Investing for People Who Hate Investing

March 01, 2012

If you’re like most people, you may not know much about investing or quite frankly, even care to know. Perhaps you’re only vaguely aware of what’s going on in the stock market and rarely look at your 401(k) performance. The last thing you want to worry about is researching and monitoring mutual funds. Yet, you’re responsible for choosing and managing the investments that will help determine whether you can retire early or end up having to eat cat food in your retirement.

One way to really simplify your investing is to use a one-stop shop asset allocation fund. These are mutual funds that do all the investment selection and re-balancing for you. All you have to do is select one and then set it and forget it.

You probably have several of these as options in your retirement plan. There are generally 3 types:

Target Risk or Balanced Funds

These funds try to give you the highest return for a given level of risk. There’s usually a range of options with the most conservative fund having the least in stocks and the most aggressive one having the most. You’re sometimes given a questionnaire to help you determine which fund best matches your comfort level with risk. The key is that you want to pick one that you can stick with. If you switch from the aggressive fund to the conservative one every time the market goes down, you’re defeating the whole purpose.

Target Date Funds

These are similar to target risk funds but their risk level becomes more conservative as you approach retirement. At first, selecting one of these funds is easier because you simply choose the one that targets the date closest to when you plan to retire. However, there is a major variation between different target date funds. Some are known as “to” funds and become extremely conservative with a focus on preservation once you hit your target date. Others are “through” funds and are designed more to provide continual growth throughout your retirement so they are not as conservative at your target date.

Unless you’re planning to withdraw the money all at once for something like paying off a mortgage or buying an annuity, you’re probably better off with the more aggressive “through” fund. That’s because there may actually be more risk in having your money not grow enough to offset inflation and provide you with enough income to last for what could be a very long retirement. One of our planners, Michael Smith, likes to call this “reckless conservatism.”

Flexible or Tactical Allocation Funds

These are the hardest to find in employer-sponsored retirement plans so you might need to purchase them in an IRA. Unlike the first two, the allocations of these funds can change depending on where the money managers see the most opportunity. They might move more money into stocks if they think the market will start moving up or shelter more money in bonds or cash if they think stocks are overvalued. The funds provide the most upside if the money managers are good but also expose you to the risk of poor investment management.

All of these choices are designed to make your life easier by removing the need for you to decide how much to invest in different types of investments (at least after picking your asset allocation fund) and manage them. Yet, hardly any of the people I speak with actually use these funds the way they were intended. Instead, they becomes just more funds to spread money around in and thus only make things even more complicated. Maybe it’s because having all your money in one fund feels like having all of your eggs in one basket even though one asset allocation fund is more diversified than having ten funds that all invest in US stocks. In any case, if you enjoy picking your own investments or if you work with a financial advisor who can help you, go ahead. On the other hand, if you want to keep things simple, any of these asset allocation funds will do that but only if you use them as they were intended.