Investing Made Easy, Part 1

Tired of complicated investing strategies? If so, then this article from Kiplinger's titled "Investing Made Easy" is perfect for you. Here's what it promises:

Think you don't have the time or expertise to handle your investments? Relax. With one of our three no-fuss strategies, you can start investing today and get on your way to reaching your goals.

Fortunately, you don't need an MBA or ridiculous amounts of time to research and monitor your investments. You can simply choose a mutual fund that will do the heavy lifting for you. Some funds come with ready-made, diversified portfolios designed to give you a broad, one-stop investment mix. Some rejigger their holdings periodically to manage your exposure to risk, keeping it right where you're comfortable. And others automatically tone down your risk as you near retirement. All this without you having to lift a finger.

These three no-fuss strategies are designed for slightly different temperaments. We offer specific fund suggestions along with them so you can start putting your money toward your goals now.

And since I'm a glutton for punishment, I thought I'd break this piece into three posts so we can focus on each strategy individually (as well as have three multi-part topics going at one time). :-)

So let's get started with option #1:

Strategy #1: I want a single investment that I can set and forget.

EASY SOLUTION: Target funds

For the ultimate in hands-off investing, consider a target fund. Also known as "life-cycle" funds, managers of these investments assemble a diversified portfolio for you, and automatically tone down your risk as you approach your target date, whether it be for retirement, Junior's education or another goal. This means you can pick one fund and let it ride. There's no stressing over whether you're properly diversified, and you don't have to rebalance your portfolio or trade in your stocks for bonds at the appropriate time of your life. It's all handled for you.

With benefits like these, it's easy to see why the concept is popular. Assets in life-cycle funds have more than doubled since 2000, according to a recent study by Lipper, a fund data-tracking firm, and rose 65% in 2004 alone. And more employers are offering target funds in their workplace retirement plans.

Basically, it's like having your own money manager, except that you can't tweak the investments to cater to your personal circumstances. These are cookie cutter portfolios and, in reality, your retirement plans may differ greatly from the next guy's. But for the most part, life-cycle funds can be a practical -- and simple -- place to start laying the investing groundwork.

Fidelity, Vanguard and T. Rowe Price are among the biggest purveyors of target funds. The Fidelity Freedom funds are a good standard, medium-risk investment, and the 2040 target fund (meaning you're aiming for retirement 35 years from now) has been around long enough to earn the top, five-star rating from Morningstar.

Vanguard's Target Retirement funds make a good choice for the risk-averse because they become more conservative faster than their peers. And the T. Rowe Price Retirement funds run more aggressive, making them a good choice for those who can handle some risk in hopes of generating higher returns over the long haul. The Vanguard and T. Rowe Price funds with the furthest target dates haven't been around long enough to have a meaningful record, but they have outpaced the Standard & Poor's 500-stock index (which measures the performance of the 500 largest companies' stocks) each year since inception.

My thoughts:

1. I have accounts with both Vanguard and Fidelity and both are good companies. I usually prefer Vanguard because their fund costs are lower, but given the information above (great performance by Fidelity, not an established record for Vanguard's fund, and Vanguard getting conservative early), I personally would opt for Fidelity in this case.

2. That said, I would only do this if I was forced into this strategy. I'm more hands-on and aggressive in my investing, so overall this strategy is not for me.

Click here to read part 2 of this series.

Update: Linking to the Beltway Traffic Jam.

Comments

[Brian]

Life cycle funds are usually the best option for those just starting their investment portfolio because at this stage of the game most do no have enough capital to avoid the low balance fees of having multiple mutual funds that are required to maintain proper diversification.

We're currently using Vanguard’s Target Retirement 2045 (VTIVX) until we can build enough money to put together something based on Taylor’s 4-fund portfolio.

We chose VTIVX because of two reasons:

1. Vanguard does not charge any additional fees besides the expense ratios of the underlying funds. Fidelity does charge an overall fee for managing the freedom funds.

2. Fidelity and T. Rowe Price mostly employ actively managed products, while Vanguard relies mostly on index funds.