The Ultimate Investing Checklist: 7 (Simple) Steps to Measure Your Investment Strategy
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Welcome to the Stay Wealthy Podcast. I'm your host, Jeremy Schneider, filling in for Taylor Schulte. And today I'm sharing with you my ultimate investing checklist. Specifically, I'm sharing the post-it note size piece of advice that may tell you everything you need to know about investing.

That includes the seven steps you can measure your own investment strategy against, and I'm answering two questions from listeners. If you want to see how your investment strategy measures up against my ultimate investing checklist, today's episode is for you. For all the links and resources mentioned in today's episode, head over to youstaywealthy.com slash 162.

So this is the last episode I'm filling in for Taylor. Four or so for all of you hardcore Taylor fans who are sick of hearing from me. I understand. I know when one of my favorite shows are the guest hosts that can annoy me. So this is the last one. But I do want to go off a bang. And so today I'm going to break down my ultimate investing checklist.

I wrote this advice on literally a post-it note and shared it on my Instagram where I now have 380,000 followers. And it's one of my most popular posts of all time because I think it really does boil down all the complexity that can be around investing and building wealth into like a very simple little list. And so I'm going to break that down for you today. It has seven checkboxes and I'm going to walk through each of the seven checkboxes and you can see how your investing strategy measures up.

So checkbox number one is to invest in these accounts in this order. Number one is your 401k up to any company match. Number two is your HSA up to the $3,650 limit. Number three is a Roth IRA up to the $6,000 limit. Number four is going back to your 401k or 403b up to the $20,500 limit.

And number five is to invest in a taxable brokerage account, which can be unlimited.

And so this is all checkbox number one. It's to invest in these accounts in this order. And the reason that this order of these accounts exists is basically to optimize first the match, which is free money from a company. Second, the tax benefit, which is why HSA is second, because it's actually the only account with the triple tax benefit. I talked about the HSA a couple episodes ago. Next, it optimizes for...

fees and investment options. That's why I put the Roth IRA next before a 401 or 403B because Roth IRAs generally have

unlimited investment options and lower fees. 401ks often have higher fees and fewer investment options. Not true for everyone, of course. And then fourth, we go to the 401k. The reason that's next is because that offers a tax break. And then finally, the fifth, which is kind of the catch-all, is the regular brokerage account. And don't sleep on the brokerage account. Personally, about 95% of my own wealth is in a brokerage account. But if I could take advantage of those tax breaks I mentioned before, I would.

This doesn't perfectly apply to everyone. So not everyone can use all these accounts. For example, your health insurance might not allow you to use an HSA. Your income might not allow you to use a Roth IRA. Your employer might not offer you a 401k. Also, if you are self-employed or own your own business, you might have a different tax advantage account like a SEP IRA or a solo 401k. But broad strokes for a lot of

employees in the wealth building phase of their life, which can extend well into your 60s and 70s maybe, these accounts in this order make a lot of sense.

If you don't have access to one of these steps, like you can't do the HSA, you just skip it and it's kind of like a waterfall. You just skip it and move your mind to the next one. So for example, if you didn't have an HSA, but you did have a 401k, you might do your 401k up to your match, then a Roth IRA, then back to your 401k. And if you still have more money to invest over that $6,000 in the Roth IRA and over that $20,500 in the 401k, then go to your taxable brokerage account.

So there you go. That's checkbox number one. That's one of the longer ones though, so bear with me. All right. Checkbox number two of seven of the ultimate investing checklist. Choose one to five low cost index funds diversified across US, international and bonds.

And so what's that saying is inside of all these accounts in step number one or in checkbox number one, you have to invest something in there. And this checkbox number two is to choose one to five low cost index funds. You could choose one like a target date index fund that is automatically in a single fund diversified across U.S. international bonds.

Or you could choose three, like a three-fund portfolio. Or you could choose five. When you get into the realm of five, in my opinion, you start to get more in the realm of speculation rather than investing. But if you were to add a couple more to a traditional three-fund portfolio of U.S. international bonds, you might add like a REIT index fund, or you might even add like a small cap value index fund. I know Taylor has talked about

the historical outperformance of small cap value relative to the total stock market. It's not going to continue to happen going forward. We don't know. Nobody knows. But you're not crazy if you wanted to give your portfolio a small cap value tilt. And the reason this is checkbox number two is because it keeps things very simple. Some people could have portfolios of

Dozens or hundreds of different investments, different mutual funds that overlap in different confusing ways, different individual stocks. And when you have a simple portfolio, I think you're much more likely to stay the course. You're much more likely to have a nice diversified portfolio and you're much more likely to optimally invest rather than speculate and guess. Sometimes people ask me things like, shouldn't I buy multiple stocks?

index funds? Should I buy growth or small cap or large cap or value or whatever it is to get more diversified? And the answer is that doesn't actually get you more diversified. If you own a total stock market index fund, for example, buying a growth index fund and a value index fund,

would actually get you less diversified just by overweighting that portion of the market. If you were to buy an actively managed mutual fund, you're just buying more of the same and more different weights based on what that active manager chooses. And so when you buy these fully diversified index funds, one, three, or five, your portfolio is basically fully diversified with maximum simplicity. All right, checkbox number three, turn on dividend reinvestment.

