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I'm a 29-year-old living in Europe and I'm looking for some investment advice.

I’m fortunate enough to be earning roughly $28k per month after tax, and I currently have about $400k in cash sitting in my bank account.

I’m single, my living expenses rarely exceed $4k a month, I’ve already got a mortgage on a house, and I don’t need a car. Other than a buffer, most of my cash and future earnings should probably be invested.

My goal would be to have this money work for me in the future, e.g. being able to travel and live comfortably thanks to it. I don't see myself retiring early, although within 10-15 years I'd like not to be dependent on a high-earning job like I am now, without having to change my standard of living.

I think should invest on a time horizon of 20-30 years, and I assume I can tolerate a high amount of risk because I don't depend on the money and I’m comfortable with it “disappearing” in the short term. I don't know how to translate those two assumptions into an actual strategy, however.

I recently read "A Random Walk Down Wall Street," and "I will teach you to be rich." I understood that individual stocks and actively-managed funds lose out in the long term because of higher fees and the investor's biases coming into play. The books seem to suggest that an S&P 500 ETF is a smart option since it tends to outperform other funds in the long term and it has low costs.

I can't figure out if this is the best choice for me. I get the feeling I am missing something and that my strategy ought to be a bit more nuanced than this.

I'd break down my question into the following:

  • Are my assumptions about risk tolerance and time horizon valid?
  • Considering those assumptions, would a 5 / 95 bonds to stocks split make sense? Or should I go 100% in on stocks?
  • Looking at stocks, should I be looking much further than putting all the money into an S&P 500 ETF? If not, what should my portfolio distribution look like?
    • I worry that putting all my money in an S&P 500 ETF is "bad" diversification, but I don't truly understand what diversifying means. Do I diversify via individual stocks, pricier actively-managed funds, or by investing in markets and continents?
  • What does it mean to "take risk"? I imagine the point is to increase my returns, but how do I avoiding the pitfalls I read about in the book? Also, how can I avoid having to look at my portfolio allocation more often than once a month or every six months?

I'm open to any and all advice about this situation, so please feel free to point out the holes in my thinking! Thanks in advance for your help.

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  • Does this answer your question? How to pick an initial investment mix
    – keshlam
    Commented Feb 28, 2023 at 22:29
  • No one everost their job for recommending the Bogelheads Three Fund Portfolio. Your task will be finding European analogs to those funds.
    – RonJohn
    Commented Feb 28, 2023 at 23:00
  • A lot may depend on the tax laws and available investments in your country. For example, if you're a US citizen you're stuck paying US taxes for life, but have tax-deferred accounts that can be used to delay your taxes. You'll also need to think carefully about the risks associated with currency exchange rates- if your expenses are in euros and your investments in dollars, this could present a problem if the dollar loses value relative to the euro. Commented Mar 1, 2023 at 4:54

2 Answers 2

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You are off to a good start.

Highly recommended reading https://www.amazon.com/Intelligent-Investor-Definitive-Investing-Essentials/dp/0060555661: The guy was Warren Buffet's teacher has been dead for 30+ years but he is still very relevant and full of common sense.

Short summary: "you can't beat the market but if you diversify broadly you can easily match the market" That's the best you can do.

So then it comes down to diversification which simply means "buy a bit of everything and not a lot of any single thing". You can diversify

  1. Volatility: stock vs bonds. Since you have a long horizon, you can go heavy on stock maybe 90/10 or 80/20. It's always good to have some amount of cushioning for extended stock market slumps and unexpected short term needs or opportunities
  2. Index funds: low fees and broad splatter. S&P500 isn't the only game in town, there are funds that cover the entire stock market which specifically includes a lot of smaller companies that the S&P500 ignores.
  3. Globally: S&P500 is a US fund so you have the added risk of currency fluctuation. There is probably something similar in your own location. You can have a mix between Europe, North America, Asia/Pacific & Emerging markets.
  4. Alternative assets: commodities, real estate funds, international money market funds.

You can probably cover all of this with maybe a dozen or so index funds (if they are offered in your neck of the woods). You can adjust your portfolio by moving money between these funds once a year or so. Often that means (somewhat counterintuitively): Sell the stuff that did great (because it's expensive now) and buy the stuff that did poorly (because it's cheap right now). At least that's the best strategy for "normal" market cycles.

There is also a whole angle on taxes but that's best discussed with a local ta advisor.

Another possibility is to buy real estate outright. Buy a house and start renting. That comes with some extra work of managing the property but that can be farmed out to a management company (for a fee of course) if that's not your thing. This can generate very stable returns and is one of the more inflation-proof investments.

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  • S&P 500 funds are a good start, but they don't include small US stocks. US total market funds are better, but don't include stocks outside the US. A whole world market fund is best. In the US that would be VTWAX. If there's no equivalent in the EU, you can roughly replicate it by putting 60% in total US fund, 30% in developed markets outside the US, and 10% in emerging markets.
    – Earth
    Commented Mar 1, 2023 at 23:38
  • @wide.writing.immediately: that's exactly what I was trying to say with bullet #2
    – Hilmar
    Commented Mar 2, 2023 at 12:56
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You are indeed in a very fortunate situation and as @Hilmar pointed out on the right track. I suggest to talk to a professional in your region. Ideally someone who does not take commission for selling products. There may be plenty of ways to save on taxes (from your investment income and otherwise). E.g. in the US, municipals can be very tax efficient. In the UK, ISAs are a good way to invest (some of your money). You will spend a bit of money, but your net worth and income is high enough to likely offset these expenses with tax savings in my opinion.

