Retirement Planning Step 3: Choose Your Investments
May 17, 2017When it comes to choosing how to invest the money you deposit into your 401k and/or your IRA, it’s easy to get overwhelmed, but don’t let information overload stop you. It’s true that investing can get complicated and involved, but there are also things out there that make it pretty easy.
First thing though, is knowing whether you are a conservative, moderate or aggressive investor. The younger you are, the more aggressive you MAY be, but just to be sure, take this quiz to find out. Once you know what your investing personality is, the best way to narrow your options is by declaring yourself either a hands-off or hands-on investor.
What’s the difference?
Typical things a hands-off investor might say:
“I wish someone would just do this for me.”
“Words like ‘allocation’ and ‘portfolio’ are foreign to me.”
“I want to set it and forget it.”
“I rarely review my account and prefer a pre-mixed solution.”
The good news is that the investing industry recognizes that there are plenty of people out there who want the benefits of investing but who don’t have the knowledge, interest or even just the time to do it well, so they have created solutions that can be really great. If that sounds like you, then you don’t need to worry about how to pick a stock or watch channels like CNBC or Bloomberg TV – that’s more for the hands-on folks.
If you’re a hands-off investor, look for Target Date Funds in your 401k or IRA – the easiest way to spot them is that they have a year, like 2050, in their name. Target Date Funds are great because they choose the mix of stocks and bonds for you, in a mix according to the year you choose, and they typically charge lower fees than more actively managed options. Moderate investors typically choose the fund with the year closest to when they turn 65, while conservative investors may look for a year that’s closer to today and aggressive people often choose the one closer to the year they’ll turn 70 or 75.
When Target Date Funds aren’t available, then hands-off investors may opt to hire an investment manager to help them pick or they use the suggested investment mixes that can be found on the last page of the Risk Tolerance Profile and Asset Allocation Worksheet to help them put together a mix of the funds available in their 401k.
Typical things a hands-on investor might say:
“I enjoy researching mutual funds and their objectives.”
“I love my Jim Cramer bobblehead.”
“I log into my account regularly to check in on things.”
“Investing is interesting and I enjoy learning about it.”
If you’re a hands-on investor, chances are you probably have a pretty good handle on what you want to do with your money, but here are a few resources to check out to keep your knowledge and skills top notch:
How to Invest in Your Employer’s Retirement Plan
Should You Care About a Mutual Fund’s Past Performance?
How Investing is Like Eating Pizza