Start Before You’re An Expert
Often the hardest part is for people to know where to start. You have time to learn about investments and what makes the most sense for you. However, you need to start saving today. In the first few years, if your investments go down while learning, you still have plenty of time for the market to recover.
Meet Bob; he made mistakes, but he consistently saved his money. Bob shows us the importance of getting started! https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/
Evaluate Your Plan
The first thing you should look at does your company has a match? If so, your first goal should be to contribute up to the match. Unless you are already taking full advantage of the match sign up for the traditional plan.
Once you know how much you will contribute, ask yourself how disciplined you can be when the stock market drops 30-40%. Will you be ok and not sell? Or will you be so stressed that you won’t be able to sleep at night? This is also something you can learn about yourself in the first few years while your portfolio is still small. When you have $3,000 30% is only $900 while 30% of $300,000 is $90,000. The worst thing you could do is sell when it drops.
Investment Options
Stocks:
With stocks, you own a small share in a company. Stocks give you the best chance for a decent return on your investment.
Bonds:
With a bond, you are owed money by the company or government. Bonds are not as risky as stocks, but they can still go up and down. If you own stock in a company and it goes out of business, you will lose your investment. On the other hand, if you own a bond in the same company after they liquidate their assets since you are owed a debt, you are much more likely to receive some of your investment back.
Mutual Funds:
This is a fund that has stocks and or bonds with many different companies. This fund is professionally managed, and they decide what should be in the fund. Some of these funds can have high fees. They often pay the person that is selling the fund to you a commission as well. This fee, of course, is being passed on to you. It is usually easy to see what types of investments will be in the fund by the name.
Index Funds:
An index fund is every company in the category that you choose. The value of your portfolio will mirror the market that your fund is in. There are still fees, but they are much less than a mutual fund. Once again, look at the name, and it may tell you what it is. VTSAX from vanguard says it right in the name. It is a total stock market fund, so it will go up and down, matching the total U.S. stock market. You will own every company in the U.S. market. The goal is to be diversified, and if you own the entire market, you will definitely be diversified.
Retirement Date Funds:
If your retirement plan has one of these, consider putting your entire portfolio into it. You can easily identify these if they have a date in the description. As a long-term strategy, they leave a little to be desired, but this is a great option until you feel comfortable investing. With this fund, you pick the date that you think you will retire. The fund will own stock, bonds, and international. The fund will automatically rebalance it for you. The only major issue I have with these is the closer to retirement, the more conservative it gets. You could manage this by having several different dates.
Money Market
This would be similar to an online savings account’s interest rate. I would recommend avoiding money markets unless you are retiring within 5 years. Even then, it isn’t ideal for most people. Inflation will cost more than you receive in interest.
Finding The Right Portfolio For You
You should have some if not all of the options above in your retirement plan. Please visit morningstar.com if you want to evaluate the different funds that are in your retirement plan. You can see fees and companies that each fund owns.
You will need to pick a portfolio allocation that you feel comfortable with. If somebody would ask me for help on investing options, I will share what funds I invest in and why. At 40 years old, I have always had an all-stock portfolio. The only change I made a few years ago is putting 20% of my portfolio into a target-date fund. The target-date fund has a 15% bond position. The stock market going up and down has not bothered me; I know it will eventually go back up. If the market goes down, think of it as you are buying on clearance. I have a mixture of index funds, mutual funds, and a target-date fund. As I get older, I will add a larger percentage of bonds into my portfolio.
Please check out JL Collins and his book The Simple Path to Wealth. He makes it very easy to understand how to invest. He goes into greater detail, and the book is a great resource.