Buying a House, or "Twilight of the Idols"

Well, it's official, I have placed an offer on two houses in my hometown of Vacaville, CA. In preparation, I have begun selling off some possessions for the sake of padding my bank account balance for the closing costs, down payment, deposit, and so on.

Purchasing a house forces you to think long-term and to have clear priorities. For example, I am selling my prized DVD boxed set of Star Trek: The Next Generation, which I would never have considered selling a year ago. Of course, since then, the various incarnations of Star Trek have become available for instant streaming on Netflix, so the DVDs are not as necessary as they have been in the past. But it is possible to think of the Star Trek DVDs as a symbol, an idol of sorts, a testament to the priorities of a younger and more frivolous former self.

Granted, I will probably purchase the soon-to-be-released Blu-Ray edition of Star Trek: The Next Generation, but the short-term tradeoff of my beloved Star Trek collection for the sake of long-term stability and owning my own house is a wise financial decision.

Besides, owning my own house will allow me to focus on some of my other interests and passions in life, such as vegetable gardening and raising backyard chickens. So perhaps it is not the Twilight of the Idols after all, for new idols and priorities ebb and flow with the seasons and years in the course of a human lifetime.

Modus Ponens - How to Invest Like a Logician

Modus ponens is arguably the simplest, most well-known inference rule in formal logic. Modus ponens states that, if some proposition p implies another proposition q, and if proposition p is true, then proposition q must be true also.

Here is modus ponens stated more formally:

Premise 1: p → q
Premise 2: p
Conclusion: q

Or, if you prefer, here is modus ponens in ordinary language:

Premise 1: If p is true, then q is true.
Premise 2: p is true.
Therefore,
Conclusion: q is true.

Of course, the ins and outs of investing are more complicated than a simple two-premise argument makes them out to be. However, the fact remains that, if you take some simple, preliminary financial steps, then you will be better off financially in the future.

For example, are you contributing aggressively to your company's 401(k) plan? Have you opened a Roth IRA? Do you have an emergency cash fund? These are extremely simple steps you can take to become financially well-off in the future.

Investing is not difficult, or even time-consuming. Just pick a target-date retirement mutual fund, or a broad-market index fund (such as the iShares S&P 500 Index ETF, AMEX:IVV), and start investing a portion of your income regularly. Diversification is the key, and many funds are already adequately diversified for you.

Premise 1: If you do these these things (p), you will become financially secure later in life (q). The real challenge to making our modus ponens comparison hold is premise 2 (p). It is up to you to take these simple steps toward your own financial future; no one will take these steps for you. But if you do take these steps, and if you persist in following through with investing for the long term, you will truly be investing like a logician, with the principle of modus ponens on your side.

Three Sample Roth IRA ETF Portfolios for Various Investment Time Frames

In general, if you have a long investment time frame, then a greater percentage of your investment portfolio should be in aggressive, higher-risk investments such as stocks. As your investment time frame gets shorter, a greater percentage of your portfolio should be in more conservative, lower-risk investments such as bonds.

Below are three very simple Roth IRA portfolios using ETFs (exchange traded funds) for various investment time frames that you can use as-is or customize according to your own investment philosophy and goals:

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Short-Term ETF Portfolio (0 to 5 years):

40% Bonds (BND or AGG)
60% Stocks (IVV or SSO)

Intermediate-Term ETF Portfolio (6 to 10 years):

20% Bonds (BND or AGG)
80% Stocks (IVV or SSO)

Long-Term ETF Portfolio (11 or more years):

100% Stocks (IVV or SSO)

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To keep these sample portfolios as simple as possible, I used S&P 500 Index ETFs for the stock portion of the portfolios: the iShares S&P 500 Index ETF (AMEX:IVV) or the ProShares Ultra S&P 500 Index ETF (NYSE:SSO).

If you would like to be even more aggressive, especially for the long-term portfolio, you could use a growth or value ETF (such as IVW or IVE) for the stock portfion of the portfolio, or you could use a mix of small-cap and mid-cap Index ETFs (such as IWM or IJH).

Key lessons:

• If you are investing for more than 10 years, your entire portfolio should be in stocks or stock funds.
• To keep a portfolio simple and diversified, use a single broad-market index fund ETF or a balanced mix of different types of index fund ETFs.
• As you get closer to needing the money from your investments (that is, as your investment time frame gets shorter), a greater percentage of your portfolio should be dedicated to more conservative investments such as bonds or bond funds. Again, to keep the portfolio simple, use a broad-market bond fund ETF.
• To keep the trading fees low, purchase only one investment at a time, perhaps by alternating which investment you purchase each month.
• Rebalance your portfolio once per year to bring the ratios between investments back into proportion, or when your investment time frame has changed.
• If you are absolutely new to investing, I still recommend that you open an account with Sharebuilder (through ING Direct) because Sharebuilder makes it easy for a new investor to set up an automatic investment plan. Just click over to Sharebuilder, open a Roth IRA account, and follow the prompts to set up an automatic investment plan.
  
• Investing for the long-term is much simpler than you think! Just do it! Later in life, you will thank your younger self!
  

Recommended reading about ETF investing: