Saving for retirement is an important financial decision that will have a huge impact on your lifestyle during the golden years. But starting an investment fund isn’t as simple as it may seem.
A report by Investment Company Institute shows that there almost 25 different investment options in 401(k) plan, which is the most common retirement fund among American workers.
Simpler is Better
In addition to the 401(k), some people also have other individual retirement accounts (IRA), brokerage accounts and Health Savings Account (HSA) to make sure that their money is being accumulated into different funds. But does it really make sense to invest your money into a dozen different funds?
According to financial experts, opening too many accounts is unnecessary and can cause duplication of funds. When it comes to saving for retirement, a minimalist approach is all you need. Most will say that holding your money in just three investment funds is a ‘lazy portfolio’ with insufficient returns, but that isn’t always the case.
According to author and investment expert, Taylor Larimore, investing doesn’t have to be complicated in order to get a better return. Sometimes, simple is the best way to go about it. Larimore recommends a three-fund portfolio which invests in domestics stocks and bonds as well as international stocks through three different index funds.
But a minimalistic investment style only works when you’re young and still have plenty of years in the workforce. Once you start getting closer to retirement, you can add more investment accounts to your portfolio for more flexibility. Taylor recommends a combination of tax-free, taxable and tax-deferred accounts so that your savings are not affected by a tax hit once you start withdrawing the money after retirement.
The Lazy Portfolio
One of the biggest advantages of choosing a simple portfolio over a complicated one is the ease with which you can manage your funds and keep track of the investment. According to Mumy Financial Advisors’ CFP, Ryan Mumy, this minimalistic approach often suits people who are new to the world of investment and often put their money in too many funds from an early stage.
Over-diversification may be great for lowering investment risk but it often results in too many fees which can offset the earnings over the long run.
According to investment strategy expert and CEO of Vanguard, Larimore, the best strategy for long-term investment is to refrain from timing the market and keep fees as low as possible. Having a ‘lazy portfolio’ means that you aren’t constantly adjusting or making changes to it, which can impact the balance of the portfolio.
Richard Thaler, who has spent his career studying financial decisions and even earned a Nobel Prize in behavioral economics, says that he often advises his young clients to create an investment portfolio that leans heavily towards stocks. Investing in stocks is often riskier but the increased risk is offset by high returns which can grow your portfolio exponentially in the long run.
Steer Clear of Headlines
One of the biggest investment advices Thaler gives is to avoid reading information about the market from newspapers since headlines can have a big influence on investors’ sentiment and send them in panic mode as soon as the share prices start going down. Thaler says that the only think you need to read on the newspaper is the sports or entertainment section.
If you’re new to investment and feel overwhelmed by the sheer number of options you can choose from, start with a simple target-date fund that allocates a right mix of stocks and bonds for your portfolio and regularly adjusts the investments to keep them in balance until you retire.
Target-date funds are like all-in-one funds which invest in various investment assets and often have more expensive fees than other funds. According to Mumy, people need to go back to the basics and start saving money the way their parents did.
You probably won’t know everything from the beginning and you don’t really have to. Start simple and slowly build up your portfolio as you gain more knowledge in the field.