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.