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.

Imitation = flattery = easy investing

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.

Retirement Planning Step 3: Choose Your Investments

May 17, 2017

When 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

 

How to Invest in Your Employer’s Retirement Plan

April 27, 2017

Last week, I wrote about how to invest in a Roth IRA but how about your employer’s retirement plan like a 401(k) or 403(b)? After all, that’s where most people have the bulk of their retirement savings. Here are some options:

Keep it simple…real simple. If you have a target date retirement fund in your plan, this is the simplest option. In fact, it’s probably the default so you may not need to do anything at all.

The idea is to pick the fund with the target date closes to when you think you’ll retire. Each fund is fully-diversified to be a one-stop shop that automatically becomes more conservative as you get closer to retirement so you can set it and forget it. It doesn’t get much easier than that.

There are a couple of downsides though. First, you may not even have this option in your plan. Second, your plan’s target date funds may have high fees. Finally, you don’t have the ability to customize the mix of investments to match your particular risk tolerance (although you can pick an earlier date if you want to be more conservative or a later date if you want to be more aggressive) or to complement any outside investments you may have.

Target a particular risk level. If you don’t have a target date fund or want something more tailored to your particular risk tolerance, see if your plan has a target risk fund or an advice program. A target risk fund is fully diversified to be a one-stop shop, but it stays at a particular risk level so you may want to switch to something more conservative as you get closer to retirement.

An online advice program can recommend a particular mix of investments based on your risk tolerance. Many programs will even use the lowest cost options in your plan and/or factor in any outside assets you may have. For example, if you have a lot of stocks in a Roth IRA, the program may reduce your stock holdings in your plan accordingly. However, it will need to be periodically updated as your situation changes and some programs charge additional fees.

Create your own mix. If the above options aren’t available to you or if you prefer to have more control, you may have to create your own mix of investments. You can take a risk tolerance quiz like this one and use the suggested allocations as guidelines.

Just be sure to look for low cost fund options to implement your portfolio. You may want to use your plan for those assets in which you have low cost fund options and use outside accounts for the rest. (That’s why I invest mine all in a low cost S&P 500 index fund.) Don’t forget that taxes are another cost. If you have investments in taxable accounts, you may want to prioritize the most tax-inefficient investments like taxable bonds, commodities, real estate investment trusts, and funds with high dividends and turnover for your tax-sheltered retirement account since more of their earnings will otherwise be lost to Uncle Sam.

Consider a small amount in company stock. If company stock is an option, you might want to keep a small amount there to benefit from potentially lower taxes on the gains when you eventually withdraw it from the plan. Just don’t have more than 10-15% there because having too much in any one stock is too risky, no matter how great the company is. This is especially true with employer stock because if something happens to your company, you could be out of a job at the same time as your portfolio is decimated.

Not sure what to do? Don’t let analysis paralysis prevent you from investing at all. You can start with a simple option like a target date or target risk fund for now and adjust later. You don’t want to make the perfect investment plan the enemy of the good.

 

Should You Be In an Asset Allocation Fund?

February 09, 2017

One of the most common questions we get on the Financial Helpline is how to choose investments in your employer’s retirement plan. Investing can be complex and intimidating so it doesn’t surprise me that people are looking for help with their decision. What does surprise me is how few of them understand and use an option that was created to help simplify their decision.

Depending on your plan, you may have a target date or a target risk fund available to you. Both are “asset allocation funds” that are designed to be fully-diversified “one stop shops.” All you need to do is pick one fund that most closely matches your target retirement date or your risk level. (Target date funds can also be “set it and forget it” because the funds automatically become more conservative as you get closer to the target retirement date.)

If you think of investing as getting you from point A to point B, asset allocation funds are like the commercial jets of investing. They’re much cheaper than a private jet (a financial advisor) and much simpler than piloting your own plane (picking your own investments). That’s why when I first heard about these funds early in my financial career, I assumed they would take over much of the mutual fund industry and even replace the need for a lot of financial advisors. While they have seen a meteoric rise, especially as the default option in retirement plans, they still aren’t utilized as much as I thought they would be. I think there are 3 main myths responsible for this:

1. Putting everything in one asset allocation fund is having all my eggs in one basket. What you don’t see is that an asset allocation fund is actually a basket of baskets. Each fund is composed of several other funds. In fact, one asset allocation fund is usually more diversified then the typical mix of funds that I see people in.

So why not have other funds in addition to it? Isn’t that making your portfolio even more diversified? The problem here is that these funds were professionally designed to hold a certain proportion of investments so adding others will throw the balance off. It’s like adding extra ingredients to a chef-prepared meal. Only do it if you really know what you’re doing (in which case, you probably don’t need an asset allocation fund anyway).