With regards to your questions:

  • Risk tolerance: Yes, you can indeed tolerate a lot of risk - if you want to is subjective and something you need to ask yourself.
  • More expected return (and risk) will come from stocks. One consideration why not to invest 100% in stocks depends on diversification. Bonds and stocks are often negatively correlated - see this Schroders article. In theory, that reduces your risk, for given returns. If your holding period return is long enough, expected returns from 100% stock will be higher than bond returns.
  • S&P500 is well suited if you were living in the US, and you do not worry about the USD (relative to other currencies or in general). The US is very big, and if there were big problems with the US, everything else will struggle to (at least to some extent). Diversification is well explained in this article. As long as you know what standard deviation is, you will understand the logic. enter image description here
  • The pitfalls (higher fees and biases...) can best be avoided by buying low cost index funds. It is difficult to avoid frequently looking at your portfolio. Ultimately it is your ability to resisting short-term temptations. If you know you are tempted to do that, get a seperate internet banking account for your savings, use a password you cannot remember and look it at a safe deposit box at a bank or some other trustworthy institution. It will come at some extra costs, but you it will be cumbersome to go there and retrieve the password and remind you of why you wanted to avoid looking at the performance before you actually do.

Some personal comments I find you may find useful:

Assuming you invest 350K up front, and a further 20K each month, you have 2,4M within 10 years, excluding any gains. That leaves you with 50K in cash, plus 8K to spend a month (double your current spending). If you earn 6% on average (the S&P500 returned 10.15% since adopting 500 stocks in 1957 according to Investopedia), you will end up with 3,876M after 10 years, according to this calculator. (4,358M if it is 8%, 2,1M with negative 5% every year)

enter image description here

If you plan to retire at 43 (in 15 years), assume to live until 85 (the US average is ~79) have no pension (unrealistic, given your current income), no social security and other income, and require 50K a year ( a bit over your current 4K a month), you need 1,87M to retire according to this calculator.

enter image description here

So even in a very adverse scenario of -5% a year for the next 10 years, you would already have enough money to retire at the age of 43, if you do not save any more money after you turn 38.

Seems you already have a house. Probably at a mortgage rate that is very favourable for you (low fixed interest). It also seems you do live a fairly modest life, and do not even intend to buy a car. Below are a few details that you may find insightful and that should help you decide what you want to do:

  • Vanguard offers a good overview of investment returns over a long time horizon based on different allocations between fixed income and equity.

  • On a rolling 10 year period, stock returns have only been negative 3% of the time bewteen 1937 and 2022 according to Nuveen.

  • Passive investing as you already suggest is indeed historically the preferred method, see for example this answer for plenty of details.

  • Investing monthly provides some extra safety - see finra: cost averaging

If you are happy to potentially have a small decline in your total saving, with the benefit of expected bigger gains (on average), you can invest as much as you desire in the stock market. As @Hilmar pointed out, an importing thing to consider is exchange rate risk. If you invest in different markets (you do have enough money to do so), you can also benefit from this. If you invest in USD, EUR, GBP, CNH, JPY, and whatever market you believe in (say INR), you will definitely be invested in something that does well. Historically, the US has done very well with regards to delivering returns in the stock market and the USD itself is also very stable. However, you still expose yourself to this particular market and FX rate if you put all your eggs in this basket.

There are two extremes:

  • If you want to invest as little time and money as possible, buy low cost ETFs or index funds.
  • If you actually do intend to retire in max 15 years from what you currently do, you may need a hobby.

In the latter case, you may find it interesting to focus a bit more on your investments. If so, commodities, art, oldtimers, fine wine etc may be interesting too, provided you are interested in that sort of stuff. For me, it's good fun to go for a ride with oldtimers every so often, while at the same time maybe even gaining a bit on the cars worth itself. If you don't mind being a landlord, you can invest real estate but you can also invest in funds that invest in real estate, which avoids the burden of being a landlord.

Last but not least (based on a lesson I unfortunately learnt the hard way), if you ever plan to get married (in some jurisdictions living together for a while can be equivalent), get a prenuptial agreement (marriage contract / cohabitation agreement) that sets out how certain matters will be dealt with should the parties separate or divorce. This will likely save you hundreds of thousands in case you do separate. However unlikely you think this may be, statistically, chances are very high.

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  • Thank you for such a thorough and helpful answer! I have some follow-up questions. You said "If you are happy to potentially have a small decline in your total saving, with the benefit of expected bigger gains (on average), you can invest as much as you desire in the stock market." What do you mean by "small decline in your total saving" in this context? Also, when you say I may need a hobby, do you mean I would need to find a lucrative activity in order to make it feasible for me to reach the goal of retiring in 15 years? Or more something to fill the time once I do?
    – kettlepot
    Commented Mar 3, 2023 at 19:35
  • No lucrative activity needed. Your income puts you right into the top salaries. The calculators I posted should make it clear that you would earn enough money to retire. I assumed a -5% return (negative) a year as a worst case scenario, which would still allow you to retire comfortably in about 15 years from now, given you do not increase your expenditures. I meant a hobby. If you earn that much money you either have a lot of responsibility, own your own business or are an athlete (may be wrong). Either way, life without work can be quite boring after a while if you are used to working hard.
    – AKdemy
    Commented Mar 3, 2023 at 23:43
  • I hear you, thanks. One more thing if you have the time. I just read that ETFs don't generate compounding interest. How should this affect my planning? Is compounding interest an important factor, and what should I do in order to achieve it? I currently don't know what I would need to do or where to look in order to set myself up for compounding interest. Maybe I'm thinking of it the wrong way.
    – kettlepot
    Commented Mar 4, 2023 at 10:38
  • Compound interest just means you get interest on interest. If you have a bank account and earn some interest in the first year, it will be on your account earning interest the next year (unless you withdraw it). You can reinvest dividends to have a similar effect.
    – AKdemy
    Commented Apr 10, 2023 at 18:08

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