So You Want To Invest: The Easy Method

So, you think you’re ready to invest.  You have a predictable, if not necessarily steady source of income (from a job, small business, sales commissions, or the like), you’ve paid off any high interest debt, and you’ve built up an emergency fund.  You’re fully covered by insurance for your house, your car, your business (if needed), and even your life, assuming you have any dependents.  You’re ready and raring to go to start to putting your money to work.

Well, you’ve come to right place.  All this week, I’m going to cover a variety different techniques for investing, ranging from the simple techniques for those who have no interest in learning about investing to more complex and involved possibilities for anyone who really gets a kick out of managing their money.  No method is necessarily better than the others; it’s all a matter of personal taste.

If this is how you look when choosing an investment, consider sticking with a target-date fundIf this is how you look when choosing an investment, consider sticking with a target-date fund

For each method, I’m also going to introduce a fictional investor whose attitude is typical of someone who should try that method.  Let’s start with Adam, who is very interested in retirement, but not so interested in investing:

“Yeah, I keep hearing about how pensions are a thing of the past, and how I need to invest in order to retire eventually.  But man, does that sound boring.  How can I make sure I retire on time, if not early, without having to spend all my time reading The Wall Street Journal and watching CNBC?”

First, it’s worth reminding Adam (and everyone currently reading this entry) that there’s no direct link between consuming lots of financial media and having your investments perform well.  In fact, if you end up buying and selling more as a result of said media exposure, you’ll likely underperform, as a result of increased expenses if nothing else.  But back to Adam’s main question; if you want an investment that will require virtually none of your time, there’s one phrase to remember:

Target-Date Funds

A target date fund, for those of you who didn’t catch my Investing 101 coverage, is a fund of funds, a mutual fund that invests in other mutual funds.  The target date fund is designed to start out agressive, holding mostly stock mutual funds and other high-risk, high return investments.  As time passes and it gets closer to the date specified by the fund (the ‘Target Date’ in the title), the fund will shift to hold more conservative, safer investments, until the target date is reached and the fund either (a) cashes out, or (b) converts into a fund designed to provide income, depending on the particular type of target date fund.

There are a variety of target date funds, each covering a different need.  There are retirement funds, where you choose the date closest to the year you hope to retire as your target date.  There are college savings funds, which work in the same way, only using the year that you (or more likely, your children) head off to college as the target.   Finally, there are any number of shorter term target date funds, designed to meet goals like saving for house or starting a business that are so big and costly that you’ll need years to reach them, and don’t want to be stuck getting only a tiny bit of interest from a bank account.

While target date funds aren’t quite ‘set it ant forget it’, they come pretty close; they are well diversified, simple, and work very well as the only investment in your portfolio.   Choose one that will meet your target date from a high quality fund family like Vanguard, don’t panic if it goes down in value (target date funds, like all investments that offer a significant return, also have the potential to drop significantly in value over the short term), and as long as you put enough money into the fund at the start or in regular amounts over time, you should be able to meet your goal.  Which brings us to one other consideration for investing…

How Much To Invest

You’ll need to make sure that your investment amounts are on track to reach your goal.  Depending on your time frame, as well as what goal you are trying to reach, you’ll have to invest different amounts.  To help you figure out how much you will need to invest, you can consult with the following chart:

Investing Amounts
This chart shows what amounts you need to invest to reach $1000 after the given number of years, whether you start with one lump sum, a yearly investment, or monthly contributions.  Why $1000?  Well, it’s an easy amount to multiply in order to reach your desired goal.  If you think you need one million dollars to fund your retirement in twenty-five years, you can multiply by one thousand to find you’ll need $184,250 as a lump sum, $6990 yearly, or $580 each month.  Pretty simple, right?

You should be able to use the table to figure out how much to invest for any goal, but if you’re trying to figure out what to add to your 401(k), it might be easier to have a specific percentage of your income to add.  So, if you are starting with nothing in retirement savings, here are some conservative percentages to put into your 401(k); add these amounts, and you should be able to retire at 65 with twenty times your final salary (enough to withdraw 80% of your final salary each year):

401k Percentage
Good luck with your investments, and tune in tomorrow if you’re looking for a more involved investment method!

Leave a Comment

Your email address will not be published. Required fields are marked *