Episode 557 | Investing for Founders

Welcome to this week’s episode of Startups for the Rest of Us. I’m Rob Walling. This is episode 557 where I’m going to fly solo and I’m going to talk about investing for founders. There’s an emphasis on retirement investing, investing for the future. I view investing as a long-term game, not something that is playing the stock market and buying stocks. I don’t buy individual stocks.

We’ll talk about how I view it, how I’ve viewed this whole concept, and how I tried to simplify it for myself because as founders, we’re busy with our work, our family, and the balance, and friends. Oftentimes we don’t want to spend a ton of time, but there is an 80:20 or 90:10 approach to doing that.

Before we dive in, I have a new review and I just had to read it. I really appreciate it. It’s from BrianRhea in the US and he says, “Five stars. Your Bootstrapped Startup MBA. This is the definitive podcast for founders who dream of building a sustainable, profitable business without sacrificing their personal wellness or relationships. If you want to hear hard-fought wisdom from real-life stories with a long-term perspective, this is the show for you.”

That’s very well written, sir. I really appreciate it. Brian is co-host of the Slow & Steady podcast with Benedikt Deicke. I appreciate you summarizing it like that and I love that phrase, “Your bootstrapped startup MBA.” If you’ve been listening, getting value out of the podcast, and want to give a little favor back, five stars in any of the places you listen to this podcast would help. It helps us find more users and listeners.

We have actually been growing pretty well over the past 18 months to 2 years since I really put renewed focus on the podcast. We redesigned the website, up the games, up the audio quality, the investment in research, time, and guests. It was just about two years ago and the subscribers basically have gone up since then. I really do appreciate it. As always, welcome new and old listeners alike.

As we dive into this topic of investing for founders, obviously I have to start by giving a disclaimer. I’m not an investment advisor. This is not investment advice. This is for entertainment purposes only, I think I’m supposed to say, but this is what I did. This is what I’ve done throughout my life and I essentially was able to retire at 41 and that was from starting companies. That was from making both profitable companies of being able to pull money out of them as well as exiting companies.

I actually have an essay that’s unpublished that I may just turn into a Twitter thread later on. It’s about in order in my life the things that I’ve made the most money from. I don’t give exact dollar amounts, but the number one was selling companies—exiting Drip, exiting HitTail. The number two is angel investing because I was an early investor in WP Engine and several others that have done reasonably well or cryptocurrency.

People are going to smack themselves in the head and say no, not another podcast about crypto. But those are the two and three. Then beyond that, it’s actually investing. It’s having money that I can put into the stock market or whatever and get returns on. Back in the day, it was just W-2 earnings coming from what I was doing during the day as well as side projects.

For me, investing has always been a long-term game and I actually started when I had my first job right around 20 because I was just exiting college, maybe 22. I opened up, in the US it’s called an individual retirement account or an IRA, and I started putting a little bit of money in each month and putting that into index funds.

I had built up a few thousand dollars of that and as Warren Buffett says, it’s all about the compounding because if you put in several thousand dollars when you’re 20 versus several thousand dollars when you’re 40, by the time you do get to retirement age of 65, that first extra 20 years can be just a massive, massive difference in how much you wind up with.

There’s this thing called the rule of 72, some of you may be familiar with, but you take whatever interest rate, your yield, your earnings on something. Let’s say the stock market is going to return 8% a year, so you take 72% and you divide it by what you’re going to earn. So 72 divided by 8 is going to be 9. Every nine years, your money is going to double.

If you think about that $5000 that I put in when I’m 20 is going to double to $10,000 at 29, then it’s going to double to $20,000 at 38, and then we go to 47 and that’s going to be $40,000. Then we go to 56 and that’s going to be $80,000. Then we go to 65, I believe, and that’s going to be $160,000. That’s $5000 I put away when I was 20 versus if I put that away when I’m 40. It only doubles about 2 1/2 times.

The last couple of doubles are what makes the difference. Think about the last doubles from $40,000 to $80,000 to $160,000. The difference between $40,000 and $160,000 in future inflation-adjusted earnings is massively, massively different. When I view investing, and I don’t mean investing in our companies, I have to differentiate here.

When I was building SaaS companies, I was all in on them and my time, effort, and a lot of my money went into them, but I was always putting a little bit away on the side thinking this money is going to double, double, double over these next 30, 40 years until I actually retire.

