For the longest time, I sat on the sidelines of investing. I was paralyzed by the choices out there, and afraid that I would choose the wrong stock, the wrong amount of stock, or the wrong timing. Perhaps all three! It was so intimidating and I felt like I didn’t have the time nor the energy to learn the details and intricacies of complicated markets and trends. There was so much to learn.
You are most likely just like me in that you do something completely unrelated to finance or investing as your day job. I am an IT Consultant, so while I do have to work with numbers to run my business, I couldn’t tell you what “alpha” is in terms of a stock. Could I sit down and learn a bunch about investing, read articles online hoping to glean great stock strategies and picks, and become a pseudo-expert over time? Perhaps. Perhaps not! You could continue sitting on the sidelines, unable to decide what to do. But then you would be spending more time out of the market, and as they say, time in in the market beats timing the market. The way to win is to play.
As I’ve mentioned in the past, I am no financial expert, this blog is simply an outward expression of the inward thought processes that I have worked through. It may be of help to you. Would you like to know what my investment strategy has been for the past year or so? I’ll lay it out for you, although you might be disappointed by the lack of pizzazz and complexity in my approach.
I started by creating an account for my wife and me (two separate accounts) at Vanguard.com. Once the accounts were created, I set up a Roth IRA account within each Vanguard account. With the accounts created, I had to choose what stocks and bonds to purchase within those accounts. I took the easy way out and I will explain my reasoning.
I chose the Vanguard Target Retirement 2060 Fund (VTTSX) to put all of our investments in. Some may scoff at this choice, but I wanted maximum ease. What a target date fund like this does are a few things. First, it is automatically diversified. When you buy a fund like this, you are not buying a handful of stocks. Rather, you are buying small amounts of a bunch of different stocks. You are buying a “slice of the market”. That way, if one stock is struggling, you’ve got a ton of other stocks that are chugging along either in a neutral or positive position. They balance each other out. The trade-off of this is that sure, there could be more aggressive funds out there that might make more money in the long term, but a fund like this offers a slightly more conservative, predictable growth strategy. The other thing I really like about these target-date funds is that they automatically adjust their makeup over time. As a general rule of thumb, when you are young in your working career, you probably want to hold all or almost all of your investments in stocks that will have more aggressive growth over time. While the stocks can have big swings up and down, it doesn’t matter much when you are young since you don’t need the money and aren’t expecting to tap into any of it until retirement age. As you get closer to retirement age, you would want to hold more stable assets like bonds, that are predictable and steady but give a much smaller rate of return. The beauty of a target-date fund is that it holds both stocks and bonds, and it reallocates the mix over time as you get closer to retirement. For example, today, as I am 30 years old, my investments are 90% stocks and 10% bonds. When I am maybe 50 years old, the mix could be 50% stocks and 50% bonds. When I am 70 and ready to retire, I’d likely be at 10% stocks and 90% bonds. What is so great about the target date fund is I don’t have to go in and adjust my investment mix manually. The fund’s contents of stocks and bonds shift over time as Vanguard’s team decides what should be in the fund, to slowly but steadily move the fund’s strategy from more aggressive to more conservative as I get closer to retirement age. I don’t have to lift a finger to make this happen.
The other piece that makes this strategy work so well for me is a thing called dollar-cost averaging. As I mentioned earlier, timing the market is a fool’s errand. It is basically impossible to know when to buy stocks at a low price in order to sell them at a higher price later. That trickery is for day traders as far as I am concerned. Instead, you can dollar cost average your money into the market by making regular stock purchases in your account. For our retirement accounts, we are not going to use any of the money until retirement age, so I really don’t even need to look at the account balances. I check in on them maybe once a month, just to observe the progress and to make sure things are on track.
So how do we do this dollar-cost averaging then? Vanguard comes in clutch again here as they make it easy. As a couple of independent contractors like my wife and I, our income is somewhat variable. For quite a while, I would make excuses for what our money could be better used for than a retirement account contribution. It is easy to convince yourself at the moment that your money is better used for something else. However, it takes a ton of discipline to sit down and say “hey, I’m going to move this chunk of money into my retirement account for when I need it in 40 years”. You’d have to have pretty dang good self-control to be able to do that consistently. I found I couldn’t do this, so I took the choice out of my own hands.
In the Roth IRA account, there is an option to make automatic contributions. They can be as often or infrequent as you’d like. With a Roth IRA account in 2021 for someone my age, my wife and I are each able to contribute $6,000 per year to each of our accounts. I wanted to max out contributions to each account, but like I said above, having the discipline to do that is almost impossible. So, what I did instead is I told Vanguard to pull a relatively small amount from our checking account each week to hit the max contribution by the end of the year. If you divide that $6,000 by 52 weeks in a year, it comes out to about $115.38 per week. For me, that is way more palatable than huge chunks of money I’d have to voluntarily contribute manually. Each week, I noticed my balance go down a bit, but over time it has become so natural that I notice it less and less. Meanwhile, contributions are continually being made, our retirement accounts are growing, rebalancing themselves, and will be ready for us when we go to retire in a few decades.
Some may think this is a huge oversimplification of retirement investing. And it is. But that is what I wanted. I don’t want to think about these things, but I do want to do them. You may be in the same boat. Perhaps $115 a week is way too much for you. Don’t be intimidated or held back by that. Once you have the minimum amount to start a Roth IRA account, you can make much, much smaller contributions. Start out with $5 or $10 a week just to get the hang of it. Once that automatic contribution starts coming out of your account, you’ll get used to it. If you get a raise or find a way to free up other funds in your budget, you could turn it up to $20 or $25 a week, and more from there.
Target date funds and automatic contributions are a great way to set and (mostly) forget your retirement savings strategy. This is particularly helpful if you are an independent contractor or your employer doesn’t offer a 401k or similar retirement account option.
I hope you have found this helpful! Thank you for reading.