Investment Strategy For Wealth - Claude AI

[r0ckyreed]

I asked Claude AI about how to get into investing and build wealth. Here is the conversation:

 

Me: I am wanting to get into investing. Let me picture this scenario. Let's say I have $50,000 in my savings account. I make $3,100 a month. I plan to allocate $500 a month into investing. What strategy would you recommend? Please be specific.

Claude: Here is a potential investment strategy I would recommend for your scenario:

Build an Emergency Fund Before investing, ensure you have at least 3-6 months' worth of living expenses set aside in a high-yield savings account or money market fund. This emergency fund will protect you from having to sell investments during a downturn if you lose your job or have unexpected expenses.

Open a Tax-Advantaged Retirement Account Open a tax-advantaged retirement account like a 401(k) through your employer or an IRA. Contribute enough to get any employer match if available. The tax savings and compound growth over decades can make a big difference.

Open a Taxable Investment Account After maxing out tax-advantaged accounts, open a regular taxable brokerage account to invest additional funds. This will likely make up the bulk of your investable assets initially.

Asset Allocation For the $50,000 lump sum and $500 monthly investments, I'd recommend a diversified portfolio of:

60% in low-cost total stock market index funds (e.g. VTI)

30% in a total bond market index fund (e.g. BND)

10% in a total international stock index fund (e.g. VXUS)

Automate Investments Set up automatic transfers of $500/month from your bank into the brokerage account to purchase shares on a set schedule. This automates the process and takes emotion out of timing the market.

Rebalance Periodically
Once or twice a year, check your overall asset allocation and rebalance by selling some assets that are overweight and deploying new funds into underweight areas. This will control risk.

Boost Savings Rate As your income grows, try to increase your monthly investment amount. Saving 15%+ of your income can build wealth rapidly over time.

The key is developing consistent investing habits through a diversified, tax-efficient strategy that has you buying more shares without trying to time the market. Let me know if you need any clarification or have additional questions!

 

Me: Would you recommend me keeping $15,000 in my savings account and then putting the rest of the $35,000 in a low cost index fund such as VTSAX, and then allocate $500/month into VTSAX?

Claude: Yes, that could be a very reasonable approach given your situation. Here's how I would break it down:

Emergency Fund:

Keep $15,000 in a high-yield savings account as an emergency fund covering 4-5 months' expenses.

Invest Lump Sum:

Invest the remaining $35,000 lump sum into a low-cost total stock market index fund like VTSAX (Vanguard Total Stock Market Index).

Monthly Investments:

Invest the $500 per month directly into VTSAX as well.

Here are some potential benefits of this approach:

You maintain a solid emergency fund cushion while still investing a significant lump sum upfront.

By investing the $35,000 and $500/month into a total stock index fund like VTSAX, you get excellent diversification across the entire U.S. stock market in a simple, low-cost way.

VTSAX contains thousands of stocks but has an expense ratio of only 0.04%, keeping more returns in your pocket.

This allows you to dollar cost average the $500 monthly investments, which can reduce risk somewhat compared to investing the entire $50,000 at once.

It's an easy, straightforward approach that avoids overthinking or trying to slice the pie too finely between multiple funds initially.

You can always branch out into bonds, international stocks, etc later if desired. But for starting out, putting that $35,000 lump sum and recurring $500 into VTSAX can be an excellent wealth-building strategy over many years. Let me know if you need any clarification or have additional thoughts!

 

Me: If I did this strategy, how much could I make in 40 years given the previous history of the stock market returns and the history of VTSAX?

Claude: Okay, let's run some projections based on investing in VTSAX (Vanguard Total Stock Market Index Fund) using the details you provided:

Initial Investment: $35,000 lump sum
Monthly Investment: $500 ($6,000 per year)
Investment Period: 40 years
Assumed Annual Return: 8% (Based on historical averages for total stock market)

Using a compound interest calculator, here are the potential results after 40 years:

Total Contributions (Initial + Monthly):
$35,000 + ($6,000 x 40 years) = $275,000

Balance After 40 Years With 8% Annual Return:
$2,655,202

So if you invest that $35,000 lump sum upfront, add $500 per month, and earn a 8% annualized return over 40 years, your ending balance could potentially be around $2.65 million.

However, it's important to note that returns vary year-to-year and 8% is just a long-term average estimate based on historical U.S. stock market performance. Some years will be higher, some lower.

But this illustrates the powerful compounding that can occur when investing consistently over decades. The monthly additions, while modest, add up substantially thanks to time and compounding.

Of course, there are no guarantees when it comes to investing. But based on the fundamentals of regular investing in a diversified total stock fund like VTSAX, you could potentially accumulate well over $2 million in 40 years from that $35,000 start.

Let me know if you need any other projections or have additional questions!

_____________________________________

What are your all's thoughts on investing, especially in low cost index funds through Vanguard?

I am new to investing, but I really want to start investing my money wisely.

Thanks!  

 

Edited March 31 by r0ckyreed

[Ishanga]

I feel bad for the younger gen, those in below 40 or so, as the world is going to be a very different place unfortunately in 40yrs, unless a major change in Consciousness happens within the next 5-10yrs, we will not have the same world we have now and have been having for the last 60yrs...

Its good advice, but will you be able to take advantage of it when your going to need it?

[universe]

You also have to consider that 2,6 million will only be worth 1,2 million after inflation (assumed 2% p.a.).

 

It could also be closer to zero with maybe a 1% chance. Doomsday Szenario.

 

I would rather invest money into my business or into my hobbies and increase my income sources that way.

Seems more fun.

But if you don’t know what else to do with your money, investing is always a good idea.

[Abe27]

The thing with AI is that it gives advice based on stats from what it has read, therefore it will most often give quite generic advice, like it does here. I mean, it's good, but it's in no means actual advice that relly can help you achiwe your goals.

The low cost index fund option is pretty good, but there are lots of funds, and types of funds. Small cap and value tend to perform better, with higher risk, it mentions nothing about that here.

It also dosent get into systematic and ideosyncratic risk, concepts which for the DIY investor are essentiel to understand, to plan out your investment and savings plan. 

[Davino]

On 31/3/2024 at 8:40 PM, Ishanga said:

I feel bad for the younger gen, those in below 40 or so, as the world is going to be a very different place unfortunately in 40yrs

Ou yeah, what my old granfather used to say

[Ishanga]

12 hours ago, Davino said:

Ou yeah, what my old granfather used to say

My Grandfather who was probably born in the early 1900's from Sweden never said anything like that too me, I think he thought things were pretty good. My Father who was born in the 20's for sure thought things were much better, he was in WW2, but after that things got better, the 60's,70's and 80's were the best years, things we much simpler and there was more opportunity and the culture was not as messed up as it is today. I was hyper active as a kid, today I would have been put on Redlin for sure, but back then they just watched my sugar intake and made sure I was being active outside playing as all the kids were doing, we would play for hours, today that doesn't happen, phone addiction!! and that is just one example, I can't imagine how bad its going to get in 10-15 yrs.. Just think, Trump is under how many indictments but he's the republican rep, and may just win, this is a simple eg of he consciousness level of the general public..things are getting worse not better!

How the nuclear threat is as real as it ever was...

 

Edited April 2 by Ishanga