The interesting thing about that rule of 72 is to think about if you can earn 10% or 12% on your money, at a certain point it becomes kind of ridiculous. Especially in today’s market, it’s really hard and really risky to try to earn 10% or 12%. Even though historically, the stock market has returned that, if you look over the next 10 years, it’s not set. It’s not likely to do that given how high valuations are.

If you could earn 12%, year after year, approximately, then it doubles every 6 years, and you get even more doubles, so starting early is even more important.

I’m going to dive into some very specific things here. I have a whole outline that I’m going to dive into a second. The bottom line is when I was building SaaS companies, I didn’t pay a ton of attention to this, but I still had this on autopilot. And then once I exited Drip and things got less complex in my life, then I actually did pay a lot more attention to it.

But then I also had enough money that it made sense to make things more complicated. By the time we sold Drip, between my wife and I, we had around $400,000 or $500,000 to our name that did not count Drip. That was all earned from work in the day job, squirreling money away, squirreling money into 401(k) which is a United States employer-provided retirement thing, squirreling into IRAs, building side software products, taking the profit from those, selling those, some very small angel investment. We just kind of […] that together. I had none of that.

When we got married, we had $2000 to our name literally and I was making $17 an hour as an electrician. To get to that point of wealth was pretty significant, but it wasn’t enough money that it made sense for me to spend a ton of time working and focusing on it because fiddling little bits with a few hundred dollars doesn’t move the needle. Fiddling little bits and optimizing with several million dollars does.

Again, this is my opinion. This is what I’ve done. That’s the mindset. While I’m in growth mode, while I’m building startups, I want autopilot, but I still want to be doing something. For me, since I’m interested in this because I’m a nerd and it’s personal finance and investing as a hobby, then I made it complex, but you don’t have to do that. It doesn’t have to be complex.

I’m going to cover four things then I’m going to talk about some additions, some of the ways you can allocate, and this and that.

The first thing is you want to get an emergency fund of 3–6 months of cash in a place that is not getting cut in half if the stock market plummets. Usually, that’s cash in a savings account, not in a CD, certificate of deposit where it’s tied up and you can’t get easy access to it. This depends on your risk tolerance. Do you think you can be employed next month if everything is going to crash and burn if your company collapses? Is it going to take you three months to get your feet under you, is it going to take you six months, that’s the general range.

As you get more money, I will say at this point, we have quite a bit more than six months of complete living expenses in cash, in accounts because we can. It doesn’t detract from earnings on investment. Again, early on, we started to build a nest egg of hey, we have three months, that’s great. Now let’s put a little more into retirement, and then over time, we’ll buy a house so we have to pull some money out of that for a downpayment, and then we’ll rebuild it back.

Somewhere between 3–6 months is the first thing to do. In case your car breaks down, in case a tree falls and hits your house, in case you need a desperate house repair, you need some cash so that you don’t have to sell stock, crypto, or gold, or whatever it is you’re going to own in order to pay these expenses that are going to come up. It’s an emergency fund.

In addition, I would say I heard someone who had like 18 months or two years of savings and it was all in cash. That’s a mistake on the other side because inflation destroys that cash. Not only does inflation make it worth less every year, let’s say 2%, 3%, 4% in today’s environment. Then you’re not also getting the stock market gains.

If you look at what the stock market—whether it’s the US or worldwide—has made in the past 12, 18, 24 months, it’s a lot of money you’re leaving on the table. I wouldn’t take all of that money. If I have two years saved up, I’d personally consider taking 18 months of that and putting that into the market. If you put it in the market, you need to be willing to have it cut in half at the next big drop and then build it back up over time. That’s number one, getting that emergency fund in.

Number two is to max out every retirement plan you can get your hands on. If you are working a day job and you have an employer sponsor your retirement program. Again, in the US they’re called 401(k). I know they have different names elsewhere in the world, but a 401(k) with matching is like free money.

I would always max mine out to the match. I’m going to talk in a second about what I then put that one into. It’s asset allocation. Where do you allocate the money to, but for now I would put in 401(k)s and then individual retirement plans if they’re available to you as well. We opened IRAs way back in the day, individual retirement accounts, when we were 22 and started putting money in there.

