You’re on your own more than ever when it comes to retirement, and that means you have to manage your money wisely. But investing is a challenge, especially if you don’t have the time or desire to figure out all of the complexities.
The good news? Investing doesn’t necessarily have to be complicated, and you don’t need a degree in finance (or political science) to be successful.
Yes, it’s true that you have to learn a few things, pay (at least a small amount of) attention to your accounts, and make some decisions without knowing how things will pan out. But you don’t need to make this your life’s work. There’s little reason to spend more than a few hours per year on your retirement (unless retirement is rapidly approaching – in which case you’ll want to spend a few extra hours per year).
The Challenge
As you start investing, you may begin to hear terms that sound foreign. Maybe you’ll get the picture that mutual funds are the easiest way to invest, but then you’ll start to hear Greek letters – which really sound foreign – such as alpha, beta, and so on. Oh dear…
Is all this necessary? Not if you just need to know what time it is.
You’ll also notice things in the media that you never paid attention to before. If you never invested, you probably never cared what the market did, what the Fed said, or which mutual funds are “best” for the coming year. Unfortunately, the media can be persuasive, and you’ll believe that you need to constantly “do something” with your money or you’ll spend your retirement scraping dog food out of a can.
The emotional attacks won’t stop there. You’ll also be told that some politician or other is ruining it for you – literally – and that the deck is stacked against you.
Any of that might or might not be true, but it doesn’t matter – it’s a distraction. If you have the time and energy to devote to those topics, go ahead and have fun with that, but here’s what you really need to know if you want to retire: a successful retirement is simply the result of saving enough and investing wisely. Beyond that, suffice it to say that the world is a complicated place, and it will change many times – back and forth – over the course of your lifetime (bozos will come and go, be replaced by others, make things better, and make things worse). All you can do is control what you can control.
Keys to Retirement
If you’re more or less on board with the worldview above, here are some tips to improve your chances while saving your time and energy for more important things:
You don’t need to pick the very best investments. Sure, you will be better off if you do, but that’s extremely hard to pull off. You don’t even need to have great investments – as long as you use halfway decent investments you can reach your goals. If you happen to somehow consistently use great investments for your entire life, you’ll be a little bit more comfortable (but probably not as much as you think). Most people end up hurting their investment performance by trying to get too fancy here. In fact, the amount you save has more of an impact than the performance of your investments.
Risk is a reality. One of the most important decisions you need to make is how much risk to take. Unfortunately, there’s no free lunch with risk: you can have the potential for bigger returns (along with the potential for bigger losses), or you can try to keep your account balance stable (or while risking losing purchasing power due to inflation). You can’t have it all.
Diversification helps. If there was any free lunch when it comes to investing, it would be diversification: spreading your money around into lots of different places so you don’t have all of your eggs in one basket. Unfortunately, diversifying can only reduce the risks of being in the wrong place at the wrong time – you can’t completely eliminate market risks.
Chart your course. Yogi Berra is quoted as saying “if you don’t know where you’re going, you might end up somewhere else.” It’s essential to have at least a basic plan for your retirement. Start on this as soon as you can – you’re never too young. As you get older and approach retirement, your plan should become less basic. The key is to know what you want out of retirement, and learn – before the day arrives – if you’re doing what it takes to get there.
Market timing is virtually impossible. Once you decide to get started (which is the most important step), you might get sidetracked by whatever is going on right now. Don’t do that. When things are bad, you’ll think you should wait until they get better. When things are good, you’ll say the market is too high and you’re waiting for it to come down. There is never a perfect time – you just need a strategy that’s suitable for you over the long-term, and you need to follow that strategy. If you can’t afford risk, use a less risky strategy. If you want and need to take risks, you might be messing it up by sitting on the sidelines.
Easy Investing? There’s a Fund for That
So, how can you make the investing part of the process as easy as possible? Use mutual funds to do the work for you. You just need to pick a fund (or combination of funds) that takes the right amount of risk, and you’re done with the investing. You’ll need to check on your investments from time to time but once or twice per year is plenty for most people.
Which funds should you use? That’s ultimately up to you, but using an “asset allocation” fund is going to be the easiest approach. These funds do the diversifying for you – typically you invest in one fund, and that fund invests in many other funds (including US stock funds, overseas funds, bond funds, and so on). Asset allocation funds can be actively or passively managed, so pick whichever type you think is best.
There are two types of asset allocation funds. Target risk funds are built to take on a certain level of risk. For example, an aggressive fund will invest mostly in stocks and take on more risk than a conservative fund. Target date funds are very similar, but they change over time: they automatically get more conservative as you grow older.
Again, the key is to decide how much risk you are willing and able to take, and then to build a portfolio that meets your needs. Save as much as you need to save in order to meet your goals. For most people the most important thing is to get started – hopefully this helps you at least do that.
Photo credit: Paul L Dineen