Hey everyone,

I'd like too see if I can utilize the rational powers of Less Wrong

Currently I work full time. Am well paid for my age. Have approximately $20,000 AU in savings.

My spouse is in uni. Will finish this year and begin working next year. But currently I am supporting our household.

I have recently concluded that $20k is too much to be sitting idle, and the rational thing to do would be to find a way of putting those savings to work in some fashion. But how?

What would be the best way of utilizing these finances in terms of self-development and/or monetary return?

A few things to consider:

a) My skillset at the moment is limited, but I am eager to learn anything.

b) I only desire money in that it enables me to carry out many plans that would be difficult otherwise.

c) Relationships are far more important to me than money, however money is still pretty high up there.


I come to Less Wrong because it is the only community whose advice I would trust. The rest of the internet as many scammers, most friends and family feel threatened by the idea of investment/new things etc. Also they just aren't as rational as Less Wrong.

I would be so appreciative of any advice given.


Also anyone in the same boat?

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35 comments, sorted by Click to highlight new comments since: Today at 1:59 PM

This article I wrote basically summarizes how economists think people should invest their money.

That's a nice article. The only caveat I have is that there doesn't seem to be a lot of evidence that taking on more market risk increases returns (mentioned in #6) (link), so you're probably better off choosing something relatively low risk.

I think many 40-year-olds would prefer working during retirement age over saving for a 75-year retirement. Consider revising #19.

That's assuming you'll be employable long past the retirement age, which is by no means certain. Even if you are, chances are that the jobs you'll be able to get will be much worse paid and lower-status that what you did during your regular career -- and even if they're not so bad by some absolute standards, such a status hit is likely to lead to deep unhappiness.

Of course, this doesn't hold if future anti-aging medicine allows you to keep your physical and mental powers intact for a longer time. But the present trends are mainly towards prolonging deep old age in which your abilities are severely diminished.

I remember that that was a really good article and I'd like to link to it again, but knol is now defunct. Maybe you could repost on LW?

Thanks James.

Seriously considering an Index Fund.

Also do you have any thoughts to share regarding the ethical ramifications of investing? I'm just concerned that I'd be making profits at the expense of others, and I don't want ignorance to be an excuse for that, but again I have no idea about economics so I'd love to hear from someone who knows what they're talkinga bout?


Investing is not inherently unethical. If you're directly buying a tobacco company's bonds, then yeah, you're helping evil to prosper, but consider the following scenarios. (Remember that money is just a number - what it represents is that you've done work for other people, and in exchange other people are willing to do a certain amount of work for you. Compared to barter, money provides a magical layer of indirection as it sloshes around the economy - you may make widgets for FooCorp, and the money you earn allows you to buy gizmos from BarInc, even if nobody from BarInc has ever heard of a widget.)

  • You have money, but right now you're not interested in buying anything with it. Person X doesn't have money, but would like to have a car right now instead of waiting for a year to accumulate enough cash, or would like to live in a house right now instead of waiting for 30 years to accumulate enough cash while living in a tiny apartment. If you loan Person X money, they get to buy that car or house right now (yay for them!). In exchange for not being able to access your money for a period of time, and for taking on the risk that you might not be paid back, Person X agrees to pay you back extra money. (The original pile of cash that changes hands is called the "principal", while the extra pile of cash is called the "interest".) This is super awesome for you - you've earned extra money by doing financial work, instead of the usual physical work or mental work at your day job.

  • There are many other reasons why someone might want to borrow money (i.e. giving you an opportunity to lend to them). A company might want to expand its operations, but needs a temporary infusion of cash to do so. Once expanded, they predict that they'll make more money than before, so after paying you back their position will have improved. Or perhaps a country needs to buy a bunch of tanks in order to fight Nazis, or zombies, or zombie Nazis.

There are ways to do this wrong (see the epic housing crash), but that doesn't mean that all lending is wrong.