If you do have a choice, as a rule of thumb, this is what I did (not investment advice), but in the US there are Traditional IRAs which is where you take your money pretax. So before you pay taxes on it in your paycheck, it goes to your IRA, you have to write off for that. Then when you take the money out, years down the line when it has all these earnings and growth, then you pay income tax on it as you draw it out.

The other option is to do a Roth IRA. Roths have existed for I think 20 or 25 years maybe, not that long. When I get my paycheck today, taxes already come out of it, and then I put after-tax money into the IRA. Then it grows and I don’t pay taxes on it when I withdraw on the other end. I never have to pay taxes again.

If given the choice, Roth IRAs are usually the better decision because not only do you not pay tax on the other end, but the limits of how much you can contribute to a Roth and a Traditional are the same. Since you’re paying tax on the money already, you can get more money into a Roth. It’s the same amount, but it’s after-tax.

I’m not going to go further into that other than to say, also Traditional IRAs have a required minimum distribution at age 70 or 72 that Roths do not. There’s a bunch of pluses, so I think we only have Roth except for the times we have been required to have Traditionals for some reason. Most of my stuff is on Roths. That is number two, maxing out retirement plans.

The third one is once you start a company, if you start an LLC, C Corp, S Corp, and you have revenue and profit, you can then open potentially (depending on what country you’re in) things like SIMPLE IRAs or Spira that are company-related, or you can open 401(k)s and then you can funnel even more money on that.

That’s number three and something my accountant guided me early on in our investing because IRAs—if you’re on your own and you do not work for a company—you can only put in $5000 or $6000 a year. It’s not very much money compared to what you can potentially earn as an entrepreneur. SIMPLEs and SEPs have different formulas, but you can sometimes put $20,000, $30,000, or $40,000 in those. That allows you to actually tax shield your money because that’s the biggest problem you’re going to run into.

Taxes chew through a lot of your money, so anything you can tax shield by getting them into these retirement accounts—again, assuming you don’t need them for a really long time—that’s the way to do it.

The fourth thing is life insurance. Life insurance is the worst. I hate the topic, it’s boring. There’s term insurance and there is whole life insurance. I have been taught by people I respect and trust that whole life insurance is something to be avoided and when you’re young, you get a 30- or 40-year term life insurance, premiums are small, and that’s what you do.

You insure yourself for half a million bucks. Then as you get older, you have to renew that, the premiums go up, and at a certain point, hopefully, you have enough money that you can self insure and that you don’t need life insurance anymore. Again, if you have $10 million in the bank and you don’t really need half a million or a million dollars of life insurance because you have enough, everybody can live forever on that money.

I had a couple of life insurance providers. I have heard good things about and I actually had a good experience with Haven Life. I think they’re a little more expensive than a lot of the others, but I heard about them on the Stacking Benjamins podcast. There’s a code like stackingbenjamins, benjamins, or something that you can use. Haven Life, if you’re a healthy person, they have a really easy signup process.

I’ve done all this intense research about them, but going through the process myself, I felt like things looked good to me. It was much easier than the first time I got life insurance where they came to my house and did blood tests. It was crazy. I didn’t realize that they went to that length, but I guess if they are betting on your longevity, that’s something they’d do.

As we transition, just a couple of more topics. One is the asset allocation of I put all this money in these retirement accounts, but where should I actually consider putting it? That’s asset allocation. Then I have the if you want to make things a more complicated section, which I think is where most people will turn this off. In my opinion, index funds are the way to go.

Index funds have very low expense ratios. They’re not actively managed funds, and they’re not as volatile as individual stocks. You don’t have to manage them, watch them, and see if they earned this much. Their earnings are down so they go up, they go down, Apple and Facebook are in a lawsuit, blah blah blah. Index funds own a bunch of stocks, sometimes thousands and they just track an index. If I’m going to do it, it’s the whole stock market.

The two places I like the best are Vanguard and Charles Schwab. Again, these are US-based, so if you’re in Canada and Europe, it’s all different. But basically, the reason I like them is the expense ratios are ridiculously low because that’s the worst part of using funds—index funds or mutual funds—is that if you get an active manager, then they charge you a fee of half a percent or one percent a year. It’s just a bit of drag on your returns versus these index funds where there’s a VTSAX, which is a Vanguard total stock market fund. It’s US only.

