I am extremely risk-averse but one risk is inflation outstripping your investments, so I have never had much of my long-term investments in bonds. Here’s my journey.
1. Ignore investing until student loans are paid off. Meanwhile, began career at employer with a defined-benefit pension.
2. Calculate max amount I can lose without being bothered ($60/month). Calculate how much I can invest in 403(b) and lose $60/month from my pay ($75/month). Invest $75/month in socially responsible mutual fund.
3. Roth IRAs are invented. Being raised in the 1970s (and having a pretty low income), feel that taxes have nowhere to go but up, so I love this invention. Realize that I am unlikely to lose ALL my invested money; I would probably lose no more than half. Realize that my socially responsible mutual fund is doing worse than the market at large. Realize that the only benefit of socially responsible investing is that the mutual fund has bargaining power with companies to encourage them to be nicer. Stop the 403(b) investing and begin investing the maximum amount ($166.66/month) in low-cost index fund. Keep barely maxing out my Roth IRA as limits go up.
4. I-bonds are invented. Several months later I discover them. I know that stocks tend to do better than bonds long-term, but tell myself that having 10% of my investments in bonds is perfectly reasonable and buy several hundred dollars worth at a fixed rate of 3% (plus inflation). [Now I wish I had bought a lot more.]
5. Somewhere in there I bought a house. It cost only 50% of the median price in my town, and I could afford it (barely) without a roommate but planned always to have a roommate. I got a 30-year fixed-rate loan at 8.25% (so cheap compared to what my parents paid in the 70s!!). Yet my principal payment was only $30/month (on a $600/month payment). I paid an extra $100/month (cutting 3 months off my ending date each month) for 2 years, then refinanced to 15-year loan with a slightly higher payment at 6.625%. Then I paid the minimum so I could keep maxing out my IRA. I did manage to usually have a roommate. Except for the year I bought the house and the year I re-financed, I basically broke even compared to renting (with a roommate). Now the house is paid off and is costing me less (property tax + homeowner’s insurance + maintenance) than renting.
6. Decided to split my investments into multiple low-cost index funds so that I could use rebalancing to buy low and sell high. Started working towards even amounts in: large-cap growth, large-cap value, small-cap growth, small-cap value, European, Asian, developing, REIT, bond fund, inflation bonds (TIPS/I-bonds).
7. Could afford to exceed the Roth IRA max—started putting money in to low-cost index funds in a Roth 403(b).
8. Realized I hated my job. Switched my extra money to a 457 (from which you can withdraw penalty-free whenever you leave the job even if you’re not yet old) as a sort of unemployment insurance.
9. At some point, I invested in a few specific companies in a non-retirement account. Recently, I got excited about growth dividend stocks. Started investing a small amount of extra money in those outside of retirement funds. (Of my first two, one cut dividends entirely and one cut dividends in half. So I started looking at a lot more information in picking my stocks after that, Seeking Alpha style.) Noticed that some were in my large-cap growth index fund and some were in my large-cap value index fund, so I decided to reduce the percentage of those funds proportionally.
10. Quit job. Cashed out 457 (and stockpiled vacation). Stopped investing in anything and stopped charitable contributions. Started taking on part-time jobs. I’ll decide at the end of the year whether I want to make contributions for this year (depending how things go). I’ve got 2 – 6 years before I am FI (depending how much of my work is at my former employer and how high my salary is).
11. PP sounds awesome yet scary, especially with gold being at all-time highs. I also prefer to stay in more liquid investments. Real estate also sounds like a good idea, but it’s already half my net worth with just the one house, plus I wouldn’t enjoy most landlady duties, so I’m settling for REITs.
12. Another thing—Choices change all the time. (One cool thing about “The Intelligent Investor” is how obvious this is. In the olden days, everyone invested in railroad bonds.) My safe money started in savings accounts. Then I started moving much of it into CDs—that “substantial” penalty for early withdrawal turned out to be no more than the interest you’ve earned so far, and probably less. Then I moved it to online savings accounts. Now I’m actually using I-bonds. At 0% + inflation, they are depressing for long-term needs, but for any money I can ignore for a year, the interest is a lot better than any savings account right now. I’ve decided that financial instruments are often a good place to be an early adopter (except for the crazy ones). I-bonds and online savings accounts where much more awesome when they were new than they are now. The Target debit card is still new enough to be awesome (because people are scared to give Target their checking account information).
13. I still want more diversification. Basically, I use diversification to deal with my risk aversion (instead of trying to keep my principal risk-free like all the books say that risk-averse people should do because that just seems idiotic unless you're rich enough). I’m sick to death of people saying, “oh, yes, you need stocks AND bonds.” That’s only two eggs for my basket. The same two eggs my pension is using. So I’ve also paid off my house. If property taxes go up too much, that must mean my house is worth a lot, so I could sell it and use the proceeds to live elsewhere. So, three eggs. Now I’m working on having more skills so I don’t have to rely on hiring other people so much.