Investment advice from a Dad. Be a tortoise not a Hare.

Very Proud of my babies. This is one of my favorite Christmas memories of them.

You will always be my babies

 

Investing for Jen and Kristen: A Tortoise, Not a Hare Approach

When it comes to investing, I encourage Jen and Kristen to embrace the steady and deliberate approach of the tortoise, rather than the haste of the hare.

I’ve been investing in mutual funds since I was 22 years old. My slow, methodical approach—spreading risk and using time as an ally—has allowed me to benefit from the power of compounding returns over decades.

Together, your mom and I worked hard to save and invest wisely, achieving financial independence. This has given us the freedom to enjoy life on our terms, becoming “time affluent” rather than victims of “time scarcity.” Today, we are recreationally employed, with enough financial flexibility to pursue our wishes guilt free.

This guide is designed to help you achieve similar success by understanding mutual funds, asset allocation, and utilizing low-cost Fidelity mutual funds. The goal is to help you avoid risky stock speculation by owning a diversified portfolio that represents the entire market.

1. Understanding Your Goals and Timeline

Start by clearly defining what you’re investing for:

• Retirement?

• A home purchase?

• Other long-term goals?

Then, consider your timeline. Is this money needed in the short term, or are you investing for the long term?

Lastly, assess your risk tolerance. How comfortable are you with market fluctuations? For example:

• Can you handle seeing your investments drop by 50% in a downturn?

• Your risk tolerance will determine whether your portfolio is conservative, moderate, or aggressive.

If your goals are long-term, consider a more aggressive approach, giving your portfolio time to recover from potential losses.

2. Basics of Asset Allocation

Diversify your investments across asset classes like stocks, bonds, and cash. A common rule of thumb:

• Subtract your age from 100 to determine the percentage to invest in stocks. For example, if you’re 30 years old, consider 70% in stocks and 30% in bonds.

Adjust this allocation based on your goals:

For long-term goals (e.g., retirement): Be more aggressive (e.g., 85% stocks, 15% bonds).

For short-term goals (e.g., a car purchase): Be more conservative (e.g., 35% stocks, 50% cash or money market, 15% bonds).

3. Open an Investment Account

If you already have a Fidelity account, you might be able to expand it. Here are your options:

Retirement Accounts:

Roth IRA: Contributions grow tax-free, and withdrawals are tax-free after age 59.5.

Traditional IRA: Contributions reduce your taxable income now, but withdrawals are taxed later.

Taxable Accounts:

• Ideal for non-retirement goals. While gains are taxed yearly, they’re at a lower rate than wages.

2024 Contribution Limits:

• IRA contributions are capped at $7,000 annually (provided you have earned income).

4. Choose Low-Cost Fidelity Mutual Funds

Here are some excellent options:

Stocks:

• U.S. Total Market Index Fund (FSKAX)

• Zero Total Market Index Fund (FZROX)

International Stocks:

• Index Fund (FSPSX)

• Zero International Index Fund (FZILX)

Bonds:

• U.S. Bond Index Fund (FXNAX)

Money Market (Low Risk):

• SPAXX

Target Allocation Funds:

• Fidelity Freedom Funds (auto-adjusts allocation based on your target retirement date).

Look for funds with low expense ratios (fees charged to manage the fund), as they directly impact your returns. Index funds typically have the lowest fees.

5. How to Invest $36,000

Step 1: Build an Emergency Fund

Set aside 3–6 months of expenses in a money market fund (SPAXX). For example, if your monthly expenses are $3,000, save $9,000.

Step 2: Allocate the Remaining Funds

If you have $27,000 left to invest and a long-term timeline, consider this allocation:

• 70% U.S. Stock Index Fund (FSKAX): $18,900

• 10% International Index Fund (FSPSX): $2,700

• 20% U.S. Bond Index Fund (FXNAX): $5,400

Step 3: Dollar-Cost Averaging (Optional)

Instead of investing all at once, invest a fixed amount monthly (e.g., $3,000 per month over 12 months). This reduces the impact of market volatility.

6. Rebalance Periodically

Check your portfolio annually and rebalance if necessary. For example, if your initial allocation of 80% stocks and 20% bonds shifts to 90% stocks and 10% bonds, sell 10% stocks and buy bonds to restore balance. Consider the tax implications of selling stocks in taxable accounts.

7. Understanding Mutual Funds

Mutual funds pool money from many investors to buy diversified stocks or bonds. Key benefits include:

1. Professional Management: Fund managers handle investments.

2. Diversification: Reduces the risk of individual investments performing poorly.

3. Accessibility and Liquidity: Easy to buy, sell, and manage.

Types of mutual funds:

Stock Funds: Invest in companies of all sizes (e.g., large-cap, small-cap, international).

Bond Funds: Lower risk; essentially loans to companies or municipalities.

Balanced Funds: A mix of stocks and bonds.

Index Funds: Track market indices (e.g., S&P 500) with minimal management costs.

Target Date Funds: Adjust allocation as you near a specific goal date.

In Conclusion

We’re thrilled to be in a position to support you on your financial journey. The earlier you invest, the sooner you can achieve financial independence. Remember: it’s not about timing the market; it’s about time in the market.

The tortoise approach of steady, patience, using time and compounding returns as your ally is in my opinion the way to go. The Hare approach would be to want to get rich right away by trying to time the market and putting all your eggs in one basket. Maybe you see your neighbors, relatives, or friends getting rich and develop FOMO. When you are in your twenties and thirties it can be stressful trying to get ends to meet. Don’t forget that other persons life might not be as great as you think it is. One way to look at is if you wish you were rich like them, then you have to also take on everything else in their life. That can help disipate FOMO.

With discipline, patience, and smart decisions, you’ll be on your way to creating the life you dream of—one where you, too, can enjoy the freedom of financial independence. There’s a reason the tortoise was named Shelldon. Think about it :)

 
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