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Investing can seem overly complicated, and that complexity can lead Americans to do nothing.
But investing – and investing intelligently – doesn’t have to be hard. According to financial experts, getting started can actually be relatively easy.
“You don’t have to be a rocket scientist. Investing is not a game where the guy with an IQ of 160 beats the guy with an IQ of 130,” said Warren Buffett, chairman and CEO of Berkshire Hathaway.
For many people, investing is a necessity to grow their savings and ensure financial security in retirement. Starting your career early benefits the investor because interest and investment returns increase over a longer time horizon.
While appropriate long-term goals can vary from person to person, a rule of thumb is to aim for about 1x your salary by age 30, 3x by age 40, and finally 10x by age 40, according to Fidelity Investments to save at the age of 67.
A “fabulous, simple solution” for beginners
According to financial professionals, target funds, called TDFs, are the easiest entry point for long-term investments.
“I think they’re a fabulous, simple solution for novice investors — and any investor,” said Christine Benz, director of personal finance and retirement planning at Morningstar.
TDFs are based on age: Investors choose a fund based on the year they plan to retire. For example, a currently 25-year-old who expects to retire in about 40 years might choose a 2065 fund.
These mutual funds do most of the hard work for investors, such as rebalancing, diversifying across many different stocks and bonds, and selecting a relatively reasonable level of risk.
As investors age, asset managers automatically reduce risk by reducing the equity portion of the TDF and increasing exposure to bonds and cash.
How to choose a target fund
TDFs are a good starting point for do-nothing investors looking for a straightforward approach, said Lee Baker, a certified financial planner and founder of Apex Financial Services in Atlanta.
“This is the easiest thing for a lot of people to do,” said Baker, a member of CNBC’s advisory board.
Investors simply need to select their TDF provider, target year and investment amount.
Benz recommends choosing a TDF that uses underlying index funds. Index funds, unlike actively managed funds, aim to replicate the returns of broad stock and bond markets and are generally cheaper. Index funds (also called passive funds) tend to outperform their actively managed counterparts over the long term.
“You definitely want a passive TDF,” said Carolyn McClanahan, CFP and founder of Life Planning Partners in Jacksonville, Florida.
Benz also recommends investors look for funds from the largest TDF providers such as Fidelity, Vanguard Group, Charles Schwab, BlackRock or T. Rowe Price.
More “solid options” for inexperienced investors
Investors who want to take a more hands-on approach compared to TDF investors have other easy options, experts say.
Some might choose a target fund, for example, Baker said. These funds are similar to TDFs in that asset managers diversify between stocks and bonds according to a specific asset allocation – for example, 60% stocks and 40% bonds.
But this allocation is static: It doesn’t change over time like TDFs do, meaning investors may need to reconsider their choice at some point. They can find out which fund might be a good starting point by filling out an online risk profile questionnaire, Baker said.
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As another option, investors could instead opt for a global market index fund, an all-stock portfolio diversified across U.S. and non-U.S. stocks, Benz said. As with target funds, the risk of these funds does not decrease with age.
“I think inexperienced investors sometimes question the simple elegance of some of these very solid decisions,” Benz said. “People long for something more complex because they assume it must be better, but that’s not the case.”
Ask yourself: Why am I investing?
Young, long-term investors should generally make sure their fund — whether TDF or not — has a high allocation to stocks, about 90% or more, said McClanahan, a member of CNBC’s Advisor Council.
Retirees under age 50 would likely be well-suited if their portfolio was primarily focused on stocks, with some cash reserves set aside in case of emergencies such as job loss or health problems, Benz said.
You don’t have to be a rocket scientist. Investing is not a game where the man with IQ 160 beats the man with IQ 130.
Warren Buffett
Chairman and CEO of Berkshire Hathaway
One caveat: Investors saving for a short- or medium-term need — perhaps a home or a car — would likely be better served by investing their allocated money in safer vehicles such as money market accounts or certificates of deposit, McClanahan said.
The easiest place to save for long-term investors is a company retirement plan like a 401(k) plan. Anyone who has an employer share should try to invest at least enough to receive the full share, McClanahan said.
“Where else can you get 100% of your money back?” she said.
Investors who don’t have access to a 401(k) plan can instead save in an individual retirement account — another type of tax-advantaged retirement account — and set up automatic deposit, McClanahan said.
Experts say TDF investors who save in a taxable brokerage account may face an unexpected tax bill. Because TDFs periodically rebalance, it is likely that transactions within the fund will trigger capital gains taxes if not held in a tax-advantaged retirement account.
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2024-03-18 18:18:03
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