The index, the charge on them are five basis points, like 0.05 or 0.1 basis point. It’s ridiculously low. It can be a fifth or a tenth of a lot of other providers. Again, Vanguard and Schwab I think are definitely the places that I would invest in.

VTSAX, some people just say put all your money in there. Personally, I don’t like being only US-based. It just doesn’t make sense to me because, in the rest of the world, there are a lot of companies that are doing a lot of interesting things, especially in the 2020s. This is not the 1960s or 1970s when things like Vanguard and Schwab are really coming up, but there is this thing, very simple.

It’s called the lazy portfolio. We’re going to put a link to it on the show notes. While there are variations of it and you’ll see it’s almost a crowdsourced thing, the variation that I like is the simplest and the laziest. I don’t even know if it’s in the article we’re going to link to.

The one I think is the simplest is a single fund lazy portfolio, and it’s basically to put all the money that you want in stocks into one fund, with Vanguard it’s called the Total World Stock Index Fund. I would do a 100% allocation. Obviously, you have cash on the side in your emergency fund, but that’s it. It’s just that simple.

Everything is in equities. As long as you’re not nearing retirement and you have a cash reserve, that emergency fund I said earlier. Personally, I am someone who has a higher risk tolerance and I don’t love the stock-bond. I’m not going to put a bunch of my money in bonds, especially as low as the yields are today. I think that maybe as I’m nearing retirement, I want to soften the blow. It makes the ride a little less bumpy, but I prefer just to have cash given that bond yields are so terrible.

Then there are ways to mix it up. You can do three-fund lazy portfolios, there’s a four-fund portfolio. You can get as fancy as you want with it. But again if I were in your shoes and this is the path that we took, I kept it simple. We did essentially a lazy portfolio and didn’t get any more complex than that and didn’t watch it very closely. Just had money auto deducted as much as we could into these IRAs or just into a straight brokerage account with Vanguard, Schwab, or whoever you chose.

It was just buying into these dollar-cost averaging over time. When the stock market would go down, we keep buying in every month, so we’d buy more. And when it would go up, we’d make money and then you’d be buying less, so you’re averaging the costs of your purchases over time.

That’s really it. That was a long time to say a few simple things, but that is to me the way as an entrepreneur who’s running a company, that’s how simple I want it to be. As I think about taking it to the next step, which once we sold Drip, okay, now we have more assets to manage. I can go to a personal financer or an investment advisor, or I can do this stuff myself, which you of course can if you decide you want to and it gets more complicated.

That’s if you want to go beyond index funds. This is where we started looking at diversifying into things like angel investment, which we had already been making anyway. Do I think it’s not bad to have some riskier bets if you do have a good amount of cash, if you do have a good chunk of money in equities and public stocks that are going to be up over time but they’re going to potentially have a bumpy ride over time?

Do I think it’s interesting to have some really risky bets like angel investment up to 3%–5% of your network if you’re able to do this through crowdfunding or through being a credit investor? I do. It’s not investment advice, but this is what I did. A couple of those bets have paid off and have made a substantial amount of money—much, much more than I’ve put into all the angel investments.

It won’t necessarily do that for everyone, but to me, it’s nice to have that. I don’t want all of my money in the public stock markets, I’ll put it that way. In fact, I was saying having it all in is not a big deal, and that’s why I had it for years.

Once we had enough money that I never had to work again, I wanted less and less of that money in public stock markets because I think there are other ways to make really interesting returns once you start going beyond the next funds and getting into fiddly bits. One of them is angel investment. Up to 5% of your network, sure, I think that’s reasonable.

I think some people might say up to 10%, that feels a lot to me. It’s a personal preference. Do I think you should probably maybe own some metals, whether that’s physical metals you want to own gold, platinum, or silver, or whether you can buy ETFs with metals in, I don’t think that’s a bad idea. The more diverse you get your portfolio, usually, the smoother the ride gets because some things are getting up as the other things are going down, that’s portfolio theory.

Owning 3%–5% metals, not a bad idea. Whether publicly traded, they are not really public stocks and they historically shouldn’t follow the stock market directly, and they’re a hedge against inflation. There are just reasons to own them.

