in German and that means governmental bonds and maybe some other fixed income investments with at least a AAA rating.
Hence I would call your strategy conservative.
You should be aware of the fact that the interest rates are really low at the moment and that means that bonds are expensive and will maybe not be traded for the same value in 10y. (Ok, that only applies to 30y bonds that will not be hold until the end)
Yes! I am very interested in your feedback Thomas.
DeleteThe fund "invests in all segments and maturities of the fixed income market." So I don't think the timing is so important with this fund. I know that buying into the fund meant buying into bonds issued before (perhaps when interest rates were better) since I received some long term capital gains income a month after buying some shares myself.