“Reasonable?” you say. “How about Great? Or even Good?”
Well, I basically hate clickbait in general (who likes to be manipulated?), but especially when it comes to something as important to you as your money. And, frankly, if you can choose, and stick with, “reasonable” investments over the entire course of your investing life, you will be So Much Better Off than almost every one, everyone else looking for that “great” investment or that “next big thing.”
“Great” and “sure thing” investments simply don’t exist, except in hindsight. So, let me know when Marty McFly shows up at your doorstep, and we’ll talk. (If you’re not a child of the ’80s, please feel free to ignore that.)
How Do the Individual Investments Fit Into the Whole Investing “Thing”?
Most of what makes good investing is not the selection of the individual investments (the Facebook stock or the California muni bond or the cryptocurrency ETF or the large-cap US mutual fund). Most of the most important work comes earlier.
The most important work is usually choosing your “asset allocation” correctly. Your asset allocation is simply your balance of stocks (risky) and bonds (lower-risk) in your investment portfolio. This is influenced by two things:
- How long you have until you need the money, your timeline. Generally, the longer the time frame, the riskier your investments can be. This is because you have more time to recover from stock market drops, and, historically, the stock market goes up.
- How you feel about risk, your risk tolerance. If seeing your 401(k) lose half its value (which can totally happen) would make you so miserable that you’d sell it all for cash, then you should have less stock. Because the best investment strategy is the one you can stick to.
The Three Rules of Choosing Reasonable Investments
Without further ado:
Rule #1: Every day, in every way: Keep costs low.
Rule #2: Make sure you are “broadly diversified” (own lots of companies in lots of industries in lots of countries)
Rule #3: Do not invest in anything you don’t understand. I’ve had very smart women ask me “well, how much knowledge is enough to say I understand something?” And honestly, I’m thinking about that. I don’t know yet how to answer that question usefully.
Investing Inside your 401(k) Vs. Anywhere Else
If you have an investment account—a brokerage account or an IRA at a “custodian” like Vanguard or Schwab or eTrade—then you have a lot of control over your investment: their costs, their diversification, and whether or not you understand it. You have pretty much the entire universe of investments available to you; pick the ones that obey the rules!
In your 401(k), however, for the most part, you don’t have any choice. The investment choices are limited, and they are what they are. Lots of large tech companies I know of have excellent 401(k)s with low costs, simple broadly diversified investments. But I also have run across many 401(k)s that are mediocre.
Honestly, if your 401(k) is mediocre—the investment costs aren’t very low (I would ballpark that at about a 0.50%, maybe 0.75%, “expense ratio”), the funds are complicated, or perhaps narrowly focused—then yes, that sucks. But a mediocre 401(k) over a few years won’t kill you. And eventually you’ll leave this job. And then you’ll be able to roll money out of this 401(k) into a better retirement account (either your new company’s 401(k) or an IRA). Yeah for short job tenure in tech!
Simple Solutions That Fit These 3 Rules
These 3 rules might make sense to you. I mean, they’re English, right? But you also might not know how to translate the seemingly simple logic of the 3 rules into actual specific investments, in your 401(k) or elsewhere. So, permit me to give you a short-cut, a couple of solutions that more or less fit all these 3 rules and require little (notice I didn’t say “no”) effort, thought, or analysis on your part.
When I say “all-in-one” fund, I’m talking about:
- target date retirement funds (I like Vanguard so I tend to use their funds as examples, in this case a Vanguard Target Retirement 2040), and
- balanced funds (funds that keep a fixed balance of stocks and bonds, like Vanguard’s LifeStrategy Moderate Growth).
In both cases, you can just focus on shovelling money into the investment, and the investment adjusts itself depending on the year (how far you are from retirement) and market conditions.
You most likely have target date retirement funds in your 401(k). They are, thankfully, increasingly common in 401(k)s.
Now, not all target-date retirement funds satisfy these rules.
- Some can be stupidly expensive. For example, the T Rowe Price 2045 fund costs 0.74% per year. The Vanguard equivalent costs 0.15% per year.
- Some of them have so many underlying funds (these all-in-one funds are simply collections of other mutual funds) that it’s a mystery what they truly hold or how they truly work. Vanguard’s 2045 fund holds only 4 underlying funds; the T Rowe Price fund holds 22 funds.
But some of them do. And you’re much more likely to build a reasonable, easy-to-understand portfolio by using an all-in-one fund than cobbling together a bunch of different stocks or mutual funds.
The other easy-peasy solution is a roboadvisor. Betterment (which charges 0.25% on top of the costs of the investments they use) and Ellevest (which charges 0.50% on top) are the two I’m most familiar with (which isn’t saying I know all that much).
You move your money to the roboadvisor, answer some basic questions about what you need the money for (buying a home? Retiring? Sending a kid to college? When do you need the money? ), and the software does the investing for you. And stays on top of the investing for you. You don’t need to tweak anything. You just need to keep adding more money.
Unfortunately, just as not all all-in-one funds are good, roboadvisors aren’t guaranteed to be low-cost and simple either. I think you’re pretty safe on diversification, at least.
But honestly, considering that so many people keep their money in cash instead of investing, because they don’t think they know enough, these solutions are probably still going to be a better-than-average way of investing your money.
Keep the Proper Perspective on the Importance of Investing
As you approach your late career (and get closer to that “work optional” time of your life), and your investment portfolio has gotten bigger over years of saving and investing, investing becomes much more important.
But if you’re in your mid career, and especially your early career, investing is pretty far down on the list of things to spend your time, brain cycles, and anxiety on.
So, yes, please, I very much think it is important for you to understand the basics of investing, and get the basics implemented in your own life. But do not waste time on this!
I’d much rather you spend your time and effort on:
- Saving as much as you can for your near-term and longer-term goals
- Cultivating your career, be it through networking or conferences or degrees or certificates or what have you.
- Protecting your ability to earn an income, through disability insurance (which many tech companies offer as an employee benefit) and, if you have anyone relying on your income, life insurance
- Regularly taking the time to be intentional about your life and career. It’s a hell of a lot easier to get somewhere if you know where you’re going.
I could go on and on, talking about things more important about investing! Especially because you can get most of the benefit of investing by doing so very little work, by using the “simple solutions” I mention above.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.