Today we’re going to talk about what investments to select after you’ve decided to sign up for a 401(k) or open up an IRA. You might be thinking: “Ugh, I’d better grab a glass of wine. This is going to be long discussion.” After all, when you open up one of these accounts, you are typically presented with a long list of options that makes the menu at an upscale wine bar look short. With so many choices to select from, many people just spread their money equally across all of the options. Or, worse, they make no choice at all. But, after reading this article, you’ll know just how to pick the investment choice that’s right for you:
1. Think Chicken Rotisserie: Set-It-And-Forget-It
First off, check to see if you can select a target-date retirement fund. These are the investing version of the chicken rotisserie “set-it-and-forget-it” machine. They have rather clinical sounding names like “Target Date Retirement Fund 2040.” But, behind those sterile titles is a very warm and inviting investment choice. The year in the title of the fund corresponds to the year closest to which you expect to retire. (If unsure, I suggest assuming you will work until age 70). Once you commit to investing in that fund, the company overseeing it will gradually shift your money between stocks, bonds, and cash to become more conservative as you get closer to your golden years. Although many firms offer them, my personal favorite is Vanguard because of their low fees and the pace at which they shift your investments from more aggressive to conservative.
2. As A Back-Up Plan, Think Financial Smoothie
If your plan does not offer target-date retirement funds, my next favorite option is to go with index funds. Index funds are like financial smoothies, as they come in several flavors. The two most common are stock index funds and bond index funds. You can create your own target-date retirement fund out of those two using this formula:
110 minus your age = percentage of your portfolio to be invested in a stock index fund. The remainder goes in a bond index fund.
For example, if you are 30 years old: 110-30 = 80. So, you should allocate 80% of your portfolio to a stock index fund and the remaining 20% of your long-term investment money to a bond index fund. Each year as you make your annual contribution, revisit your mix and rejigger to get yourself back in line with this investment recipe.
That’s it. If you follow one of these two options, you will out perform over the long run the vast majority of more complex investment plans. And, you’ll have a lot more time to sip that glass of wine!