In a previous post, I mentioned expense ratios ought to be a consideration on whether you should invest your money in a retirement fund because the different between 0.25% versus 1% over 30 years will mean the difference of nearly $300,000.
So, what exactly should you invest your money in? The answer, like everything else in life, is it depends on what your financial goals are, what your appetite of risk is, and how long you have until retirement. The longer you have until retirement, the better because it gives you the opportunity of taking advantage of compound interest.
However, if you’re the type of person who doesn’t have the time or you simply don’t want to deal with figuring out how to allocate your funds, then there are 3 options, all of which will be explored in greater detail in future posts:
- Use a robo-advisor such as Wealthfront to help you figure out the best way to manage your retirement funds. However, a word of caution, you’ll be subject to fees from the advice these companies provide.
- Find a target date retirement fund that’s closest to your expected retirement age, but make sure that the expense ratio is low. Most target funds have an expense ratio between 0.1-0.9%, so they’re typically low compared to active managed mutual funds. For example, if you plan to retire near or around 2050, select a target date retirement fund that is closest to your expected date.
- Find a low-cost (as in low expense ratio) major market index fund (e.g., S&P 500) to invest in. These funds are not typically assessed a sales charge or any other fee because they belong to a category of investing known as passive investing meaning they are not actively managed by a money manager. A major market index fund is a portfolio meant to match the performance of well, a major market index (e.g., S&P 500). They’re low cost indexes because of low operating expenses and since assets are rarely sold in an index, transaction costs are kept to a minimum as well. The return of an index fund is dependent on which asset class you’re investing in. For example. the Vanguard’s S&P index fund has on average realized 7% annual gains. Nothing sexy, but hey, it beats inflation.
I’ll keep it simple. If you don’t have the time nor energy to deal with investing, I say go with a target fund date or an index fund. Just make sure you’re your expense ratio is low compared to the other retirement funds offered through your employer.
However, if you enjoy investing, but don’t know where to start, but you want an investment strategy that’s tailored to your needs rather than a one-size fits all approach target or index fund, consider using a robo-advisor like Wealthfront.