The Default Investment
In what should you invest if you know nothing about investing? While there are plenty of people (most readers of my blog) who enjoys spending time seeking out new and attractive investments, there are plenty of people who do not enjoy that, do not have the time, or do not have the knowledge or the desire to gain the knowledge necessary to invest well. Luckily, there are some good solutions for such “defensive investors”. The standard advice for defense of investors has been to invest in index funds. This is a great idea. Unfortunately, there are now hundreds of different index funds in many different asset classes. So even choosing in which index funds to invest is now a complicated decision.
Luckily, there are now many target date funds. These are funds that are set up for investors who wish to withdraw their money gradually starting on a certain date, usually because of retirement but for other reasons such as paying for college for children as well. So let’s say that you are investing for retirement starting approximately 2040 and paying for your children’s college education starting in 2025. You estimate that it will cost $200,000 for each of your two children and that you will need at least $2 million at the start of retirement. You can plug these numbers in any of various online retirement or savings calculators to calculate how much you will need to save. Then, you invest in two different target date index funds through Vanguard: a 2025 target date fund and the 2040 target date fund. You use those handy online calculators again to determine how much you’ll need to put into each fund to reach your goals.
All that is left for you to do is to faithfully put away money into each of those funds every month like clockwork. You will never have to think about your investments again, except for occasionally checking to make sure that you are progressing well towards your goals. Those target date funds will do all the work for you, investing mostly in stocks at first and gradually sticking more money into bonds as your target date approaches. And the only target date funds you should consider are Vanguard’s funds, because they have the lowest fees around, about 0.21% per year.
I think the above plan is the easiest and most generally appropriate plan for the majority of individual investors. However, your investment needs may differ, in which case you may wish to seek out a certified financial planner (CFP) who is compensated on an hourly basis to offer you unbiased and personalized investment advice.
Disclosure: I invest in at least one Vanguard ETF, though none of the target-date funds.