The Perfect Investment for the “Average” Person

On Quora, someone asked how the average person should invest his or her money.  One of my followers requested that I answer this question.  Below is my answer.

When reading this question, a number of follow-up questions come to mind, such as:

1. How old is this person?
2. What are this person’s goals?
3. Does this person have a family or other people depending on them?
4. What is the person’s income?
5. What sorts of assets does this person own? What is the person’s net worth?

There are so many potential definitions of “average.” According to this Wikipedia article, the US Census Bureau reported a mean personal income of $44,510 based on the 2015 Current Population Survey.

To some, that income may seem very low, to others it may seem high, and to others it may seem “average.” My point here is that everyone has different perspectives on what is truly average.

That said, I’d like to give a real answer to this question. Of course, this is based upon my own thoughts.

According to USA Today, the “average” American has $3,600 in credit card debt.

Most credit cards charge interest rates of 15% or more on balances.

Since you’d be hard-pressed to find an investment that steadily and reliably pays more than 15% in the long-term, the unexciting answer is that it would be best for the average American to start by paying off credit card debt.

Next, look at other debts. Without going into too much detail, my rough rule of thumb would be that any debt upon which you pay 7% or more in interest should probably be paid off before seeking other investments. This is just my opinion; there may be some valid reasons to make investments before paying off this debt.

Moving on…

Assuming that there is no high-interest debt standing in the way, one assumption that I’ll make is that the “average” American is not a finance expert.

Taking it one step further, even “finance experts” are not always finance experts. In a world where hedge fund managers are consistently outdone by monkeys, can an “average” person really expect to be an expert investment picker?

My answer is no.

While no answer is the “right” answer and everyone has individual needs (disclaimer: talk to you CPA/financial advisor/yada yada before making any decisions), my recommendation would be to try to remove any thought, active management effort, and emotion from your decisions. It is easy to get emotional about your money, and history shows us that some of the best times to invest is when fear is the greatest.

I’d recommend one of these options:

1. If you’re in it for the long term, and you don’t need your money for 7–10 years or longer, consider investing in a simple, low-fee S&P 500 ETF (exchange traded fund). This is basically a fund that represents the entire S&P 500 index — without having to invest in individual stocks. The S&P 500 has shown to return roughly 10% (not accounting for inflation) over the long-term, according to Investopedia. An example option would be the SPDR S&P 500 ETF Trust, stock symbol SPY.
   1. Note: It’s never a bad idea to diversify and only invest a portion of your assets into a single index, sector, or country. Therefore, you may want to put some of your money into foreign stocks, emerging markets, commodities, real estate, bonds, and other investments.
   2. For the reasons mentioned in the note above, if you’re investing a significant amount of money (whatever the word “significant” might mean to you), see option #2 below.
2. Use an online “Robo-Advisor,” such as Betterment or Wealthfront. These are designed for the “average” person because there have very low investment minimums. Compared to a traditional investment advisor, fees are very low (well under one half of one percent). Tools like this can help you to diversify. They automate investment decisions to take the emotion out of it. Once again, I’d still recommend ensuring that you’re in it for the long-term. This means 7–10+ years without needing your money. If you have short-term liquidity needs, you may end up needing to pull your money out at a loss if the market is down.
3. This one is my favorite option. Consider investing in yourself so you can be more than “average.” Some ideas are as follows:
   1. Purchase self-improvement and personal development books.
   2. Attend personal development and business-related courses and workshops.
   3. Use the funds to start a business that you’ve always dreamed of starting — or at least invest in learning more about how you might approach starting this business.

Let me comment a bit more on #3 because I believe it deserves more attention.

One of the greatest ways to build wealth is to start your own business. If you are smart, passionate, and you work hard, you will likely be able to earn more than you would have earned in the stock market or in other investment options. When you start a business, there is essentially unlimited upside potential. It is difficult to say the same about other traditional investments.

To sum it up, you are better than “average” — so believe in yourself.