Starting Out
Investing Made Easy
Think you don't have the time or expertise to handle your investments? Relax. With one of our three no-fuss strategies, you can start investing today and get on your way to reaching your goals.
By Erin Burt, Contributing Editor, Kiplinger.com
September 22, 2005
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So you wanna invest. All you need to do is make a few stellar selections from among more than 8,000 mutual funds, more than 10,000 individual stocks, a myriad of bond offerings and a dizzying array of other investment opportunities.
Good luck!
Fortunately, you don't need an MBA or ridiculous amounts of time to research and monitor your investments. You can simply choose a mutual fund that will do the heavy lifting for you. Some funds come with ready-made, diversified portfolios designed to give you a broad, one-stop investment mix. Some rejigger their holdings periodically to manage your exposure to risk, keeping it right where you're comfortable. And others automatically tone down your risk as you near retirement. All this without you having to lift a finger.
These three no-fuss strategies are designed for slightly different temperaments. We offer specific fund suggestions along with them so you can start putting your money toward your goals now.
1. I want a single investment that I can set and forget.
EASY SOLUTION: Target funds
For the ultimate in hands-off investing, consider a target fund. Also known as "life-cycle" funds, managers of these investments assemble a diversified portfolio for you, and automatically tone down your risk as you approach your target date, whether it be for retirement, Junior's education or another goal. This means you can pick one fund and let it ride. There's no stressing over whether you're properly diversified, and you don't have to rebalance your portfolio or trade in your stocks for bonds at the appropriate time of your life. It's all handled for you.
With benefits like these, it's easy to see why the concept is popular. Assets in life-cycle funds have more than doubled since 2000, according to a recent study by Lipper, a fund data-tracking firm, and rose 65% in 2004 alone. And more employers are offering target funds in their workplace retirement plans.
Basically, it's like having your own money manager, except that you can't tweak the investments to cater to your personal circumstances. These are cookie cutter portfolios and, in reality, your retirement plans may differ greatly from the next guy's. But for the most part, life-cycle funds can be a practical -- and simple -- place to start laying the investing groundwork.
Fidelity, Vanguard and T. Rowe Price are among the biggest purveyors of target funds (see the table below). The Fidelity Freedom funds are a good standard, medium-risk investment, and the 2040 target fund (meaning you're aiming for retirement 35 years from now) has been around long enough to earn the top, five-star rating from Morningstar.
Vanguard's Target Retirement funds make a good choice for the risk-averse because they become more conservative faster than their peers. And the T. Rowe Price Retirement funds run more aggressive, making them a good choice for those who can handle some risk in hopes of generating higher returns over the long haul. The Vanguard and T. Rowe Price funds with the furthest target dates haven't been around long enough to have a meaningful record, but they have outpaced the Standard & Poor's 500-stock index (which measures the performance of the 500 largest companies' stocks) each year since inception.
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2. I want to pick good investments but I'm paralyzed by all the choices.
EASY SOLUTION: Index funds
Over the long-term, few mutual funds perform better than the overall market, so if you don't have the time to decipher different managers' investing philosophies, adopt your own philosophy: If you can't beat 'em join 'em. Invest in index funds that aim to match market results instead.
Index funds are designed to track a market benchmark -- say, Standard & Poor's 500-stock index, a yardstick of large-company performance, or the Russell 2000, a small-company index. With an index fund, you should do as well as the benchmark over time, minus the expenses of running the fund -- which are famously low.
Fidelity's index funds, for example, charge investors between 0.10% and 0.33% of assets each year. By comparison, most actively-managed funds levy more than 1%. What you save on expenses puts more money in your pocket. And because the fund's performance is tied to the market and not to an individual manager's stock picks, you don't have to worry about a successful manager leaving or losing his touch.
So, which index funds? Because you're young and probably have a long time before your goal, you'll want to put most of your money -- if not all of it -- in stock funds, because they'll net you the highest returns over time. Start with the Vanguard Total Stock Market fund (VTSMX), which tracks the entire U.S. stock market. (How's that for diversification?) Then, add Vanguard Total International (VGTSX), which covers the remainder of the globe.
Eventually, your goal is to allocate about 75% of your portfolio to the U.S. index and 25% to the international index. You'll need at least $3,000 to get started with Vanguard -- $1,000 if you're opening an IRA.
If investing entirely in stocks makes you a little queasy, tone down your risk with a good tax-exempt bond fund, such as Fidelity Spartan Intermediate Municipal Income (FLTMX). But if you have more than ten years to your goal, try to limit your bond exposure to no more than 10% of your portfolio.
See The New Spin on Indexing for more about this simple investing strategy. And if you like the idea of bypassing the fund manager but want to take a more hands-on approach to your investments, consider a portfolio of exchange-traded funds, which also track market indexes but trade through brokers like stocks.
3. I want some control over the risk level of my portfolio, but I don't have the time to monitor it regularly.
EASY SOLUTION: Lifestyle funds
With a bit of research, you can assemble a diversified portfolio on your own. But over time, as some investments inevitably outperform others, your careful allocation will get thrown out of whack.
Say, for example, you want a division of 90% stocks and 10% bonds. But then your stock funds perform better than your bond funds, meaning 95% of your portfolio's value is in stocks and only 5% in bonds. You have to sell some of the stocks and put the proceeds back into bonds to maintain your desired balance. It's a good idea to do this rebalancing act every quarter or so.
No time for that sort of thing? Get a mutual fund that will do it for you. So-called lifestyle funds come in a variety of flavors ranging from ultra-conservative to aggressive, so you're bound to find one that fits your individual style. However, these funds don't automatically tone down your risk over time like target funds do, so you maintain the control to switch from one level to the next when you're ready -- not when a cookie-cutter formula says you are. (Bear in mind that you'll have to pay taxes when you sell funds outside a retirement account.)
A good option is one of the three T. Rowe Price Personal Strategy funds. If you've got a long time horizon, consider the most aggressive offering, the Personal Strategy Growth fund (TRSGX). It aims to allocate 80% of its portfolio to stocks and 20% to bonds, and it invests directly in stocks and bonds chosen by the firm's other managers.
Over the past three years, Personal Strategy Growth has returned an annualized 17%. Returns are 5% over the past five years and 10% over the past ten years. And T. Rowe Price makes it easy to get started for those of us who are young and short on cash. You can open an account with as little as $50 a month if you enroll in the automatic investment program. Otherwise, you'll need $2,500 ($1,000 for an IRA).
Another fine choice is one of the four Vanguard LifeStrategy Funds. The LifeStrategy Growth fund (VASGX) also divvies up its holdings 80% to stocks and 20% to bonds. The fund is invested in four other Vanguard funds -- three index funds and one actively-managed fund that invests directly in stocks and bonds -- so it's well diversified. LifeStrategy Growth has returned an annualized 17% over the past three years, 2% over the past five years and 9% over the past decade. You'll need $3,000 ($1,000 for an IRA) to open an account.