So when you own these index funds inside of all these accounts, they're going to pay dividends. Just by owning them, they're going to pay dividends. If you don't have dividend reinvestment turned on, you're going to have cash drag happening in your account. That's going to be cash is building up, just sitting there, losing value to inflation, not working for you, not contributing to compound growth, etc.

etc. And dividend reinvestment is just a little checkbox option on your investing website. So if you have a Vanguard, Fidelity or Schwab website, you might have to Google how to turn it on or how to check. But generally, when you look inside of these accounts, any sort of tax advantage account for sure shouldn't have cash in there unless you are already like at or after retirement and holding cash as part of your capital preservation strategy.

So get that dividend reinvestment option turned on to prevent cash drag from building up inside of your investment accounts. All right, that brings us to checkbox number four, which is set up automatic investments.

My big thing, I end every episode with it. It's my two rules, live below your means and invest early and often. And when I say invest early and often, that means regularly contribute to your accounts because we can talk about the nuance of investing all day and the difference in expense ratios and the different tax benefits and yada, yada, yada. But if you're not putting more money in, it's all useless, right? And so getting in a habit and getting in a system of automating those investments and automating investments

contributions to your investment accounts is what's really going to make you wealthy over time. 401ks generally do this for you. When you sign up for them, you choose your investment amount. It's automatically deducted from payroll, which is great, which is why lots of people become 401k millionaires. And if you have a Roth IRA or a brokerage account, set up those automatic investments. So every month you're just used to plowing money in their high market, low market, whatever we've talked about, timing the market doesn't work. Investing early and often is what works.

That brings us to checkbox number five, which is to reallocate towards bonds as you age. And so...

traditional investing advice is that when you're young, you invest mostly in stocks. And when you're old, you invest in more of a balanced portfolio or mostly in bonds. And the reason this is, is because bonds are less volatile than stocks and provide income. But they also have less long term big growth potential than stocks. And so when you're young, and you can ride out those ups and downs in the stock market and don't need the money, you want to maximize your growth by having a stock portfolio. But then when you're old, you're

you know, or at retirement and you know, not all, we're all still young. We got a lot of life ahead of us, but when you're at retirement and you want to maximize your wealth preservation, uh,

you migrate towards those bonds, which will help preserve your wealth and provide income. When I talk to real people in the world, I see this because young people just are super aggressive. They want to be getting rich as quick as possible. They want to be speculative. They want to be gamblers. And while I don't approve of that speculative and gambling, I understand they're not looking for a 3% annual return. They want to be making more money for it quickly. But generally,

That sentiment changes. When I talk to people in their 60s and 70s, suddenly they're very concerned about not losing this nest egg they've spent the last 30 or 40 or 50 years building up. And they're okay with lower likely annual returns in exchange for not losing their portfolio. And one thing that's important about this is to do this on a fixed schedule.

So you don't want to have this reallocation towards bonds be a knee-jerk reaction to macroeconomic happening. So for example, right now I'm recording this in May of 2022 and the market is currently down, I think 15 or 16%. If somebody gets spooked after the market's down 16% and then switches to bonds, that's a missed opportunity, right? You could have sold a few months ago or you could have been selling regularly to reallocate towards bonds as you age.

So that was checkbox number five, reallocate towards bonds as you age, which brings us to number six, which is rebalance on a fixed schedule. So rebalancing only applies if you have multiple funds in your accounts. So for example, if in all of your accounts, you have a single target date index fund, which would be fine, by the way, I think that'd be great.

rebalancing doesn't apply to you because that happens internally to that fund. If you have multiple funds, then the point of rebalancing is to stay on your target asset allocation. So for example, if you are very young and you have a 90% stock portfolio and a 10% bond portfolio, and you are lucky enough to have

a market crash happens, so your stock portfolio drops to 70% and your bond portfolio is up to 30%, you're going to want to sell some of those bonds and buy some of those stocks, which basically allows you to buy more stocks at a cheap price. And bonds did their job as providing some capital in the down market to buy stocks at a cheaper price.

