Starting out, picking the right investments can seem overwhelming. There are just so many choices out there, stocks, mutual funds, exchange traded funds (ETFs), etc., etc.
This blog isn’t going to tell you specific investments to put your money in, but I can give you some general guidance on where to start. First of all, let me share my investing strategy with you.
I’ve read a lot of books on investing and a common view of many authors and one that I also subscribe to is that, the average investor cannot beat the stock market long term.
There are few that can. So while I do have some play money in my Zecco (read my Zecco review) account where I do pick individual stocks and try to beat the market, the bulk of my holdings are in passive index funds.
Passive Investing with Index Funds
An index fund is a fund that that tracks a specific stock index, the S&P 500, for example. Index funds are passive investments because they simply track the index and do not frequently buy and sell other securities. An S&P 500 index fund for example simply holds stock in the 500 largest publicly traded companies in America. Therefore these funds do not try to beat the market, they simply mimic the market and because these funds are not actively managed, they have a lot lower expense ratio and generally carry no sales charge. Research proves that the majority of actively managed mutual funds do not beat the market long term so for most of us who are investing for the long term, a simple passive index fund is a great way to start. If you just buy and hold and periodically invest more when you can, a good index fund should serve you well.
Passive Investing with Target Retirement Funds
Target date retirement funds are relatively new investment vehicle. With one of these funds you select a date at which you plan to retire and as that date approaches the fund automatically becomes more and more conservative. So if your 30 now and plan to retire at 65 you could pick a fund like the Vanguard Target Retirement 2045. This fund holds mainly stocks now but as 2045 approaches, it will switch to more conservative, income oriented investments, like bonds and money market funds. These funds are nice because they don’t require you to do anything like reallocate your portfolio or worry if your money is in the appropriate place. You simply buy into the fund and keep investing over the years.
Good Passive Investment Funds
I’m not going to tell you specifically which funds to invest in. Everyone is different and you should factor in your age, your risk tolerance, and what you want to gain through your investments. I am going to point out a couple good, investor friendly, fund familys that you may want to consider.
Vanguard pioneered passive investing with their Vanguard S&P 500 Index Fund (VFINX) back in 1976 and they continue to have a wide selection of index and target retirement funds available. I personally hold all my mutual funds with Vanguard. Vanguard does require a minimum investment of $3,000 per fund so if you don’t have quite that much stashed away, you could consider a fund from TIAA-CREF or T. Rowe Price. Although Vanguard may have some higher fees in the beginning, I believe that over the long run their low expenses and indexing-expertise will result in superior performance. This is a company that I can see sticking with for the next 50+ years.
TIAA-CREF or T. Rowe Price
If you don’t have much to start with but are willing to set aside $50 every month to invest automatically, you can open an account with TIAA-CREF or T. Rowe Price. Both seem to be solid companies with good customer service. If you’re in your 20s – 30s, you can check out the T. Rowe Price Retirement 2045 fund (TRRKX) or TIAA-CREF Lifecycle 2040 (TCLOX).
Most of us and most professional fund managers simply cannot beat the stock market year in and year out. So instead of trying to and paying high expenses on actively managed funds or stock commissions, a better alternative is to put your investing on autopilot and just buy and hold a boring passively managed index or target retirement fund. For more reading on the advantages of passive investing, I highly recommend The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by Vanguard founder John Boggle.