DIY Investing Doesn't Mean Becoming a Professional
By Gary Silverman, CFP®
Most people who want to do investing on their own don’t want to make a career of it. They don’t want to spend an hour or so after work each day doing research. Heck, they really don’t want to spend much time at all worrying about things. For them (maybe you?), I’ll discuss a simple way of getting to it and while you can apply the principals to any financial goal, I’ll assume you are saving for retirement.
Just because you want to have a simplified way of investing that you can control, there’s no reason you can’t emulate what I do with our client accounts. I still want you to diversify and rebalance. I still want you to be in the U.S. and foreign markets. I still want you to have stocks and bonds and even more exotic investments. I want you to have a cushion of cash so that the whipsaws of the market don’t affect your grocery shopping. And I want you to do this all by using only two investments: I want you to buy a Target-Date fund and open a bank account.
A Target-Date fund is designed to bring simplicity to investing for retirement. You need to only follow two steps. Step one: Find the fund with the number closest to the year you plan to retire. For example, if you are retiring in 10 years you might look at a Target 2025 or 2030 fund (they typically come in 5-year increments). Step two: Put (almost) all of your retirement savings into that fund.
Simple? Yes...well, sort of. Step one is pretty simple. Step two causes people some indigestion. After all, putting most of your retirement savings into a single fund seems to be akin to putting all of your eggs in one basket. You’ve already heard me preach to diversify. Fortunately, though it may not seem like it, that single Target-Date fund is already well diversified.
Target-Date funds, like any mutual fund, give you securities-level diversification—they own many of a particular security type. In addition they diversify further by owning more than one type of security. For example, they may include stocks, bonds and alternatives like real estate and commodities. Then they take this one step further by changing the fund’s risk profile across time.
People buy the fund with a date close to when they will retire, so the fund manager knows the approximate date that the investor will start using the money. So, as that target date gets closer, less of the portfolio is geared toward growth and more is invested for income.
Rather than leave you thinking that Target-Date funds are perfect, come back next week and we’ll look further into them. After all, if I’m suggesting you put most of your life savings in one, you should probably know a bit more about them.
Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing