My last post was A Q&A About Saving For Retirement, which seemed to successfully answer several questions – so thank you for asking and then providing feedback! I did receive a follow-up question (one I have heard in one way or another many times before) that I feel is worth addressing in its own post. Here is that question:
This of course depends on each person’s specific situation, personal financial goals, and risk tolerance, among other things, but I think I can help answer this more generally and hopefully give you the foundation you need to get started.
If you’re investing in a 401(k) or other employer sponsored retirement plan where you are limited to the list of available investment options within your plan, look for Vanguard and Dimensional (DFA) funds. For many of you, putting 100% of your current balance and 100% of your future contributions in a target date fund is probably your best option.
For example, the Vanguard Target Retirement 2035 Fund is made up of:
- 48% US Stocks
- 32% International Stocks
- 14% US Bonds
- 6% International Bonds
This is a well balanced and diversified portfolio that exposes you to the global market (you’re owning thousands of companies) within an 80% stock and 20% bond mix. And, the expense ratio is an amazingly low 0.15%!
If you don’t have access to Vanguard or DFA funds within your 401(k), 403(b), or other retirement plan, look for another target date fund with a low expense ratio.
While the Vanguard website can certainly be confusing (I have heard this from many friends), they have a 1-800 number where you can talk to a specialist, which I have found to be helpful. While the initial set-up may be somewhat painful (or at least annoying), Vanguard funds are the least expensive option available and I think they’re worth it. Plus, after the initial set-up, things should largely be on auto-pilot.
Keep in mind that just because you add money to a newly opened account, it does not mean that the money is invested. It will sit there, as cash, earning next to nothing, until you tell it how you want it invested. Be sure you make an investment election – and a simple balanced fund will do!
Also note that you don’t necessarily have to open a new account. If you already have an account somewhere else, it is likely that you can buy Vanguard funds within that account. If not, they may have other low-cost options. I would look into both the fees you’re paying to have the account and the funds available first – because opening more and more accounts can only complicate things. Be sure you’re not paying too much just to have the account in the first place. (While Vanguard is not the ONLY solution, it ranks highest on my list of the best available investment options. You can also read Mr. Money Mustache’s post on How To Make Money In The Stock Market and see his investing recommendations here, just so you know I’m not the only one.)
As one more suggestion, you may want to consider Betterment. Betterment utilizes technology to take the hassle out of investing. They pick the funds and then rebalance as necessary. This is what is called a robo-advisor. You can read about their pricing structure here.
As one final reminder, getting started is better than doing nothing. Don’t let the multitude of options keep you from taking any action. And of course, you can certainly send me an email with your questions!
- Open accounts with Vanguard and pick a target date fund, which does the rebalancing for you (or use an existing account and buy Vanguard or other low cost funds within that account).
- Try a robo-advisor such as Betterment and let the computer algorithm go to work for you.
- Don’t let all the options keep you from trying any of them.
I hope this is helpful!
Until next time,
*Note: A taxable account is often called a brokerage account. This means you are saving after-tax dollars and aren’t restricted by a specific age as to when you can take the money out without penalty, as you are with retirement accounts like 401(k)s and IRAs. As an example, this is where you would invest money after saving for retirement (such as maxing out your 401(k) contribution) and when you still have more money to save and invest.