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Investing may seem overly complex, and that complexity may leave Americans idle.
But investing – and investing wisely – doesn’t have to be difficult. In fact, according to financial experts, getting started can be relatively easy.
“You don’t need to be a rocket scientist. Investing is not a game where the person with an IQ of 160 beats the person with an IQ of 130,” Warren Buffett, chairman and CEO of Berkshire Hathaway, famously said.
For many people, investing is necessary to grow their savings and provide financial security in retirement. Since interest and investment returns compound over a longer period of time, it is to investors’ benefit to start their careers as early as possible.
While appropriate long-term goals may vary from person to person, a rule of thumb is to save approximately 1x your salary by age 30, 3x by age 40, and ultimately 10x by age 67. according to Fidelity Investments.
“A wonderful and simple solution” for beginners
Financial experts say target-date funds (TDFs) are the easiest entry point into long-term investing.
“I think they’re a great, simple solution for novice investors and any investor,” said Christine Benz, director of personal finance and retirement planning at Morningstar.
TDFs are age-based: Investors select funds based on the year they plan to retire. For example, a current 25-year-old who expects to retire in about 40 years might choose a 2065 fund.
These mutual funds do most of the hard work for investors, such as rebalancing, diversifying across many different stocks and bonds, and choosing a relatively appropriate level of risk.
As investors age, asset managers automatically reduce risk by reducing the share of stocks in the TDF and increasing exposure to bonds and cash.
How to Choose a Target Date Fund
Lee Baker, a certified financial planner and founder of Apex Financial Services in Atlanta, said TDFs are a good place to start for “do nothing” investors looking for a hands-off approach.
“This is the easiest thing for a lot of people,” CNBC member Baker said. consultant Committee.
Investors simply select their TDF provider, target year and investment amount.
Benz recommends choosing TDFs that use underlying index funds. Unlike actively managed funds, index funds aim to replicate broad stock and bond market returns and are often cheaper; index funds (also known as passive funds) tend to outperform their actively managed counterparts over the long term .
“You definitely want a passive TDF,” says Carolyn McClanahan, CFP and founder of Life Planning Partners in Jacksonville, Florida.
Banks also recommends investors seek funds from the largest TDF providers, such as Fidelity, Vanguard Group, Charles Schwab, BlackRock or T. Rowe Price.
Other “solid options” for novice investors
Experts say there are other simple options for investors who want to be more practical than TDF investors.
For example, Baker said, some might choose a target allocation fund. These funds are similar to TDFs, where asset managers diversify investments between stocks and bonds based on a specific asset allocation (such as 60% stocks and 40% bonds).
But this allocation is static: it doesn’t change over time like a TDF, which means investors may eventually need to revisit their options. Baker said they can determine which fund might be a good starting point by filling out an online risk profile questionnaire.
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As another option, investors might choose a Global Markets Index Fund, a diversified all-stock portfolio of U.S. and non-U.S. stocks, Banks said. Like target allocation funds, these funds do not reduce risk with age.
“I think sometimes novice investors question the simple elegance of some of these very solid options,” Bentz said. “People crave something more complex because they think it has to be better, but it’s not.”
Ask yourself: Why should I invest?
McClanahan, a member of CNBC’s advisory board, said younger, long-term investors should generally make sure their funds, whether TDF or otherwise, have a higher allocation to stocks, around 90% or more.
Retirement investors under 50 may be well-suited to a portfolio invested primarily in stocks, with some cash reserves set aside for emergencies such as job loss or health problems, Benz said.
You don’t need to be a rocket scientist. Investing is not a game where a person with an IQ of 160 beats a person with an IQ of 130.
Warren Buffett
Chairman and CEO, Berkshire Hathaway
McClanahan said it’s important to note that investors who are saving for a short- or medium-term need, perhaps a house or a car, may be better off putting their allocation into safer instruments like a money market account or a certificate of deposit. middle.
For long-term investors, the easiest place to save is in a workplace retirement plan, such as a 401(k) plan. McClanahan said those who have an employer match should invest at least enough to get the full match.
“Where else can you get 100 percent?” she said.
McClanahan said investors who can’t participate in a 401(k)-type plan can put money into an IRA, another tax-advantaged retirement account, and set up automatic deposits.
TDF investors who keep their money in a taxable brokerage account could be hit with a surprise tax bill, experts say. Because TDF is rebalanced regularly, the following transactions may occur within the fund: Capital gains taxes are triggered if not held in a tax-advantaged retirement account.
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