If you’re smart enough to fly aircraft, or at least read FLYING, you may be able to educate yourself well enough to make your own basic investing decisions. My goal with this column is to present a case for a simple, effective investment strategy that you can implement right now to start your money working for you.
I encourage you to get as much investing advice and education as you can stand. If you choose to move your money into different investments, it’ll be easy to do so as soon as you’re ready. However, after you read this you may want to leave your money in the investments you started with.
These investing principles apply to any type of account: Brokerage, IRA, 401K, or TSP…Traditional or Roth.
I also want to admit that I’m not the first person to think any of this up. The ideas I’ll present here today were pioneered by Jack Bogle, the founder of Vanguard who made billions of dollars with his investing strategy.
Bogle’s strategies were applied and summarized in a fantastic book called The Simple Path to Wealth by a financier and writer named JL Collins. I cannot recommend his book highly enough. If you don’t want to buy it (or check it out from your library) he’s made all the information from the book for free in a series of articles he refers to as The Stock Series.
Smarter Not Harder
The stock market is a volatile thing. The slightest bad news can cause share prices to plummet, while a single piece of good news can cause a company’s price to soar. Over the very long term, the average return for the entire stock market is more than 10 percent (or just under 7 percent when adjusted for inflation.) If an investor did nothing but buy a cross-section of the entire stock market, she could reasonably expect that 10 percent return in the long run.
As pilots, we tend to think that we can do everything better than those around us. We look at companies like Tesla vs GM, Apple vs Dell, Chipotle vs White Castle, and figure we can pick the companies that will perform better than their peers. We figure we can buy stock in those good companies and make a lot of money. In doing so, we should be able to beat the market’s long-term 10 percent return, right?
Unfortunately, we’re wrong.
As it turns out, very few people are able to reliably discern (guess) which stocks will rise or fall. The world is full of investment firms that do nothing but make these guesses all day long. They hire teams of very smart people to study, analyze, and project corporate performance all day, every day. They travel all over the world visiting businesses before making investments in them. Given their overwhelming expertise, you’d think they’d out-perform the overall stock market by a long shot.
The truth is that most of them don’t.
S&P Global publishes an annual report comparing the returns generated by actively-managed investment firms to the passive investing ideas championed by Bogle. Even at chance levels, you’d hope that these pros could at least match the performance of the broader market. However, most of them fail to even meet that standard.
The sad truth is that few human beings are capable of out-guessing the stock market. If these highly-trained and funded professionals can’t reliably do it, when what chance does the average pilot have of beating the market?
You’re probably tempted to think, “Well, I’ll just choose the best pros and invest with them.” Unfortunately, all you’re doing in that case is trading out a guess in specific stocks for a guess in hired stock pickers. You’re not improving your chances.
Many factors contribute to active investment firms under-performing the market. One of the biggest ones is their fees.
When you hire someone else to manage your money, they don’t do it for free. In a best case scenario, a fee-only financial planner will only charge you for his or her time at a meeting to discuss your options. You’ll be free to invest according to that advice, or not. The fees are the same for everyone, and you know them before you get started.
I’m obligated to state that I am not a financial advisor. You should consider consulting a professional before you make any investment decisions. Also note that past performance does not guarantee future results, ever, for anything…including the quality of your next landing.
The next worst step is called the Assets Under Management (AUM) model. These professionals take care of all your investments for you, and charge you a set percentage of your account balance every year as your fee. A common entry-level fee is 1 percent. If you have $1,000,000 in the bank, this means the annual fee will be $10,000, so your professionals have to generate $10,000 in investment returns before you’ve even broken even for the year.
Other firms “front-load” their fees, charging you thousands of dollars to start investing with them, promising lower fees from then on out. By lower, they typically start around ½ percent AUM, though they’re usually higher.
Fee structures get worse from there. Some investment firms charge you each time they buy or sell stock for you. This incentivizes them to do as many transactions as possible, eroding your returns. The biggest-name firms charge “two and twenty.” They charge you 2 percent AUM, plus 20 percent of any profits you make in a given year.
Remember that the majority of these firms fail to even do as well as the overall stock market.
I hope by now you’re at least wondering if there’s an easy way to just invest in the overall stock market and take that long-term 10 percent return.
It turns out there is.
Bogle’s big revolution was called an “index fund,” and it’s exactly what you’re looking for. A whole stock market index fund essentially buys one share of stock in each company on the market. Once they have one share, they buy a second share of each one. They continue this process until all of their money is invested. You just buy shares of the company doing that investing. This special type of company is called a mutual fund. (Another investment vehicle called an Exchange Traded Fund, or ETF, uses a similar strategy.)
One of the best things about this type of mutual fund is that index investing is simple. You don’t need a team of multi-million dollar finance whiz kids to run it. You just need some clerks who can monitor computers who do all the trading. This means a good index fund will have fees in the range of 0.04 percent. That’s 1/25th the fees you’ll get charged by a cheap financial advisor. The biggest-name hedge funds will charge you more than 50 times as much to manage your money for you.
I’m a fan of whole stock market index funds. However, there are also funds that focus on specific portions of the stock market. There are funds for tech, pharmaceuticals, energy, consumer products, and more.
One common index fund approach is to only invest in the biggest companies on the market, the S&P 500. I won’t fault someone for choosing an S&P 500 index fund instead of a total stock market index fund.
Choosing a Mutual Fund or ETF
So, how do you choose? Most investment firms have a page listing their in-house funds. If you click on the link for one, you’ll go to a page with information and statistics on just that fund.
As long as you’ve already chosen a fund with a name like “Total Market” or “S&P 500″ in the title, you know that it should perform about the same as the overall stock market. The next thing you should look for are the fees, sometimes called the expense ratio.
The industry standard for fees on an index fund is anything from 0 to 0.05 percent. Personally, I don’t waste my time on any mutual fund or ETF with a fee above that value.
Believe it or not, that’s all you need to get started picking mutual funds and ETFs for your new investment accounts:
- Whole market or broad-based index funds
- Fees below 0.05 percent
Once you get your money invested in those vehicles, it can start growing for you while you research other options.
Some investors will try to tell you that certain sectors of the market are worth investing more money in. Others will recommend specific funds. Some will advocate putting some of your money into a specific company’s stock.
Those are all options worth considering, but only after you’ve done significant research. Many brilliant individuals have earned a PhD evaluating and discussing those and countless other investing strategies. Some of them earn millions of dollars every year implementing those strategies at swanky hedge funds on Wall Street. Many of them have written books, articles, or even produced YouTube videos to share their ideas with you. If you’re interested in advanced investing, I recommend you consume as much of that information as you can stand.
However, don’t forget that the vast majority of these very smart people fail to beat the market average.
As an aviation enthusiast, I can think of at least one other way you could spend your time and energy: Go flying! Don’t dive so deep into learning about investing that you sacrifice other parts of life.
A low-fee index fund is a productive place to invest your money while you go enjoy life. If you want to refine your investing strategies from there, do so after getting educated. In the meantime, let your money work for you while you focus on everything else going on in your life.
Jason Depew flies as a captain for a major U.S. airline. He is also an Air Force reservist and has flown more than 300 combat missions over Afghanistan and other garden spots. Based in Tampa, Florida, he instructs in the Icon A5 and anything else he can get his hands on. His writing is focused on personal finance for pilots with the goal to help all types of aviators enjoy great careers, sometimes in spite of themselves. You can send Jason questions at email@example.com.
Editor’s Notes: Investing in the stock market doesn’t guarantee returns. The opinions expressed here do not constitute endorsement by FLYING.