First Time Investor: What do I do?

I was recently talking to a family friend about his finances. He seemed very interested in getting started in investing money. Keep in mind, the family friend is turning 30 this year built up an emergency fund and is now looking to invest $3,500.

On top of that, the family friend does not know anything about investing. Now, I could have gone on and told him about IRA’s, 401(k)’s, and individual brokerage accounts, but I knew two things would happen:

  1. He would get bored with what I was saying and just want me to tell him what to do
  2. I would overwhelm him and he probably would put investing on the backburner for a while until he was able to “figure it out.”

Getting Started

So, what I told him was that it was very simple to sign up. All he had to have was a computer, over $3,000 in his bank account, and his estimated retirement age. With all of this available, he would be well on his way to building his retirement account.

The very first thing I suggested to him was to sign up for an account at Vanguard. He didn’t ask why, but if he did I would have told him this: Vanguard charges the lowest fees of any other mutual fund provider. Lower fees means more money in your pocket when you retire.

So, he signed up for an account at Vanguard. The next thing I had him do was sign up for a Roth IRA account. You can read more about why you should always choose a Roth IRA here.

Account ready and Roth IRA set up, he deposited his $3,500 into his Vanguard account. Then he asked me “What should I invest my money in?” Once again, I could have gone on a tangent about exchange traded funds vs. mutual funds and asset allocation, but I skipped the lecture.

I asked him, “When do you plan on retiring?”

He responded, “I don’t know, maybe around 60 I guess?”

“Okay, that’s all I needed” I told him.

I showed him Vanguards mutual funds, filtered “Asset Class” for “Balanced”, selected “Target Retirement 2045” and we were done. He has just made his first investment into a wide variety of stocks and bonds which automatically balances over time based on his risk profile, without him ever having to lift a finger.

Do you want to get started?

If you are a newbie just getting started with investing, picking a “Target Retirement” dated mutual fund is the simplest way to get started.

All you have to do is figure out your target retirement date, subtract your current age, and add that to 2014 and you will know exactly which fund to invest your money in.

If you are 24 years old and plan on retiring at 65, your Target Retirement date would be 2055. Viola! You are done.

Now that you know what to do, here is why you are doing it

Target Retirement date mutual funds are attractive for a number of reasons:

1. They automatically balance your portfolio for you.

You already know that you don’t want to put all of your eggs in one basket. By investing in a Target Retirement date account, you are investing in a wide variety of stocks and bonds, and effectively spreading your dollar out everywhere. This limits your risk of loss because of diversification.

2. As you get older, your investments become less risky

When you get closer to retirement, the last thing you want to worry about it giant fluctuations in the stock market destroying your investments. Target Date mutual funds become less risky as you move closer to your retirement date, making it less likely that you lose money. As a result, you will have a more stable, predictable income stream in retirement.

3. They are extremely simple to set up and manage

With Target Retirement mutual funds, you literally do not have to do anything at all except put money into the account. Every month you invest your savings into these accounts, and everything else is all taken care of. This is ideal for those who don’t know much about investments and do not care to learn about investments, but still want to retire comfortable.

That’s it!

There you have it. You just set up a retirement account that will do all of the hard work of investing for you. All you have to do is sit back and wait to reap the benefits.

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