Sometimes it is easy to get lost with all the information about investing you can find in this site. You may understand the concepts and feel informed but you still have a hard time grasping all the steps that you need to undertake in order to start investing.
Here I want to outline all the steps you need to take in regards to passive investing. My goal is that you see this as a map you can use to orient yourself whenever you get lost.
This is just a checklist of the steps you need to take. I won’t spend much time explaining the reasoning of all the steps for the sake of brevity. I will try to link to useful resources for understanding my recommendations but keep in mind that this site is a work in progress. Therefore, this post will be improved over time as I add more content to this site.
Also take this checklist as a starting point. Feel free to do things differently or do them in a different order. The goal is for you to understand the big picture.
Before you invest
1. Read good books about index fund investing. You are going to be investing for decades and you need to do it on a solid foundation. I am trying to be as helpful as I can in this site but this site is not the complete nor the definitive guide on investing. You should start with the “If You Can” book, and then read the Investing Demystified book. I also recommend “The Boglehead’s Guide To Investing” and the “Little Book of Common Sense Investing”.
2. Build an emergency fund with at least 3 months of living expenses. This will reduce your need to liquidate your investments in order to resolve an emergency.
Making decisions about your investment process
1. Choose your equity/fixed income split. This will have the biggest impact on your returns. If you don’t know what to pick start with 70% equity and 30% fixed income.
2. Decide if you need accumulating funds or distributing funds. Choosing the right fund either reduces your tax expenses or tax bureaucracy. The right type of fund varies according to the country where you live.
3. Choose a portfolio of equity funds that match the type of fund you picked (i.e. accumulating/distributing). I have a preference for funds that track companies across the whole world (or the developed world). My favorite portfolios are:
- Vanguard FTSE All World ETF (Distributing) or;
- 88% iShares Core MSCI World ETF + 12% iShares MSCI Core Emerging Markets IMI ETF or;
- iShares MSCI World ETF (Distributing, Accumulating)
5. Choose a broker. You need a broker to trade ETFs. The most beneficial broker varies by country. Popular brokers available in most European countries are Interactive Brokers and DeGiro. There are some countries where there is less tax bureaucracy if you use a local broker (e.g. Austria, Germany)
1. Periodically invest according to the decisions you made earlier. Ideally you want to be investing monthly. But depending on your investment amounts you may have to invest quarterly or semesterly to minimize your fees. Prefer limit orders when buying ETFs.
2. Save money. Your wealth will be largely driven by how much you can save. You can get everything else right but if you don’t save enough, you won’t be able to fulfill your financial goals. The more you save, the more you can invest, the more your savings will grow.
3. Stay the course. The hardest thing in investing is actually to keep investing despite of changes in the market or in your personal life. Great returns are built over decades. It is a marathon, not a sprint.
4. Rebalance yearly. As the markets fluctuate your assets values will deviate from your target equity/fixed income split. Rebalancing brings your asset allocation in line with your target.
5. Record your ETF transactions. Keep a detailed log of all your ETF transactions in a spreadsheet or custom software. You can use this ledger of transactions to run detailed analysis on your portfolio and to submit your taxes.
6. Pay taxes. You may have to report your investments in your yearly tax declarations and pay taxes accordingly.