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Mr. Money Mustache: Choosing entire index is safe standby that allows you to reap benefits of strong individual stocks

Middle school student planning to exit college debt-free seeks the best long-term investment advice.
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Photo by Patrick Weissenberger on Unsplash

Editor's note: This column is intended for informational and educational purposes only and should not be construed as professional financial advice for your individual situation. Please consult with a financial professional before making any serious financial decisions.

Hello Longmont. 

I am a dad, carpenter, writer, and retired software engineer who has been living in Longmont since 2005. I used a few simple but powerful life principles to become wealthy enough to retire at age 30, and went on to start a blog called Mr. Money Mustache that has now reached over 30 million people in the past nine years. Now it’s time to take these ideas to the streets of Longmont, so send in your questions about money and life!


Hello MMM,

I am looking to invest in stocks. Currently, I am in eighth grade and am planning to go to college. I am looking for a fairly safe investment that will be high yielding for about four to eight years (when I am in college). My plan is to work and invest throughout high school and college then leave debt-free. I am thinking of investing 50% in VTSAX,  20% in Apple stock, 20% in Tesla stock and 10% in airlines. By doing this I will have the most money in safe investments and less money in higher risk investments with a higher return on investment.

I would like to know if you see an error in my thinking or if I should go with safer investments such as bonds.

Thanks,
Caleb

Dear Caleb,

Wow, are you really thinking about this stuff so young? Congratulations! 

My own son is just a year older than you, and while he knows all about money and investing, I don’t think he has such a detailed plan yet. And I didn’t start learning about investing until I was about age 18. But you are definitely on the right track - by planning to go through college without debt, you will make smarter financial decisions throughout the entire remaining eight years of your school life, which makes all the difference.

Now for your investing question: The safe standby is always just buying the entire index: Vanguard’s VTSAX mutual fund which you can get by setting up an account at vanguard.com, or the equivalent Exchange traded fund (ETF) version which goes by the ticker symbol VTI, and you can get with any brokerage account. These days, I use VTI because the transactions are faster.

When you have the entire index, you are already holding a large percentage of Apple, Tesla, and a certain amount of airline stocks. By allocating some of your investments directly to those categories, you are saying, “I am smarter than the market and I think these segments will do better than the economy as a whole.” You may be right or wrong, but either way you are taking a bit more risk and will see a bit more volatility in your investments. 

For example, Apple is currently the most valuable company in the world - valued at almost 2 trillion dollars. Yes, they are very profitable, but some of its high stock price comes purely from speculative enthusiasm. It is hard to stay #1 in the planet forever, and many companies who have been there before, eventually reach a peak and stagnate for years or decades to come. I used to work at Cisco Systems, which was the Apple of 2000. 20 years later, the stock price still hasn’t reached the heights of that golden year.

But! At your age, to be honest this is probably fine - the stakes are low, and you will have an interesting experience watching and learning about those stocks and finance in general. As I always say, your spending and earning are the most important factors to master, while investing is a relatively simple and easy way to strap a rocket booster onto your back to accelerate the journey to financial independence even more.

I predict that in your case, you will get there somewhere in your 20s, considerably earlier than I did. So, congratulations and remember to have some fun and build and value your friendships along the way - these are the things that make wealth worthwhile in the first place!

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