2. I can probably do better on my own. Remember that these funds were put together by professional money managers who’ve been trained in investment management and do this for a living. What’s the chance that you’ll create a better portfolio? One study of 401(k) participants showed that investors who chose their own funds did worse on average than those who just went with a target date fund.

Part of that is due to lack of knowledge. However, a lot is also likely due to the temptation to buy investments that are performing well and then sell them when they eventually underperform, which is a recipe for buying high and selling low. If nothing else, asset allocation funds provide discipline… assuming you don’t trade these funds too of course.

3. Asset allocation funds are always more expensive. You would think that this professional management would come at a steep price. After all, paying for investment management typically costs .5-1% of your portfolio. However, asset allocation funds are generally only slightly more expensive than other funds and if they’re composed of index funds, they can actually cost much less than most actively managed funds. Check the fund’s expense ratio before making assumptions as to their cost.

That all being said, there are reasons not to use an asset allocation fund. You may not have one available in your plan or the one you have may be too expensive. Sophisticated investors or those with an advisor may want to create a more personalized portfolio that better matches their risk level or complements outside investments to maximize tax-efficiency. But if those situations don’t apply to you, consider an asset allocation fund. Flying commercial may not be a perfect experience, but it’s better than the alternatives for most people.

 

 

Choosing Investments is Like Choosing a Pizza

April 20, 2016

When financial planners talk about how to invest your money in the market, we often discuss dividing it up among stocks, bonds and cash (also known as your asset allocation). But then when you actually go to make your investment choices, there’s a chance that not one of the options will have the word “stock” or “cash” in it. One of the most confusing things about investing and financial instruments is the fact that there are so many words that mean the same thing. For example: stock, equity, share, capital, blue chip, mid cap, small cap, large cap …they all generally refer to the same thing: ownership in a public company. Likewise, bonds, fixed income, municipals, T-bills, etc. are all referring to similar debt instruments used by companies and governments to finance operations and projects.

I often think that if more people understood that many of the financial terms we hear refer to the same thing that there would be a lot less stress around investing and everyone would feel more comfortable taking advantage of the growth that investing in the markets can offer. So I thought I’d try instead to describe a metaphor that is near and dear to my heart to try to make it easier to understand the different options out there: pizza. When it comes to pizza, there are four main options for how to get a delicious pie onto your plate (on a sliding scale of cost and effort) similar to the options available for investing for long-term goals:

  1. Make your own from scratch
  2. Buy pre-made frozen
  3. Pay someone to deliver it to you, ready to go
  4. Have it served to you at a restaurant

Each level requires a different amount of money and effort. Choosing how to invest money in the market is similar. Here’s how it compares:

1. Make your own from scratch. Making your own pizza requires skill, knowledge and practice, but once you know what you’re doing, it’s the least expensive and can be the most delicious. My husband has mastered the art of homemade pizza, starting with dough he makes from scratch, but it took a couple of years and LOTS of practice (and worthless pizza) to get it right.

To me, this is similar to researching individual stocks and mutual funds and buying them through a discount broker. You have to know what you’re doing or you can end up with nothing, but people who know what criteria to look for and how not to take too much risk can really grow their money. For investors looking to learn the art of DIY investing, start with money you can afford to lose and start reading. The book “Grande Expectations,” was what brought home to me how the stock market really works and why buying the hottest name stock or fund isn’t necessarily the best investing strategy.

2. Buy pre-made frozen. Putting a frozen pizza in the oven and knowing exactly when it’s done (and exactly how long to let it cool so that it doesn’t burn the roof of your mouth) requires some skill and it’s still a pretty cheap way to go. The investing equivalent would be using index funds or ETFs to create your own investment mix. This requires that you understand how to create an asset allocation that is appropriate for your timeline and risk tolerance, but with a little understanding of what the different indices are, it’s pretty simple to put together a decent mix. The trick is knowing when to make changes as time progresses and also knowing when NOT to make changes (for example, not selling when the market tanks and re-balancing even when the market is hot).

3. Pay someone to deliver it to you, ready to go. Minimal effort but a little bit more money. You have to pay to get it to your door, after all.

The investing equivalent would be target date funds. You don’t have to do anything but pick one and let it ride. No pizza or investing knowledge required, you just pick the one that fits you the best (for target date funds, that’s the year that you expect to need the money such as your retirement age).

4. Have it served to you at a restaurant. Paying for someone to make your pizza and serve it to you piping hot along with beverages is similar to paying a financial advisor to manage your investments for you. You can describe what flavors you like and your server will help you pick the best pizza combo.