The machinery of lending powers apparently simple things like savings accounts - the bank isn't paying you money to be nice. It's because they're turning around and loaning your money out. By offering interest on savings accounts, they can get a bigger pile of cash to loan out. They're pocketing some (or most) of the interest, but in exchange you have the ability to withdraw money at any time (instead of in 2 years or 30 years or whenever someone pays their loan back), and you're insulated from the risk that someone might not pay back their loan. (Once upon a time, we hadn't figured out how to make this work, and the economy imploded. You may have heard of it: the Great Depression. That particular failure mode is no longer possible due to the wonders of FDIC insurance, although we keep trying to discover new ones.)

"Certificates of deposit", or CDs, which are usually FDIC-insured, are similar to savings accounts. You give up the ability to withdraw money at any time - instead your money is locked up for a fixed period that you choose (e.g. 6 months, 1 year, 2 years, etc.). In exchange, you get a higher interest rate.

More volatile investments (e.g. stocks) have higher risks (i.e. the potential that you could LOSE MONEY) but hopefully higher returns.

I started off by keeping money in a savings account - this seemed pretty cool until I realized that my bank was paying me 0.25% which is basically worthless. Then I switched to ING DIRECT, an online bank (FDIC-insured just like a physical bank - I made real sure to verify that part) offering higher interest rates on both savings accounts and CDs. Several years ago they offered some of the highest rates around - nowadays that doesn't seem to be the case, but I've stuck with them for convenience. I had a bunch of 12-month CDs, set up to expire once a month, so I could benefit from their higher interest rates, yet get money out fairly rapidly if I wanted to.

As I accumulated more and more money, I began to lose my fear of the stock market (acquired due to my parents suffering through the 2000-era tech crash as I was in college). This was also due to the fact that I had invested my 401k (which is a special money bucket, if you're unfamiliar with the US system) in three mutual funds (helpfully chosen by my father when I knew nothing). I started investing in mutual funds of my own choice through Fidelity online - no more than 5 at a time. I dropped some that I became convinced were dogs (i.e. likely to perform badly in the long run - and my suspicions have been justified) and added others. Eventually I switched to putting all of my money, outside of my 401k/IRA and about 6 months of emergency living expenses in an ING DIRECT saving account, in a single mutual fund. In order to avoid a $75 transaction fee for buying this particular fund through Fidelity, I actually mail checks directly to the mutual fund firm. (I can now observe my account balance online, although I haven't bothered to set up the stuff that lets me buy/sell shares online.) Then the economy exploded (yes - I moved into mutual funds nearly at the peak). As it fell, I shoveled more money into the furnace. At the bottom, I had lost an incredible amount of money. And then as it came back strongly, I made back my losses and more, because I had bought more shares during the free-fall. Overall, from October 2007 when I bought my first mutual fund, to today, I've made an annual percentage yield of 12.68%. That sounds pretty awesome (and it is), but remember that at some points that number had the same magnitude and was NEGATIVE.

I'm just an amateur investor (the whole point of buying mutual funds is to get professionals to do the work for you - or the market as a whole, if you like the idea of index funds, which I personally don't really understand), but my recommendation is to go to Google Finance or whatever, get a graph of an index (e.g. the S&P 500) or a fund, expand it to 10 years, and consider how you'd feel having bought and sold at various points. Don't just focus on what would have happened if you bought at the bottom and sold at the top (or kept to the current day) - consider the reverse. I moved my money into my preferred mutual fund when I saw that it outperformed the market for long periods of time, and was relatively immune to losses in value (e.g. during the tech bubble burst, it was largely flat as the indices fell). I liked that behavior, and I still do (even though it fell and rose with everything else during the Great Recession). You should find a fund or funds whose behavior you like. (Past performance is not a guarantee of future results, but it is important data.)



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The only way you're likely to be making profits at the expense of others is if you pick stocks in industries with significant externalized costs... which I admit may be hard to avoid, especially with an index fund, depending on the true impact of CO2 emissions and on the status of corresponding Pigovian taxes that apply to your investment targets.

Otherwise, for the most part you're making profits at the profit of others. Life isn't a zero sum game. Capital markets want your dollars because investment can help create and improve products that are worth more than their inputs plus the investment, and "worth more" is in the opinion of the people who buy those products, who after all wouldn't have bought them if they didn't value them more than the money they spent. Likewise for employees as well as consumers - even "sweat shops" with dismal conditions by first world standards have to supply locally-high wages to attract workers, and historically this ends up raising wages for the country as a whole.

