Retirement Investing Doesn’t Have to Be Complicated
This is a guest post from PT of PT Money: Personal Finance. Check out his list of the best online stock brokers for cheap stock trading.
The investing world is definitely more complicated than it was just a few years ago. Seth Klarman, who runs the investment firm Baupost Group, says that investing has become more “like a game of chess” these days. More moves to consider and more pieces to think about.
While I think this is true for the investing world, in general. Your own investing strategies and portfoio can remain simple, more like a game of checkers. And remember that simple doesn’t mean less-effective. Simple investing strategies have proven historically to be just as effective, if not more, than the active strategies.
I would bet that the two primary problems that the average American investor faces are: (1) not beginning early enough, and (2) not saving enough. Why? Because people are overwhelmed with choice and feel like investing is too complicated. People are paralized by the choice, the often scary news, and the foreign language of the investing world.
So as someone who’s looking out for the average investor, I’m more interested in breaking down those barriers. In this case, that’s done, I believe, by keeping things simple.
Keep your investing simple by focusing on maxing out your tax-advantaged accounts. There’s usually more than enough investing you can do within your 401K and Roth IRA to ever start worrying about taxable investing. And by sticking to these tax-advantaged accounts, you’ll naturally have less to worry about as the accounts guidlines will rule what you can do (i.e. 401K contribution limits, Roth IRA withdrawal rules, etc.)
Keep your investing simple by following a simple asset allocation model. Asset allocation is the act of splitting your investment funds into different asset classes. An asset allocation model is simply an example for you to follow. Pick a model that fits your risk tolerance and age and aim for it. Keep some money in each of the asset classes: some in cash, some in bonds, and some in stocks. But instead of individual stocks, be sure to diversify your investments with low-cost index and mutual funds.
Keep your investing simple by focusing on low-cost funds. History has shown that index funds perform as good as managed funds. There appears to be no reason for the long term investor to have someone tinkering with your portfolio or your funds on a periodic basis. And because index funds have fewer expenses, you don’t pay as much just to invest your money. You keep more of your earnings.
Keep your investing simple by doing most of the work yourself. Setting up everything I’ve mentioned so far (401K or IRA, Asset Allocation, and Low-Cost Funds) isn’t that complicated. You can understand and set them all up yourself. So get with it. However, if you just have to bring someone else into your plans for peace of mind, simply pay an independent financial advisor a small, one-time fee to help set you up. Check back in annually with them to see how you’re progressing.
Hopefully you’ll be encouraged by this to get started with your own retirement investing plan. Remember, the biggest danger is not starting at all. So cut through all the noise and get crackin’.