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Differentiate between account types and asset classes
One thing that I often notice is that when people ask me questions about how they should direct their savings, people will conflate the account with what goes into the account. So let’s take a moment to talk about the distinction between the two. Let’s use a drinking analogy here. Think of all kinds of different vessels that you can drink liquids from. There’s a pint glass, there’s a wine glass, there’s a champagne flute, and there’s a coffee mug. These are all different types of vessels, and there are different liquids that can go inside of these vessels. And certainly, it’s more common for certain liquids to go into certain vessels than other ones, right? It’s common for coffee to go into a coffee mug, for champagne to go into a champagne flute, but it doesn’t necessarily have to be that way. You could pour your wine into a coffee mug, and you could pour your coffee into a shot glass, so there’s a distinction between the vessels themselves and the liquids that go into them.
Oftentimes though, the questions that I get will reflect people who conflate the type of account that they hold with the type of thing that they think should go inside of it, the liquid that they think should go inside of it. So a person might say, “Hey, I really want to open a 401k retirement account,” but they’re scared of stocks and conflate the two because they think that opening a retirement account means that they need to invest in stocks. You don’t necessarily need to. It’s true that stocks commonly go inside of retirement accounts, but they don’t have to. And they can, if you want to, also go into different types of accounts. You can hold stocks in certain types of health savings accounts. You can hold stocks in a taxable brokerage account, right? You can. There are all of these different options, as to other types of vessels that they can go into.
And so I think the first thing that a person needs to do as they’re thinking through how they want to allocate their savings is that first they need to decide what types of vessels they want to use. And after choosing which vessels they want to use, then they can decide what should go inside of each of those vessels.
Master one tool at a time
If the question is, how do I learn about this huge gamut of different vessels out there, starting with learning about your retirement options, your retirement vessels, can be a good entry point because it limits the scope of what you’re trying to understand. And once you gain the confidence that comes from understanding the world of different retirement options, then branch out into learning about other types of vessels as well.
It’s kind of like, to go back to a food analogy, if you wanted to learn about all of the different types of glassware out there, that’s actually very intimidating. But let’s say that I started by only wanting to learn about the different types of wine glasses out there, right? That contains it a little bit more. It gives me some parameters. Oh, this glass is better for red wine, and this glass is better for white wine, and this is better for pinot noir, but this is better for Merlot. I can spend some time learning about the various types of wine glasses, and once I really feel the confidence of having mastered that, then I can move to learning about the different types of teacups that are out there or the different types of beer glasses that are out there. And it lets me tackle each of those groupings in bite-size chunks.
So do the same thing as you’re trying to learn about the different types of financial accounts that are out there. Start with just the different types of retirement accounts that are out there. And the reason that I say start with that is because you can go to your workplace HR and there will be a person who can guide you through what your workplace offers. And once you’ve mastered that, then you can look at retirement accounts outside of what your workplace offers. And then once you’ve mastered the universe of retirement accounts, then you can look at investment accounts that are non-retirement, right? And so now you’ve got these different groupings that you can sink your teeth into.