Bootstrap for First-Time Investing
This is a breakdown of a first-time allocation of your accumulated cash in order to try and preserve and even increase its value in the short and long term.
DISCLAIMER: I’m not an expert!!! This is an attempt to capture my own bootstrap into the world of financial pragmatism and in no way am I suggesting that copying this setup to any extent will necessarily work for you. It is simply what it is and you should invest at your own discretion.
The Psychology of Money (PDF)
This is a fantastic read to prime yourself for the world of money and investing. I strongly urge you to read or at least skim through this before anything else.
Pick a good reason for caring about your wealth
- Wanting to buy a house/start a family — or other desires to save aggressively for.
- Financial independence/early retirement (FIRE) — to enable yourself to choose what to do/work on without money as a factor.
- General future-proofing — even if you don’t know what you want now, to look back and know that you’ve been at least a little wise and pragmatic when in the future you DO want something clearly.
- Wanting to get rich quickly off the stock market.
- Because other people are making quick money off of stocks/crypto/whatever (valid reason to be interested, but not enough to actually start investing).
Set aside a rainy day fund
Figure out your monthly expenses, and set aside 3–6 months’ worth as a rainy day fund. This is cash — I just hold it in a bank account — that’s ready to use at a moment’s notice when necessary. I suggest setting aside an amount that’s good for 3 months of *comfort*, and making that last much longer if/when you actually need to use it.
For me a month’s expenses ~= rent + bills + food + transportation.
Set aside a play fund
If you’re interested in learning more about trading individual instruments (like stocks/cryptocurrencies) my approach would be to set aside a budget for this where you’re willing to lose it all. Day trading in particular is essentially gambling if you’re not spending hours and hours every week staying informed on what’s going on with your investments.
When I started this was about 30% of my remaining available cash. Now, the fraction is quite a bit smaller — because I got a sense of the effort I’d have to put in to make it worthwhile and re-allocated most of it back into my savings fund.
The rest is your savings fund
Hold the rest of your wealth via an ETF (exchange-traded fund) that tracks an index of the global economy. What’s basically happening with these is that an institution takes a bunch of money and invests it into many instruments, such that the allocation follows an “index” — an allocation table maintained by another institution that tries to capture some representation of a market. The idea is that the maintainer of the fund essentially provides automated diversification. Then, you as an investor buy “shares” of the fund, and when the value of the fund grows, the value of your shares grows with it. This allows you to sit back, relax, and pay a small percentage of your money (expense ratio) for someone to keep you invested in a good balance.
An example is SWDA, which tracks the MSCI World Index. This is what I personally am holding. Note that this is also traded under the ticker IWDA on some exchanges, but they are the same underlying fund. In fact, I hold IWDA from the Euronet NL Stocks exchange.
The idea is that the world is productive, and the value of companies increases simply due to the generation of wealth. While individual companies might not succeed, the world as a whole should. In times of economic depression/collapse, value of the world economy goes down, however such times are accompanied by real-world situations where an alternate investment strategy wouldn’t necessarily have helped you. In other words, if the world is fucked, you’re probably fucked too anyway, and there are bigger fish to fry.
An extended version of my philosophy can be found here: https://nhnt11.medium.com/notes-on-how-i-think-about-wealth-and-investing-217f0526e05e
How to convert cash to stonks
- Pick a broker — a trading platform. I use Interactive Brokers (IBKR) for my savings fund, and eToro for my play fund. eToro has many options that are convenient for quick trades (for example, contracts for difference and leverage options) but I’ve found them to be less robust as a platform (outages and downtime). If you use a broker local to your country, there can be some advantages when it comes to tax — I believe they can deduct tax for you automatically which sounds convenient but I haven’t tried.
- Deposit your cash via wire transfer.
- Buy stonks. Particularly for the savings fund, I’d recommend verifying that you’re buying the actual underlying asset and not just holding a promise (e.g. a contract for difference) from the broker.
Future income and savings contributions
Now that you’re all set up, how do you keep it going as new income keeps flowing? My approach is to set aside my monthly “comfort” budget and buy IWDA with whatever is left, every time I get a salary payment. This is my “savings contribution” for the month. Actually, in practice, I’m not so diligent — I end up buying IWDA quarterly on average.
If I need to make a purchase that is “extra” beyond my normal monthly expenses, I use my rainy day fund and replenish it when I get my salary before buying IWDA. So the badly named rainy day fund basically acts as a buffer to accommodate larger and non-recurring expenses.
Tracking your wealth
Your net worth is the sum total of the current value of all of the instruments you’re holding, including cash. I calculate mine quarterly, and track this in a spreadsheet. Here’s a template that I’ve been using, as a starting point: https://docs.google.com/spreadsheets/d/1fYf-17lT_auutyGunUxH-lQbokapUEaF4BRXSfS8CJ0/edit?usp=sharing
Beyond the bootstrap
There’s so much reading material out there for inspiration on where to take your portfolio from here. One great example is the “permanent portfolio” — see https://stpeter.im/journal/1549.html. Investment is to an extent a commitment to stay in touch with money and economics and productivity, and there’s always something new to learn.