Dear Deborah,
My employer is planning on ending its defined benefit program soon and switching to a defined contribution program. I’m apprehensive about being responsible for my own investments. I saw family members lose money in Internet stocks and other investments and I want to avoid that. What should I be aware of when making investment decisions?
You can sleep better at night if you don’t have your emotions driving your investment decisions. By having a sound plan, you can ignore the fads, stop following the herds of investors, and stop trying to beat the market. Just focus on your long-term investment goal.
Find out about your options in your employer-sponsored retirement plan. To get the right mix of investments, you’ll want to carefully go over your investment options, possibly talking about them with your employer’s financial advisor. Consider your risk profile when investing.
Aim for a diversified balanced portfolio. Diversifying doesn’t necessarily mean owning a dozen or more funds. Holding a total stock market index fund and a total bond market index fund provides diversification. Holding a target retirement fund – which is a mixture of balanced (stocks and bonds) mutual funds – helps reduce risk.
Look for low-cost index funds. “Indexing wins whether markets are efficient or inefficient,” says John Bogle, Vanguard founder (Money). Investment fees can make a big difference over time, so keep them as low as you can.
To get superior performance when investing, choose funds with lower total costs. If you want a no-load, or a no-commission way to keep costs down, you can be a do-it-yourself investor. This is possible at Vanguard, Fidelity, or Schwab.
Asset allocation is important, but it shouldn’t be your only concern.
Your asset location is also important. That is, investments you have in tax-deferred accounts and taxable accounts. Don’t put all your investments in tax-deferred accounts.
It’s likely that taxes will be higher in the future.
Copyright 2012 Deborah Nayrocker. All rights reserved. Permission to reprint required.
Deborah Nayrocker is the award-winning author of The Art of Debt-Free Living and Living a Balanced Financial Life.
Publication date: August 27, 2012