It’s the same thing with your financial advisor. She’ll listen to your goals and risk tolerance and then suggest an investment mix that is appropriate for you. Along with that, your financial advisor should look at how your investments fit into your overall goals and make suggestions for any changes to support those goals, much like a server at a restaurant might suggest the best beer pairing or salad to start. This is definitely the most expensive option, but if you want a little more hand-holding with your investing, it’s worth it.

In my experience, most people are delivery-types (target date funds will do the trick) but because they’ve heard you should diversify and not just hold one thing, they often think that means they need to choose more than one fund. It’s important to know that a target date fund is already diversified. Just like a pizza is the perfect assembly of crust, sauce, cheese and toppings, a target date fund can be broken down into the perfect mix of large cap, mid cap, small cap, international, fixed income, money market and sometimes even commodities – the fancy way of saying stock, bond and cash funds. But instead of you having to figure out how much of each to select, that decision is made by experts who specialize in asset allocation – just like the pizza chef knows the best mix of ingredients according to the type of pizza you ordered. Now, who’s hungry for pizza?

What The New Fiduciary Rule Could Mean For You

April 07, 2016

You may have heard by now that the Department of Labor announced a new rule requiring any advisor of a retirement account like a 401(k), IRA, and even an HSA to act as a fiduciary, putting their clients’ interest above their own. The good news is that this will drive out many glorified salespeople selling high-priced investments for a commission from “advising” people on their retirement accounts. The bad news is that many people who need advice may not be able to meet the asset minimums required by many fiduciary advisors or may not be willing to pay their asset management fees. If you’re in one of those camps, here are some options for you:

Target Date Funds

Since these funds aren’t providing personalized advice, they aren’t affected by the new rule but they can substitute for an investment advisor in many ways. All you need to do is pick the fund with the year closest to when you plan to retire. You can put all of your money into that one fund (in fact, they’re designed for that so adding more funds can actually throw off the balance of the fund) and set it and forget it. That’s because they are designed to be fully-diversified “one stop shops” that automatically become more conservative as you get closer to the target retirement date.

This doesn’t mean that all target date funds are the same. While they each have slightly different investment mixes, it’s been found that low fees are actually more important than getting the best mix (which no one can know in advance anyway). To minimize your costs, look for target date funds made up of low cost index funds.

Robo-Advisors

If you want a portfolio more customized to your particular risk tolerance, consider a “robo-advisor,” a new breed of automated online investment advisors that design a portfolio for you based on a questionnaire you answer. They already act as fiduciaries so they won’t be negatively impacted by the new rule. However, they tend to have much lower minimums and fees than human advisors.

Flat Fee Advisors

If you’re looking for more comprehensive financial advice or just prefer to work with a human being, another option is an advisor that charges fees that aren’t based on how much they’re managing. Instead, they may charge an hourly, monthly, or annual fee. However, these advisors are relatively rare so the number of local options may be limited.

There will be lots of changes as a result of the new fiduciary rule. Many investors will pay less in fees but if you’re currently working with a non-fiduciary advisor for your retirement account(s), you may have to find a new one. Fortunately, there are a lot of good alternatives if you know where to look.

 

Don’t Make These Common Investing Mistakes With Your 401(k)

March 17, 2016

In our CEO’s new book, What Your Financial Advisor Isn’t Telling You: 10 Essential Truths You Need to Know About Your Money, Liz Davidson writes about how the best place to invest your money is often where you made that money: your workplace. While most people generally understand the value of contributing to their retirement plan, there’s a lot of confusion about how they should choose investments. Here are the biggest mistakes I see people making: Continue reading “Don’t Make These Common Investing Mistakes With Your 401(k)”

5 Retirement Plan Benefits You’re Probably Overlooking

July 02, 2015

One thing that I’ve noticed when speaking to HR executives and other employees about their benefits is that many valuable retirement plan benefits aren’t being taken advantage of. These benefits are part of your compensation so not utilizing them is like not taking your whole paycheck. Here are 5 in particular: Continue reading “5 Retirement Plan Benefits You’re Probably Overlooking”

Money Management For a Busy Single Mom

March 10, 2015

Years ago, I had a friend who was trying to get her finances together but she was struggling as to how to do it. She was a single, recently divorced, full-time working mother of four, with three of the kids under the age of 5. I knew whatever strategy we developed had to be easy and automated. Continue reading “Money Management For a Busy Single Mom”

What A Lost Cell Phone Can Teach Us About Investing

February 25, 2015

Earlier this year, my boss shared with us her story of how she dropped her phone behind her bed. Her first thought since the bed was basically against the wall was to move the bed…in her words “bad idea.” After some time (and a little pain medicine), she took a second approach: use a hanger from the side to pull it out….again, “No dice.” (She thinks she actually made it worse by pushing it further out of reach.) Continue reading “What A Lost Cell Phone Can Teach Us About Investing”

Retirement Planning, Dougie Style!

