Use This Hack to Figure Out How to Invest

June 07, 2017

If I could wave a magic wand and impart knowledge to anyone who thinks they have to be an investing expert in order to make money in the stock market, I would make sure that everyone knows that you don’t have to even be interested in investing in order to do it well. People who want to talk stock tips are often disappointed when they bring that subject up with me – I have relatively zero interest in the market. Yes, I’m a CFP® and no, I don’t like to choose investments.

I understand how to do it quite well, and really enjoy helping others learn what they need to know, but I don’t waste my time worrying about whether the next bear market will happen this year or next. I am quite certain there will be quite a few bear markets between now and retirement, but as a long-term investor, I don’t particularly care when they’ll happen or how long they’ll last, and neither should you. To me, a bear market is like the semi-annual sale at Athleta – a great time to stock up!

An easy investing hack

If you’re like me, and really just want to make sure you’re taking advantage of the overall long-term growth potential that investing in the stock market offers without having to analyze mutual fund ratings, asset allocation models or stock charts (nothing against those who do – more power to you and I wish you much investing success!), then this hack is for you.

Stocks and bonds and asset allocation, oh my

One of the most confusing parts about investing is figuring out what percentage to invest in stocks versus bonds, not to mention dividing the stock portion up among different market segments like large cap, mid cap, international, etc. (JARGON ALERT!)  When I first got into financial planning, I was totally stumped about how to do this. Was there some magic formula that only really smart market gurus could come up with? I knew that there were financial advisors who very confidently presented custom mixes to clients, but where did they get this information? Did I have to work for one of the big investment banks in order to have access to this information for my clients?

Then one day, I discovered the answer. It’s not some secret formula and it isn’t rocket science. You don’t have to know the first thing about what the market is going to do tomorrow or even worry if it’s up or down or going sideways. All you have to do is copy the mix of a Target Date Fund (also sometimes called Target Retirement Funds or Freedom Funds, depending on the investment company that runs them) with the date closest to your retirement year.

How it works

The easiest way to find the mix of a Target Date Fund is to look at the information for the fund, which is often found on the Fund Fact Sheet or you can just look one up on the website of companies like Fidelity, Charles Schwab, Vanguard, etc. You can typically find a pie chart that tells you the percentage of the fund that’s invested in different parts of the market, and then literally copy that percentage using index funds into your own account.

The advantage over using the Target Date Fund itself

Why not just buy the Target Date Fund itself, you may be wondering? One of the common criticisms of Target Date Funds is cost – because they require a little more attention than a standard index fund, they typically cost a little more. So, it’s mostly just to save money on fees, although this strategy would also work for someone who has a 401(k) that doesn’t offer Target Date Funds (admittedly, this is becoming less and less common, but check those fees!). It’s kind of like going to a craft show to scope out the cute DIY goods then going home and copying everything you saw that you liked, rather than buying the finished product at the marked-up price.

This hack is also perfect for someone who wants to be a little bit more hands-on, but is still learning the ins and outs of investing. Finding that perfect asset allocation is a bit of the holy grail in the investing world, so save yourself the search and take advantage of the work already done by the experts.

Things to watch out for

• Rebalancing. If you decide to use this hack, then you also have to be sure you’re rebalancing periodically — at least once a year, you need to check in to make sure your percentages haven’t gotten too far out of whack. If you’re lucky, your account will allow you to automatically rebalance instead of having to do the math, but either way, this is how you take advantage of buying low and selling high.
• Taxes. If you’re using this hack in a non-retirement account, then any time you do rebalance, you’ll likely be incurring capital gains and/or losses. Not to discourage rebalancing, but just be aware of the potential tax consequences if you’re making big shifts.
• Adjusting for risk. One of the benefits of just choosing a Target Date Fund is that it automatically shifts the investments toward a more conservative mix as your retirement date draws nearer, so you’ll be on the hook for that with this strategy. Every five years or so, check back with the mix of your original fund to see what changes you need to make when you rebalance.