Recently, a friend asked me to sit down with her to talk finances. She’d grown up without a whole lot of guidance in that particular area, and was looking to take control of her financial future. The interesting thing is, my friend was not only well informed, but also had a pretty clear idea of what she wanted to do with her money. The obstacle wasn’t so much her own habits and knowledge, but more the opaque nature of the industry itself, which I don’t think is a coincidence. I firmly believe that the stock market is intentionally designed to be intimidating to the layperson, and to convince the average investor that if they want any shot at success, they’ll have to work with a professional.
Happily, though, I know that isn’t the case — a lesson I learned from Andrew Hallam’s book, “Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School.”
The author spends the first half of the book explaining concepts that had eluded me before reading, but does maybe his best work in Chapter 6. That’s where he delves into the nitty-gritty of exactly where and how to invest, right down to the ticker names of the assets he recommends, and specific advice tailored to the country where you live and work.
Across the board, Hallam recommends a portfolio stocked with index funds, with a ratio of stocks and bonds that should be rebalanced as retirement nears.
In case what I just wrote sounded like a lot of whirring in your ears, let’s get even more specific. Here’s the process that Hallam recommends for his American readers, broken down step-by-step. It’s the same method I followed in 2017 when I first started investing the funds in my Roth IRA retirement account, and it’s netted me nearly $11,500 in returns in the four years since.
1. Open a brokerage account
A brokerage account is an account that lets you buy, sell, and exchange securities (such as stocks and bonds) with the money it contains — as opposed to checking, savings, or rollover accounts, for example, that don’t allow you to invest your money in the market.
There are all sorts of places you can open a brokerage account, but Hallam recommends Vanguard for its user-friendly format and low expense ratios. Based on my own experience, I’m inclined to agree.
2. Look up the stock symbol for the security you want to invest in
Also called a ticker, this is a unique series of capital letters that identifies the asset for trading purposes. For example, the Vanguard Total Stock Market Index is represented as VTSAX.
3. Identify the cost per share
Once you have the stock symbol, you can look up details about the security. Find the share price, and then do a quick calculation to determine how many shares you can afford to buy, dividing the amount of money you have to invest by the cost per share.
At the time of this writing, our friend VTSAX has a share price of $97.79. So if I have $100 to invest, I can afford one share, while $1,000 to invest would earn me 10 shares.
4. Determine the commission price
The commission price is the amount it costs you to buy or sell the asset, and you’ll want to work to keep it below 1%, says Hallam. So to use his example from the book, a trading cost of $9.99 per share means you wouldn’t want to invest anything less than $1,000. It’s basically the same thinking as placing an order on anything else; if a company has a delivery or shipping charge of $10, you’d want to order enough stuff that such a high fee would be balanced out.
Once you do the math from Step 3 to see how many shares you can afford, round that number down so you have enough money to cover the purchase including commissions — even if the price jumps before the sale goes through. So if you had $1,000 to invest in VTSAX at $97.79 per share, you might want to purchase nine shares even though you can technically afford 10, just to leave yourself some wiggle room in case things go wonky.
5. Enter your details into the confusing little online system
All the information you’ve been collecting above can now be plugged into the online interface for your financial provider. The wording might be slightly different, but here’s what you should be looking out for:
- Market: Select your home country
- Symbol: That capital letters ticker thing you found before
- Action: Buy (as opposed to sell or exchange)
- Quantity: Your rounded-down number of shares you can afford
- Order type: Market (as opposed to Limit)
Verify that the date listed is the current one, check the ticker carefully for typos, and you’re good to go, having purchased your first shares.
What’s next?
Now that you know how to tackle the system, here are the specific recommendations Hallam makes for the portfolio breakdown of a 35-year-old American.
- 30% Vanguard Total Bond Market Index Fund (VBMFX)
- 35% Vanguard Total Stock Market Index Fund (VTSMX)
- 35% Vanguard Total International Stock Index (VGTSX)
As you can see, he recommends roughly one-third in an international stock index fund, another third in a domestic index fund, and a final third-ish in a domestic bond index fund. Which is pretty much identical to what my portfolio looks like, except I have more aggressive ratios. (I have a lot of working years ahead of me and the stock market is currently going nuts, so I’ve opted for 90% stocks and 10% bonds.) Once you’re set up, you need to adjust your ratios just once a year, letting your money work for you instead of the other way around.
If you do all this, Hallam advises, you’ll wind up beating 90% of investors. Even the ones who can afford to work with financial professionals or invest in the actively-managed mutual funds that may be out of your reach. (And that are certainly out of mine.)