Reallocating can also help with the differences between US and international markets, for example. For example, if US has a really bad year and international is a great year, you could sell some of those international stocks and buy some of the US stocks to rebalance to your target asset allocation, kind of guaranteeing that you're going to sell high and buy low. And one note on rebalancing is that it's not likely to actually improve your investment returns. Strangely,

When you are rebalancing, all it's really doing is staying on your target asset allocation to stay on your target risk profile. So for example, if you are at retirement and you have way, way too many stocks, you want to rebalance towards bonds so that if the stock market does take a tumble, you're more protected. But over the course of your career, what's more likely to happen is you're going to be rebalancing away from those higher performing assets like stocks towards bonds because that's what usually happens. Stocks usually go up faster than bonds.

So in that scenario, rebalancing won't actually improve your returns. It'll just keep you on your target asset allocation. And one other note about this, I kind of don't even really like this checkbox because it's really not that huge of a deal. I think if you're at or near retirement, it becomes more of a big deal. But early on in your days, if you're

US becomes too big or international becomes too big. It's not really a big deal. Rebalancing doesn't really add to your return as much, but it is one of those best practices of investing is to rebalance on a fixed schedule. So there it is in the ultimate investing checklist at number six. And number seven, checkbox number seven is don't sell anything until you retire.

This, I think, simplifies investing a lot because it just takes out all the guesswork around timing the market, when to get in and when to get out. Should I be buying? Should I be selling? And the answer is you just never, ever sell. Just hold forever.

As Warren Buffett says, his favorite holding period is forever. And it should be yours too, because the longer you hold, the more likely your investments are going to grow and the less likely you are to shoot yourself in the foot by making a bad trading decision along the way. So when do you sell? Well, when you retire, then it's time to start selling a little bit each year. And so, for example, if you have a portfolio of a million dollars, you could sell 4%, which would be $40,000 each year and let the other $960,000 continue to grow.

The whole idea of investing is to get yourself to a position of financial independence where your portfolio is going to last for the rest of your life without having to work or worry about your portfolio all going to zero. So there it is. Number seven, don't sell anything until you retire.

That's it. That is the seven checkboxes on the ultimate investing checklist. How does your portfolio stack up? If you agree and want to congratulate me on a great list, you can find me on social media at Personal Finance Club. And if you think it's a terrible list and I'm full of it, please direct all complaints to Taylor at the Stay Wealthy Podcast.

All right, that is it for this ultimate investing checklist. Now on to our two questions from listeners. First up, we have a question from Stacy from Atlanta, Georgia. Hi, this is Stacy from Atlanta, Georgia. My question is, what are your thoughts on target retirement date index funds and ETFs?

Hey, Stacey, great question. One clarification, I don't believe there exists any target retirement date ETFs. I think the nature of ETFs are that they can't really reallocate inside of the ETF. They're kind of like a slice of the market. If I'm wrong on that, someone correct me, I would love to see a target retirement ETF if that's even possible. But to my knowledge, they only exist in mutual fund form. For a bit of context, I kind of already talked about them a bit this episode, but it's basically...

an index fund or a mutual fund that contains inside of it, an US stock market index fund, an international stock market index fund, and a bond index fund. And

One other note of clarification is that there are multiple types of target retirement funds. And a lot of people who kind of bash these, or if you look at negative reviews of these online, they're almost always talking about largely, they're talking about the actively managed version, and they'll kind of say they have high fees and things like that. But Vanguard, Fidelity, and Schwab all offer target date funds that are index funds that

that have expense ratios on the order of 0.1% or lower. In fact, Vanguard just lowered theirs to 0.08% or eight basis points. And so you can get this like fund of funds, this nice basket of funds

for a very low expense ratio. And what do I feel about them? I love them. They're honestly my favorite way to invest. I invest in them. I like them because they're like maximum simplicity. It's a single fund at a super low fee, and it basically checks all the boxes of the ultimate investing checklist. It does rebalancing for you. It does reallocating for you. You can buy just one fund. You can put in all your accounts. There is a little bit of the taxable issue I talked about in the previous episode.

episode 159, where I talked about the Vanguard tax issue they had with their target date funds. Although it really wasn't a huge deal. And I think it's very unlikely to happen again now that the industry is seeing what happens if they do that. And so I love target date index funds. I think they are a basically optimal way to invest. And when you veer away from that very simple

broad, diversified allocation of US international bonds, you're basically, in my opinion, kind of dipping a toe into the water of speculation. Even if you do something like adding a small cap value tilt to your portfolio, which I like Paul Merriman famously as a two fund portfolio, where he pairs a target date index fund with a small cap value fund. And I don't think that's crazy. But you

you are kind of like banking on the fact that small cap value is going to perform in the future like it has in the past. And I think if you ask Jack Bogle about it, who's not here anymore, he would say you're basically just opening yourself up to underperformance by doing that because you're just guessing that small cap value is going to outperform. So yeah, that is why I love target date index funds. Thank you, Stacey, for the question.