December 10, 2014

One thing I love about my colleague and friend, Doug Spencer, is his ability to make the complicated simple. Take retirement planning for example. Some people approach retirement planning as though it involves complicated math, an ability to predict the future, and an ounce of luck. Continue reading “Retirement Planning, Dougie Style!”

Understand the Facts About Target-Date Funds

December 02, 2013

During a recent series of retirement workshops geared toward early and mid-career employees, I received numerous questions regarding the role of target date funds in their 401(k).  This brought up an interesting discussion about hands-on vs. hands-off investing options. Target-date funds are supposed to provide simple solutions for people seeking an all-in-one fund that is diversified.  Yet, a tremendous amount of confusion surrounds these seemingly basic asset allocation tools.  Furthermore, not all target date funds are created equal so it’s essential to first look under the hood if target date funds are a part of your investment plan for retirement. Continue reading “Understand the Facts About Target-Date Funds”

Investment Options For the Soon-to-Be-Retired

August 21, 2013

As the early and late baby boomers get closer and closer to retirement (and in some cases are already there), we receive more and more inquiries about retirement planning, and in particular, distribution planning.  Just recently, I spoke with a gentleman who is within a few years of his retirement date, and he’s done a pretty good job of saving for retirement, but what he is most concerned with now is how to make sure he invests properly throughout retirement so that he generates the cash flow he is expecting to get from his nest egg. There are a number of investment options that may achieve the goal, and each one comes with its own pros and cons.  Here is a look at several different investment options that may be suitable for a retirement investment portfolio: Continue reading “Investment Options For the Soon-to-Be-Retired”

What to Do With $100,000 in Today’s Economy

October 29, 2012

I actually get this question quite a bit on our financial helpline and in our worksite financial planning sessions, not so much that someone got an inheritance (though I did get that last week), but many people simply want to know how they should allocate their assets in their own 401(k).  The question doesn’t have a quick and easy answer and answering involves asking a series of questions first because investing starts with you – the investor. Obviously, an aggressive investor is going to have a very different investment mix than a conservative investor.  A fifty year old may have a very different investment mix than a twenty year old no matter what the current economic outlook.  Here are some questions I always start with: Continue reading “What to Do With $100,000 in Today’s Economy”

What Your Employees Don’t Know About Target Date Funds Could Hurt Them

June 12, 2012

Some of the most common questions that I’ve been receiving from employees during recent retirement planning workshops relate to confusion around the proper use of target-date funds. Ironically, these investment options are designed to simplify rather than complicate the process of saving for retirement. When used correctly, target date funds can help employees allocate and re-balance their investment assets appropriately to achieve their retirement goals with one stop diversification.  In fact, more than three-quarters of all 401(k) plans now offer target-date fund options for plan participants and in many plans, they serve as the default investment for automatic enrollment. Continue reading “What Your Employees Don’t Know About Target Date Funds Could Hurt Them”

Three Investment Mistakes the Trained Eye Can Spot

May 14, 2012

Recently, I had the opportunity to have a series of one-on-one meetings with employees called Ask-a-Planner sessions where the employees could ask me any question on any financial topic they wanted. Fortunately, they didn’t “stump the planner!” Many people used their time as an opportunity to have me review their allocation in their 401(k).  While most of them had an asset allocation that was a fit for them, some of the statements had huge rookie mistake red flags that I’d seen before. Continue reading “Three Investment Mistakes the Trained Eye Can Spot”

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. Continue reading “Investing for People Who Hate Investing”

The Truth About Target Date Funds

November 11, 2011

I read this article on Bankrate.com about investors’ belief that target date funds come with a guarantee of a sufficient retirement income. The statistics are a little bit startling (51 percent — of people investing their retirement savings in target-date funds see them as a retirement planning panacea and think that putting their money in them guarantees their retirement income needs will be met), frightening even, from the perspective of a financial planner. The conclusion of the article is: Continue reading “The Truth About Target Date Funds”

Are Target Date Funds a Good Idea?

July 20, 2010
Image courtesy of theilr/Flickr

There’s an awkward moment in virtually every conversation I have with HR executives about retirement plan education when they ask the question they’ve been waiting all meeting to ask:

“What do you think of target funds?”

(Translation: “We have target date funds in our plan, we used to think they were a great idea, but they’ve performed terribly and employees don’t seem to understand them. Now I’m wondering if we made a big mistake.”)

Continue reading “Are Target Date Funds a Good Idea?”