This is going to be a controversial one. Did we start buying crypto back in 2016, dollars-cost averaging over the course of many, many months, even a year? Yes. Do I think owning 3% of your portfolio, 5% of your portfolio on crypto depending on your risk tolerance is not a bad idea, hey, I’ve viewed them as an angel investment. I will put it that way.

We figured these things are either going to 10x or 100x, or they’re going to go 0. We’re willing to risk 3%–5%. Again, we didn’t do this back in the day when we had a few thousand dollars in net worth. Let’s say you have $300,000 total in assets you can move around and you put 3%, that’s $9000. Do I think that’s an interesting bet? Yeah, if you dollar-cost average in.

I’m the kind of person to not have all my eggs in the public markets, so I’m always looking for other drives. Am I a crypto purist or someone who could really explain to you why crypto makes sense and all the things about whether it’s going to be adapted? No, but I bought a few cryptocurrencies, those have paid off. I think dollar-cost averaging over time was the way to go.

The next thing is something we’re invested in but I don’t necessarily recommend it unless it’s higher-end collectibles like art, sports cars, comics books, and those things. That’s been a hobby of mine. I think having up to 5% of that is interesting. Of course, some people dabble in real estate. I don’t like owning physical real estate that has to be managed, but of course, owning REITs, real estate investment trusts up to 5% or 10% is totally reasonable.

I’ve tried all the things. I’ve tried peer-to-peer lending, tried online real estate hard money lending. The taxes are really high. The returns are so so. I felt like it was time-consuming and wasn’t worth it, and these other ways were more of my style.

I guess one last point before I wrap up is actually, going against it, I think traditional wisdom is I try to keep as little cash in my home as possible. Some people want to pay their home off, but I view cash in a home as money that’s tied up and money that I can’t be using for all these other things. The money I can’t be investing into my business, investing into other companies, metals, crypto, collectibles, or the stock market.

There are two schools of thought on that obviously because if you borrow money against your house, then put it in other things, and that goes down, that’s a risk because you’re levered. That’s for each person to decide. My thinking has certainly changed over the years. I know that back in the day, we wanted to pay our house up and we’d make extra payments. Over the years I realized, boy, do I really want all this cash tied up here? Cash is king and queen. I prefer to have as little of that as possible tied up in an illiquid asset like my home.

Lastly, before I sign off, I hope this was helpful. This was fun for me to talk through and try to get all of my thinking on this into a 30-minute podcast episode. There are a couple of other podcasts. If you want to dive into more of this that I recommend it. One is my favorite podcast on personal finance and investing. It’s called Money for the Rest of Us. Pretty easy to remember if you listen to the show.

David Stein does a great job of even-keeled and not crazy. When things go up and down, he is just pretty even keel. I actually pay for his plus membership, which is a couple of hundred dollars a year where he gives even in-depth analysis of the markets and stuff. There’s a free podcast that comes out every week and it’s a really good resource.

Then there are two others that I used to listen to, and it depends on if I’m in the mood to nerd out, get into personal finance or back in investing, and hear about all the stuff I mentioned in this episode. week to week listen to these, but I go through long stints. I think it’s been a year since I’ve listened to them, but when I went through 20 personal finance podcasts, these are two in addition to Money for the Rest of Us.

I still listen to Money for the Rest of Us every week, but these other two have not been in my feed for a while, but I do revisit them now and again. One is called Stacking Benjamins and it’s just an entertaining podcast, kind of goofy with bad jokes. The other one is Afford Anything, which is solid.

I did feel it got a bit repetitive and it’s also a bit millennial for my taste. I don’t know if that makes sense, but a lot of the stuff, it’s more into the FIRE movement, financial independence, retire early where it’s like I’m going to save $400,000 in a bank account and then I’m going to live on $16,000 a year. I make the 4% rule work and that’s how I’m going to live.

I think, yeah, that’s great if I was 20 or 25, but it’s just a whole different mindset than where I am, but that’s not the sole focus of the show. This show is really well done and I think the host is amazing. Paula is wise and knows a lot of stuff.

With that, I think we will call this episode a wrap. Thanks so much for joining me again this week. We’ll be back next week with a regularly scheduled conversation with an interesting founder. Maybe we’ll do some listener questions, maybe we’ll do some bootstrapper news, but it’s been great chatting with you today. I’ll be back in your earbuds again next Tuesday morning.