Unless you’ve been living under a rock you’ve undoubtedly hear this old cliché. Keep It Simple Stupid.
Options, Puts, Calls, Hedging, Day Trading, Short Selling, Bridge Financing, Convertible Debt Instruments, Mortgage Backed Securities, Mutual Funds, ETFs, Interest Rate Swaps, Treasuries…
If you don’t know what all these things mean, then you shouldn’t be even thinking about advanced investment strategies. Even if you do know what they mean do you really want to go through all the emotional turmoil of trying to outperform the market using your own money?
Often the best investment options for the average person are the simplest. A favorite tool of financial planners, especially inside of a 401k, is the Target Date Retirement Fund.
This is a simple fund that holds a pool of stocks and bonds. You choose the fund that most closely matches your expected retirement year. In 2020 if you are 30 years old and plan on retiring at age 65 your retirement year would be 2055. Most funds are done at decade marks so you could pick a Target Date Fund of 2050 or 2060.
The fund chooses more aggressive investments the further you are away from retirement. As the target date draws nearer it rebalances to hold fewer and fewer stocks while increasing holdings of bonds, and then perhaps even treasuries in the last few years.
This strategy is design to protect your money as you near retirement. If you had planned on retiring at the end of March 2020 and had all your retirement funds tied up in stocks up until that point you could have easily seen a 25% drop in your retirement account. If you had had $2 million in your account (a number many experts recommend if you are retiring right now) then you would have lost $500,000.
That big of a loss means you would either have to drastically alter your planned retirement lifestyle or continue working for at least a few more years. Perhaps both.
One of the best benefits to investing into a fund, whether it is a Target Date Fund or more traditionally Mutual Fund, is that someone else is monitoring the portfolio for you.
When I started out, I picked my own stock investments. I felt really good about it when some of those investments beat the market. I got really frustrated when others lost value. The problem I had is that I hated monitoring my investments.
I owned over a dozen different stocks, some with just a few hundred dollars invested into them. Ten years later I still owned those same stocks. I had had them so long that I wasn’t sure what I had really paid for them, I didn’t know how much I had received in dividends over the years, but I thought the account balance had gone up.
I decided to convert everything into a fund. As I was sorting through things I found out one of the stocks I had purchased had gone bankrupt, another had taken the company private. The bankruptcy I had lost my entire investment in the company, the company that had gone private had bought out my shares and I had a small lump of cash sitting in my account not earning anything.
Chances are you are not going to have the time or patience to stay up to date on all the things happening in the market and in the companies you are invested in. This is especially true when you are just starting out without much money invested. A few hundred dollars invested in a company is not going to keep you motivated enough to stay up to date on all the research you should be doing to effectively manage your portfolio.
Back in 2008 Warren Buffett made a million-dollar bet with Protégé Partners LLC, an actively managed hedge fund that a simple low cost index fund that tracked the S&P 500 would outperform a high priced hedge fund over 10 years.
The bet was conceded by Protégé Partners a few years before it was finished as Mr. Buffett had clearly won and there was no way for the fund to make up the lost ground.
Mr. Buffett’s contention was that the simple fund with its low costs was a better investment vehicle for most investors. Here is a man who has made most of his wealth picking stocks telling people that they have better odds not picking stocks. Don’t screw yourself by trying to beat the market. Over 10 years most professional managed hedge funds can’t beat the market (as proved by Mr. Buffett’s bet).Keep your investment strategy simple.