Your profits are (infinitesimally) reducing the profits made by other investors. Microeconomics says that if you increase the supply of something, including capital, the price paid to the suppliers typically goes down. But no wealth goes away in this scenario. Other investors' loss is exceeded by employees', consumers' and your gain, and since consumers and employees are on average less wealthy than investors the net gain is even greater in utility than in dollars.

Also do you have any thoughts to share regarding the ethical ramifications of investing? I'm just concerned that I'd be making profits at the expense of others,

A very basic finance book, which is also rather oldish is George Claysons: Richest Man in Babylon. It is a series of fables set in the old city of Babylon, teaching people why to save + invest in a broad sense.

To cover the ethics of investing: Imagine if you sit an hour at home doing nothing. Compare that to doing something that improves your own live like repairing something in the house, or that improves the life of someone else, like a client in your job. In the second case you did something that made a part of humanity slightly better off. If you get payed for that it is an exchange of your time and abilities against the resources of someone else, who profits from using you, and is probably as happy about the exchange as you are. Now with the money you have the choice of either consuming it - which allows others to profit by serving you, or you can 'invest' it. Which means delaying your own consumption, and instead giving someone else who is in need of capital the possibility to buy an item that helps her to produce more efficiently. As a fee for your capital you either get some fixed sum, or a share of the profits, so in the end both you and the other person profit from that. That is of course a super simplified explanation of a more complicated thing. There are companies you might not want to invest in and others that are really awesome.

Economists are broadly of the opinion that economic activity makes people better off in general. For example, if you invested in your friend's new store, you're helping him (try to) be more productive. He benefits; you benefit, and his customers benefit. His competitors may suffer, but the benefits to others are larger than those losses.

Unless you're investing in something that has a large negative impact (say creating lots of smog) you are probably making the world a better place.

What you write may be true, but it's far from certain. If you keep your money in a mattress instead of investing it, you are not hoarding any actual resources that might be put to a productive use. You are only hoarding green pieces of paper whose value and usefulness from an individual's perspective is perfectly clear, but whose aggregate role in the economy is complicated and ill-understood. The question of what consequences for the whole economy follow when you empty your mattress and invest the dollars is not at all easy, and I'm not sure if anyone is able to give a full and accurate answer.

(Not that any of this should matter for an investor, but your reasoning in the above comment does seem fallacious to me.)

Yes, you are correct.

More technically, holding AU dollars instead of other financial instruments effectively raises the demand for the good used to produce AU dollars (I would guess that is AU government bonds) relative to other financial instruments, but doesn't raise the total demand for investment directly.

but again I have no idea about economics so I'd love to hear from someone who knows what they're talkinga bout?

Buy some books on the topic and read them. Or watch the khan academy. Economics is one of the topics everyone should have basic knowledge of. One book that springs to mind is: 'why smart people make stupid money mistakes'. I can not assert if it is particularly great, but it is on my re:read stack and recommended by Ramit Sethi, one of the more reasonable private finance bloggers, and an occasional OB/LW reader.

If you're looking to invest the money, one good option is an index fund. Vanguard's US index fund, the Total Stock Market Index (VTSMX), is a good one (low expenses and broad coverage of the US stock market). Or, you could split it between that and Vanguard's non-US fund, VFWIX, to diversify across the rest of the world.

For more on investing and index funds, there was some relevant discussion in the Procedural Knowledge Thread, here and here.

I would avoid recommending specific investments to someone without some basic knowledge in the field. That might lead to trouble down the read. Reading the Booglehead book about the vanguards might be of use.

I would avoid recommending specific investments to someone without some basic knowledge in the field. That might lead to trouble down the read.

This doesn't make much sense to me. Investing in VTSMX over having money in a savings account probably has the highest ratio of additional return divided by effort involved, and is justified by two sentences and a question: "When you invest in a specific stock or fund manager, you're betting that you know more about that vehicle than the whole market. When you invest in an index fund, you're betting that the long term trend is up. Given the existence of Wall Street, which bet would you rather take?"