Our next question comes from Kathy from Florida. Hi, my name is Kathy Fitzgerald-Rehm and I live in Florida for the last two years. We're moving back to New York. We still have...

more than $100,000 from the sale of our house in New York that we want to invest. And we're really not sure what we should do with it. We're 57 years old and we just wanted to know what we could do with it. Thank you very much. And thanks for all your advice. I send it out to all my children. And thanks to you, they're all investing now. So I appreciate it. Hey, Kathy, thanks for the question and the kind words. Well, you know, that's kind of a tough question to answer without more context.

I don't really know the rest of your financial situation, but I'm going to kind of run down the priority order when I have a lump sum of money. What do I do with it? First, I make sure I'm maxing out my 401k match, which we talked about in the ultimate investing checklist. Second, I would pay off any non-mortgage debt that you have. So if you have any non-mortgage debt, pay that sucker off.

off. Third, I would make sure that you have an emergency fund, at least three months of your expenses saved up in cash. Fourth, I'd make sure that you're investing so you're on pace for a healthy retirement. So right now, can you guys retire? I don't know if you're on pace for retirement. If not, throw this all into your retirement investments as outlined by the ultimate investing checklist.

If that's on pace, the next place I would probably go is to throw it at your new mortgage. Does the new place you're living have a mortgage? If so, why not throw it towards your new mortgage? And then the last step, if that's all good, would just be more investing.

keep filling up those investment accounts. And maybe it's just a regular brokerage account. And so, you know, if I'm just to try to guess where you're at, and maybe if all that earlier stuff is taken care of, and you just want to invest this money, then you know, this would be a great episode for you. Just go down that investing checklist, throw that money in the markets. And I

Sometimes people who have a lump sum are worried about putting it in the market on all one day or if they should spread it out. And statistically, historically, about 70% of months in the past, you would have been better off dumping it in the market the day you get it. And that's true because the market's usually going up and it's more likely than not today is going to be a better price than you can get six months or a year from now. So you might as well put it in now. But if that makes you nervous about putting all that money in the market once, sure, spread it out for six months or a year. Split it into six or 12 equal parts.

dollar cost average into the market over that period of time, get it all invested in those index funds. So again, sorry, it's not an exact answer, Kathy. Hopefully that helps give you some ideas about priority of your money. And thank you for the question.

That is all I have for you today. If you want to see that ultimate investing checklist written out, you can head to youstaywealthy.com slash 162. This is my last show filling in for Taylor. He will be back next week. I'd like to take this time at the end of the show to give Taylor and I a little bit of a shout out.

For what it's worth, Taylor and I have no financial arrangement. We're just fans of each other. I'm not getting paid to do this show. I do it because this is my passion, my hobby. I like this stuff. It's also good for me just to get my name and my brand out there so people know about me so I can continue helping people with personal finance.

I assume Taylor invites me because he knows I have a big social media presence and I kind of know what I'm talking about. So it gives him, you know, a few weeks off during the summer and you know, that's just kind of our deal. And so I meant, I lead that off just to say that I'm not going to pitch Taylor for any financial kickback reason. I just believe in what he does and think he's a good guy between the two of us. I think we have kind of a natural division of our specialties. I trend towards educating younger investors, uh,

for many of whom it doesn't make sense to hire a financial advisor. And so the best place for them to build wealth is to just educate themselves and get started investing on their own using steps like the ultimate investing checklist. And Taylor specializes in helping people over the age of 50

retirement, tax planning, and estate planning, stuff that gets a little bit more complex when you've got bigger portfolios and you're doing withdrawals and things like that. And so if either of those things resonate with you, if you want to seek out some more education for younger people in your life, you can find me at personalfinanceclub.com. I'm also on Instagram at personalfinanceclub, TikTok at personalfinanceclub, and Twitter at personalfinanceclub.

per fin club, because you can't have that many letters on Twitter. And if you are over the age of 50, and you want help with estate planning or tax planning or navigating retirement, head to you stay wealthy.com and work with Taylor. He's a good guy. He really knows his stuff. And I don't pitch for many people. But you know, Taylor is one of the good ones. So check him out.

That is it for me. That is the end of my fifth episode. Thank you for listening. It's been such an honor, such a pleasure to be here. It's always an honor that Taylor asked me to fill in. This is my 15th show that I've done as a guest host. And plus I did one more as just a guest. And so I've been on the show 16 times now. So if you're a regular listener, maybe you're getting used to me. I don't know. But as always, an honor and a pleasure. And I will leave you as I do every episode with my two rules of building wealth.

Rule number one is to live below your means. And rule number two is invest early and often. See you next time. This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional service.