The Three Elements: Investing

Great film. Click on the photo to see the trailer.

This is the last post in our Three Elements series. You can read about saving/spending here and earning here.
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To recap, you need to get a handle on saving/spending first. If you don’t, it’s like making your way downriver in a leaking boat: you’re just not going to get very far.

Next, you should try to earn as much as possible. Your earnings are the fuel that make investing work. The less you earn, the harder it is to get the investing engine started. For most people who are starting from scratch, how much they earn is going to be more important than how well they invest.

Consider the following. A normal investing result might be 5% a year above inflation. You could probably achieve this by investing in a diversified, low-cost portfolio (see below). A skilled or lucky investor might be able to get a higher return, maybe 8% a year above inflation. An investing genius might make 15%. Warren Buffett, one of the best investors of all time, made about 20%.

Increasing your saving rate is likely to be more important than investing well. It’s also much easier to increase your salary or cut your expenses than to boost your returns from investing. Less risky too.

However, once you have made peace with your spending, worked on improving your career, and saved up an emergency fund large enough to match your circumstances, it’s time to think about investing.

​I recommend focusing on the things you can control: how much you invest (as much as possible), what you invest in (low-cost, diversified investment), and how long you invest for (as long as possible).

If you do these three things and stick with the plan, you should end up doing okay.

Two of the best resources to get up to speed with investing: 

1. The book Millionaire Teacher, by Andrew Hallam
2. The Stock Series blog posts by JLCollins 

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Don’t try to get rich quickly. Slowly doubling your money every ten years is not as exciting as making 900% in a year with Bitcoin, but you are also less likely to buy at $10,000 and lose all your money if you panic and sell when it crashes. 

If you are eligible to open an iDeCo account and plan to stay in Japan until you are 60, it’s one of the best options due to the tax savings on income tax, local inhabitants tax, and also capital gains within the account.

NISA is a solid option for a lot of people, especially as you can open an account for each family member and enjoy tax-free gains from investing.

If you want someone else to do all the work, an account with a robo-advisor might be a good fit.

Over the next few weeks we’ll be running our annual Progress Report posts, so you can see exactly what long-term diversified investing looks like in iDeCo, in THEO, and in NISA.

Remember, if you are not sure what to do or want some advice on a specific investment, the forum is a great place to ask questions and get help from the broader RetireJapan community.

How about you? What are you doing to invest? Any questions or suggestions?