That is to say, one of the main reasons that sleep-at-night investing is so valuable is that you sleep at night. Set up automatic investing into your Vanguard fund, and you're done. Knowing more of the philosophy behind it can help, and will make you less likely to panic and sell during a downturn, but the initial bump into an index fund is the main value-add.

Probably yes. But if you do not know the reasoning behind that chances are high that the first economic crisis makes you sell your stock at bad timing.

This does look like a feasible and safe option. Will investigate.

To add some more detail, you could consider this to be three pieces of advice, in increasing order of specificity:

First, if you want to invest your savings to make more money, you should strongly consider the stock market, since it tends to grow faster than other investments. But you should be aware that the stock market sometimes goes down, so you might lose money. So you should think this over and decide if it's what you want to do.

Second, if you invest in the stock market, you should go with index funds. Index funds try to match the market, rather than trying to beat the market, which allows them to have lower fees and expenses. It's very very hard to beat the market, and if you try to (e.g., by picking stocks or investing in an actively managed mutual fund) you'll waste a bunch of money on fees and expenses in the process. You can read more about index funds in some of the links in this thread (including mine and James_Miller's).

Third, if you invest in index funds, one very good option is Vanguard's US fund VTSMX (or you could split your money between that and VFWIX, their non-US fund). There may be better options for you, but they aren't likely to be much better. Vanguard has an excellent reputation, these funds have very low expenses and few restrictions (especially the US fund, VTSMX), VTSMX does an excellent job of matching the US stock market (and the combination does a good job of matching the world stock market), the minimum investment is only $3,000 (USD), and it's easy to do the investing online. There are other options you could look into, including ETFs (which are stocks that are designed to match the market, rather than mutual funds) and index funds at other brokerages like Schwab and Fidelity, but don't get stuck agonizing over which one to pick because the differences aren't that big.

I know you guys are all well-credentialed, pretty solidly middle class people; but I was wondering, what would be the rational thing to do for someone without any sort of educational credentials, and doesn't make a high wage? At what income does "investment" begin to make sense, lets say if you're upper lower class or lower middle class?

The relevant factor isn't income, it's assets. It's bad to have 20kUSD and no other investments, no matter what your income. On the other hand, in practice lower- or lower-middle class typically means having small or negative monetary assets. In that case, buying securities at all is probably a bad idea. First of all, there's a research, setup and monitoring overhead to any such investment, and that overhead isn't worth it if the amount you have to invest is too small. And second, the really high-return investments aren't securities at all, they're purchases of things that make your life better, save time, or help build marketable skills; and the less money you have the less likely it is that you've hit diminishing returns on those sorts of investments.

I'm reading Graham's The Intelligent Investor and I like it -- it's a kind of classic text (Graham was Warren Buffett's mentor), and Graham has a nice down-to-earth, rational approach. Still, I had to do some background reading for some of the terminology.

On the other hand, I still have to find out if the advice in the book actually works....

One thing that I am doing, based on similar priorities, is building an add-on to my (currently rather small) house so that people I care about can live with me. The rent will be small enough to be a great deal for them, and big enough to help me pay off the house faster to get me more money in the long run. It also teaches me construction, which is a useful set of skills (and rather rewarding to apply math and physics knowledge). It may not be as easy for you to do, since I have a friend who recently started a construction business, and we help each other out (which is quite fun).

In the end, this is more about friends and family than investing money. But it is definitely about the money, too.

Like other people have mentioned, investing in an index fund is almost certainly your best bet. I'd add though, that you shouldn't keep all your money there. Keep an emergency fund on hand for unexpected expenses or opportunities that can crop up. I'd invest that in a high interest (ING, ubank or similar) account.

I would ask your question over here.

Buy Berkshire Hathaway stock and hold?

Sure, buying BRK-B is not going to make anyone a billionare but it's slightly better and slightly riskier than the conventional advice to buy an index fund.

Berkshire Hathaway is $123,081.00 a share at the moment. There might be other ways to bet on the company though.

The price of the B shares is lower.

I get all my investment advice from zerohedge.com.