30 sec brief
If you spend more than five minutes watching CNBC or scrolling through a financial website, you might get the impression that investing is complicated. It doesn’t have to be. You can tune out a lot of the noise and reach your long-term goals by following a few simple investing strategies: Use Mutual Funds and Exchange-Traded…
If you spend more than five minutes watching CNBC or scrolling through a financial website, you might get the impression that investing is complicated.
It doesn’t have to be. You can tune out a lot of the noise and reach your long-term goals by following a few simple investing strategies:
Use Mutual Funds and Exchange-Traded Funds (ETFs) for instant diversification. You’ve heard the one about not having all your eggs in one basket, right? That’s one of the most important rules of investing. If you have all your money riding on just a handful of stocks, you run the risk of seeing your account value get pummeled when one of your stocks hits a bad stretch. Owning a basket of stocks (or bonds) gives you important diversification. Mutual funds and exchange-traded funds typically own hundreds, and often thousands of investments. For instance, if you own a mutual fund that tracks the S&P 500 you own all 500 stocks.
For retirement investing a Target-Date Retirement Fund (TDF) is hands down the simplest strategy. All you need to do is choose a Target Date Fund with a year in its name that matches when you think you might retire. The folks who run the TDF take the reins from there. They will build a portfolio of stock and bond funds within the TDF that balance reward and risk based on your age. And the fund will automatically “rebalance” the portfolio periodically to make sure it stays in sync with its pre-determined allocation to stocks and bonds.
Focus on fees. There is one investing factor that is completely in your control: what you pay. Low-cost index mutual funds and ETFs are the cheapest way to build a diversified portfolio. All funds and ETFs have an annual fee (deducted from fund performance) called the annual expense ratio. There are plenty of index funds and ETFs that charge 0.10 percent or less. That compares to some funds that charge one percent or more. Doesn’t sound like a big diff? It is. Let’s assume you have $10,000 to invest. If you park it in an ETF charging 0.10 percent, which earns a gross annualized return of 10 percent for 30 years, you will have nearly $170,000 net of the fee. If you instead invest in a fund or ETF that charges one percent, you will have about $133,000 in 30 years, net of fees.
Stocks for the Long-Term. Going back nearly 100 years, the long-term average annualized return for U.S. stocks is around 10 percent. But that’s just an average; in any individual year stocks can crater. The S&P 500, an index of large U.S. stocks typically loses more than 30 percent in bear markets. That’s why you only want to invest in stocks for long-term goals that are at least 10 years off. That gives your portfolio time to recover from the occasional bad market.
Even when you have a long investment horizon, you may want to own some bonds or cash, sort of as a life preserver for when stocks are falling. There’s no rule that says you must own bonds or cash for a long-term investment goal, but you may find it helps you emotionally stick to your investment strategy when stocks are falling. A basic rule of thumb for retirement investing you might want to consider is to subtract your age from 100 (or 110 if you are concerned about longevity.) That’s how much you might want to consider investing in stocks. So for example, if you’re 25, then you might want to have 75 percent to 85 percent invested in stocks. If you are 50, you might have 50-60 percent invested in stocks.
Think Globally. Sure, the U.S. economy and U.S.-based companies are world leaders, but keep in mind that U.S. stocks represent about 40 percent of all the publicly-traded stocks in the world. That’s an argument for investing some of your money outside of the U.S.
Bonds and Cash for the Short-Term. Any investing you expect to tap within five or 10 years doesn’t belong in stocks. Just when you want to use the money it could be worth 30 percent less (or worse) if we’re in the midst of a bear market. That’s where bonds and cash come into the mix.
High-quality bonds, especially those that mature in five years or less, tend not to lose value. The longer a bond’s maturity, the more susceptible you are to price losses when interest rates are rising.
The safest investment is cash. With the obvious trade-off that you aren’t going to earn much. That said, right now, if you can earn two percent or more with an online bank savings account.
About the author
Carla translates business and personal finance concepts into engaging content that helps individuals make more confident choices in how they manage their money. Her work appears in The New York Times, Money Magazine, Barron's and Consumer Reports.