Investing is not rocket science. In fact, in the world of investing less is more.
less = MORE
You don’t need to do a lot of work to earn solid investment returns. You just need to stay disciplined, following these four very simple rules:
• Keep Your Costs Low
• Buy & Hold
• Pick the investment that’s right for your risk tolerance
Keep Your Costs Low
When it comes to investing, a basic tenant is that fees charged by investment advisors or administrators eat away at your investment returns. The more you pay in fees, the less money you get to keep for yourself. So, work to keep your fees as low as possible. This can mean going with a low-cost fund provider (like Vanguard Group). This works well if you’re talking about your own Individual Retirement Arrangement (IRA) account – because you can pick where to place your IRA funds.
However, other investment accounts, such as a 401(k) or Health Savings Account, may limit your choices. You’re captive to whatever particular funds the institution holding the account places as an option.
There are three types of fees:
• Administrative Fees
Administrative fees can also be called account maintenance fees. These are going fees charged to your account simply for having an account. Whether or not you have money in the account, or whether or not you or sell an investment, you may get charged an administrative fee.
Not all accounts charge administrative fees – and some accounts only charge administrative fees under certain circumstances. For example, some types of administrators may waive their quarterly administrative fee if you maintain a minimum account balance, or set up automatic deposits.
• Transactional Fees
This is a fee charged every time you place a trade. These transactional fees can be called loads (for mutual funds) or commissions (for stocks and exchange-traded funds). These transaction fees can be expressed as a percentage (such a 5% load on a mutual fund) or a flat dollar amount (such $8.95 to buy a particular stock).
Not all transactions generate fees. For example, some mutual funds are “no-load” funds, meaning that there is not a fee to buy or sell units in that particular mutual fund. However, these same mutual funds that are “no-load” may charge what’s called an “Early Redemption Fee,” which is usually charged when you sell a fund shortly after buying it – usually three months. Whatsmore, you can also sometimes avoid a commission when you buy an ETF if you’re doing inside of an account of the same company providing that ETF. Vanguard and Charles Schwab are examples of this. Both of these companies allow you to purchase certain ETFs commission-free.
• Expense Ratios
Expenses ratios are the fees charged by funds. Funds can be either mutual funds or exchange-traded funds (ETFs). Both are funds, and both charge a fee to invest your money for you. This fee to invest your money in a fund is called an expense ratio. The lower the expense ration, the better.
I’m sure you’ve heard this before:
don’t put all your eggs in one basket.
The same applies to investing. You want to diversify your investments across all those investments that proven to historically provide superior investment returns. This means investing in:
- United States corporations
- International companies
- Companies in emerging economies
- United States real estate
- United States government bonds
When it comes to diversifying your investments across all those good type of investments above, you want to get as many of them as you possibly can; you want to get your money into as many United States companies as you can, as many international companies as you can, as many emerging country economies as you can. The best way to do this is with a board market, or total market, index fund. To diversify across all United States companies, I just get a United States broad market index – and them I’m done.
That’s it. You don’t have to worry about:
- Corporate bonds
- Junk bonds
- Currency Futures
- Foreign debt
- International real estate
- focusing obsessively on
- dividend-paying companies
- investment fad of the moment
Why not? Because those investments simply don’t have a track record of providing enough investment return. This means you can keep your portfolio relatively simply by avoiding those investments that just don’t make any sense.
Buy & Hold
Is Janet Yellen going to make an announcement about interest rate changes? Then now would a good time to do nothing with your portfolio. Is Britain going to leave the union? Then you
Is Britain going to leave the union? Then now would be a good time to forget that you even have an investment account.
Is the new president of the United States going to light Washington D.C. on fire while they play their harp? Hmm. Perhaps you want to reconsider you political affiliation – but most definitely do not touch your investments.
Is China manipulating global currency? It’s entirely possible, but that doesn’t mean you need to sell all your investments and go to cash.
Is the financial media selling you a horror story because they need ratings? Of course they are! But don’t let cheap propaganda detour your financial plan.
Buy and hold. Hold forever. Don’t look at your investment account with the exception to rebalance it.
The Easiest Option for Investing in Deloitte’s 401(k)
Now, I’ll explain the easiest way to invest with Deloitte’s 401(k). Conventional financial planning wisdom suggests that if you need money soon, that money should be in a relatively safe investment – like bonds, cash or a money market fund. However, if you do not need money for a very, very long time, that money should be invested for growth. That means investing in stocks.
Therefore, if you are managing your investments (and are doing so for a very long time), this may mean that you will need to sell relatively risky stocks to buy relatively safer bond funds and money market funds as you move closer to retirement.
Fortunately, when it comes to many 401(k) offerings, you are not in it alone. The requirement to sell stocks and buy bonds over time can be delegated to investment professionals. You can do this by opting for your 401(k)’s Target Date fund. Target Date funds are also referred to as Target Retirement funds and LifeCycle funds.
Disclaimer: Any views or opinions presented in this article are solely those of the author and do not necessarily represent those of anyone. The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell any investments ever under any circumstances, most especially those investments mentioned, or to solicit transactions or clients. Past performance of the investments discussed will most likely not continue and the investments will likely not achieve the returns as implied. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for their specific situation.