One of the most nerve-wracking tasks of financial planning can be understanding how to invest your 401k, IRA or other account. In fact, I think most of the time, financial people want you to feel nervous, because then you start to think that making investment decisions is beyond you. But what I have found is if you can just keep a few things in mind, you’ll do just fine on your own.
How To Invest To Make Yourself Crazy
Deciding how to invest your money is an area that can become VERY complicated—if you let it. But most of the time, you’re better off making the choice to stay uncomplicated. Here are the 9 most common ways that I see people messing up their investments:
Sticking to the sidelines. Did you know that if you had left all of your money invested after the market crashed in 2007, your portfolio would have recovered its original value by 2009? And yet, I see lots of people still sitting in cash, missing out on great returns. My clients who took a long-term view, took no action and simply let their investments ride the volatility are extremely happy they did.
Getting emotional. I have been alive for three market crashes (not working, alive, sheesh, how old do you think I am?!?). So I am extremely familiar with the Chicken Little, sky-is-falling rhetoric. Market correction is just basic economics. It will happen again. Just be sure that the money you need now or 5 years from now isn’t invested in the stock market, and you should be fine.
Expecting double-digit returns. When I perform analyses for clients, I NEVER assume the stock market will return double-digit growth. This is where people get emotional again—just because it WAS returning high growth doesn’t mean it will all of the time. Market return is only part of what will help you reach any given goal; saving consistently is a more important—and controllable–factor. Keep your focus where it counts.
Overcomplicating investments. I have said this before: if you can’t explain to another person what investments you have in your account, maybe you shouldn’t be using it. Most people do just fine with mutual funds. If you can’t explain mutual funds, that is a great first step to take in becoming a more knowledgeable investor! (and…email me. Maybe this should be a blog post!).
Duplication of investment. It’s normal to see someone invested in multiple mutual funds within an account, like a 401k. But sometimes the stocks INSIDE each fund are identical. Every fund will tell you what their Top Ten Holdings are, so you need to compare and make sure your funds aren’t in 3 different funds with identical holdings! You may think you’re diversified, but you really aren’t.
Not knowing What You’re Paying. This is along the same lines as overcomplicating your investment, but one of my pet peeves is seeing people pay loads or commissions and have absolutely no idea they paid them. Keep in mind that everyone gets compensated when you choose an investment—and everyone SHOULD be compensated if they are helping you–so you need to know how it plays out to ensure you’re getting good value for your money.
Not Evaluating Performance. I am a big fan of buying an investment and then ignoring it, but every once in awhile, you need to make sure that each of your investments still serves your purposes. I did a whole separate post on evaluating mutual fund performance, so it doesn’t need to be super complicated.
Not Accepting Who You Are. A long time ago, I had to accept that I would never be like other planners. I don’t enjoy financial news or talk on TV. I can’t spend hours poring over fundamental and technical analysis. But what I found is, my way performs just as well as the people knocking themselves out. So call it lazy, or simple, but I am okay with it. You should be okay with yourself, because you can be “lazy” and your investments don’t need to suffer.
How To Invest Simply
Make The Location Simple. For people getting started with investing, my top four places to invest are Vanguard, Fidelity, T. Rowe Price and Charles Schwab. Super easy online interfaces and plenty of no-load and transaction-free options.
Make The Investment Simple. For diversification, you need a little of every asset class (which could be a whole separate post). To keep things simple, use a Target Fund, which is a mutual fund with a date in its name. You simply pick the date closest to when you want to use the money, and the fund company is in charge of managing the fund, diversifying across asset classes and rebalancing the money.
OR…Choose 5 Funds (depending on how much you have to invest). At a very high level, all funds fit into 5 categories:
- Stocks of large companies or “Large Cap”
- Stocks of mid-size companies or “Mid Cap”
- Stocks of small companies or “Small Cap”
- Stocks of international companies, or (you guessed it) “International”
- Bonds of varying durations and entities
Consider Your Timeframe. The amount you invest in each asset class category depends on how soon you need the money. Soon? You shouldn’t be in the stock market. Ten plus years? Throw a little of your money into each category and you’ll be fine. You can go to anywhere you’re currently investing and filter by these 5 categories and find some good funds. I could make it more complicated, obviously, but this is a perfect starting point. Think of this like experimenting with a recipe…there is no “perfect,” just a work in progress.
Ignore For 6 Months. If you chose to use a Target fund, you don’t even need to check up on it—the company rebalances the fund for you. If you chose individual funds from different asset classes, balances will go up and down over time, and to lock in gains, you have to sell when the fund value is high and buy when other fund values are low. This is called rebalancing. Some fund companies allow you to do this automatically. Otherwise, just make an appointment to move the balances back to their original positions every 6 months
(I do mine every June and December).
It helps to look at investing as you would look at ANY new thing you try: get in, experiment, and be okay with feeling out of your element for awhile, until you start to see progress. I promise, you can do this!
Actions This Week
- Review Current Accounts. What is working and not working for you? Do you have plans from old employers? You might need to move, consolidate or organize accounts even before thinking how to invest them!
- Choose Your Investment Company (or keep the one you have). Think about whether the current location of your investments enables you to invest as easily as possible. Confusing? Then research the 4 companies I mentioned above, decide which feels the most comfortable for you and make a change.
- Decide on Target or multiple funds. Each company I mentioned above will offer you the choice to have one easy Target fund or the ability to choose no-load, transaction-free mutual funds across the different asset classes. Choose the least stressful option (that doesn’t mean you won’t be inspired to change in the future!).
- Make a 6-Month Appointment. Regardless of how you chose to invest, make a date with yourself in 6 months to review your decision and assess progress. Some people prefer 3 months, so schedule yourself for what feels right to you.
And in the comments, tell me…
What do you think is your biggest challenge with investing for yourself?
And thanks for being part of the Creative Money Community!
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