Pay Ourselves First: The Way We Save and Invest

After I posted our latest score card update last week, MoneyNing asked me if I can share how we accumulated our net worth and the source of the growth, whether it’s from our salaries or investments.

Actually, I have touched this topic quite often in the past (for example, when we reached the half-million mark). For someone who has read this Diary for a while, it should be quite clear the way we save and invest. If you are new, then this post will be a summary of what I have wrote in the past, with some new additions.

Cost Basis vs Gain

As of June 30th, more than 30% of our net worth (excluding cash and bonds) is from investment gains. Looking at the market values, that’s about $160K from price appreciations, a gain of nearly 50%. The rests are from our own investments plus some employer matches of our 401(k) contributions. We didn’t start investing till 2001 and since then have been making regular contributions, in both taxable accounts and retirements. On average, we put more than $50,000 into various investment accounts every year.

I feel that our savings rate is quite high (about 40%). The reason for having such a high rate is we always put saving and investing ahead of spending.

Saving

I have a rather large saving and investing system which consists of more than a dozen bank and brokerage accounts. However, despite the complexity (I am working to simplify it), the system has worked quite well for us because almost all the transactions are done automatically, from the time our paychecks hit the bank. We basically put our saving and investing on autopilot so we don’t forget to transfer money from checking account to high-yield savings accounts (the accounts for our emergency funds) and purchase mutual fund shares every month. That makes our live much easier.

Investing

Since I started to track our net worth in 2003, the value has more than doubled in the past four years, with a big part coming from, as I mentioned above, gains (at least on paper). We benefit from starting early and being consistent. Though I have proved with my own study before that dollar-cost averaging may not be the best investment strategy when it comes to returns, that’s what we are using to invest in mutual funds. Sometimes return is not the only goal. I believe that being disciplined in investing is much more important than trying to find the perfect investments or waiting for the right time to enter into the markets.

I have seen some discussions on whether one should pay off high interest rate credit card debt or start investing even in debt. While it makes a lot of sense to target the debt that charges some 18% interest rate first, I feel that investing should never be delayed even when one is deep in debt. For the long term, even $50 invested today will make a big difference 30 or 40 years later. So why don’t spare $50 and invest it while battling the debt?

As for our investments, all our taxable mutual funds are actively managed funds, not index funds suggested by many experts for reasons such as the high initial investments for most of Vanguard index funds. Amazingly, these funds have been doing very well without costing me too much to own as compared to index funds, at least till now. Of course, the comparison is based on past performance and there’s no guarantee the future will be the same as the history. On the other hand, we do use Vanguard funds in our IRA accounts.

In addition to mutual funds, I also buy quite a lot individual stocks. In fact, the market value of stocks we hold is about 60% bigger than the size of mutual funds, largely due to one single stock, China Life Insurance (LFC), which accounts nearly half of the total value. I used to do a lot of tradings, in hoping to make some quick money. But now I tend to hold each one I bought for much longer time.

Another thing I have done that I think helped us is I am not afraid of buying new issues, particularly mutual funds and ETFs, even though they don’t have any tracking record or a very short one. For example, I first bought Dodge & Cox International Fund (DODFX) in June 2003 when the fund had been around for less than 2 years and invested in PowerShares China ETF (PGJ) and Water ETF (PHO) only a few months after the funds were launched. So far they are among my best performers. I also invested quite early in some hot areas such as gold and real state, both in 2002 and having solid returns.

So far, we have some successes in investing, also suffered some losses for bad decisions. However, we have committed ourselves to investing, no matter it’s an up market or down market.

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