Structuring Your Simple Portfolio: Part 2 – Simplicity

Investing and personal finance is so complicated. There’s just too much to learn and know and research. I don’t have time for it. Besides, it’s boring!

I used to think that. I put off investing for retirement for years because of it. And after I started putting money in a 401k plan I borrowed from it and even took early withdrawals paying the income tax and the 10% penalty.

The amount of information and the risk can be overwhelming. But you don’t have to be a financial whiz kid to be successful. You can accumulate a sizable nest egg for a comfortable retirement with a very simple investing strategy. If you start young enough you can retire wealthy and retire early.

For the beginner, and for the uninterested, simplicity is the key to success.

1. Simplicity in investment portfolio
2. Simplicity in account types
3. Simplicity in making account contributions
4. Simplicity in increasing annual contributions over time
5. Simplicity in rebalancing your portfolio

1. Simplicity in Investment Portfolio
Absolutely the simplest investment portfolio is the Target Year Mutual Fund. This is a mutual fund managed with an objective of moderate growth and mitigating risk by asset allocation suitable to the time remaining before you retire. The fund manager does the asset allocation for you and as the years pass and the target year gets closer the manager reduces the percentage of the fund invested in stocks and increases the percentage in bonds.

Most 401k plans offer a selection of target date funds. Also Vanguard offers a series of target funds with target dates in five year increments starting with 2005 and ending with 2045. They are called “Vanguard Target Retirement 2045 Fund” with the actual target date substituted for “2045” for each fund.

The second simplest portfolio consists of two index mutual funds. Index funds are structured to closely match whatever index they are named for. The two funds in the second simplest portfolio are a total stock market index fund and a total bond market index fund. Vanguard offers both and they are highly regarded. Look for “Vanguard Total Stock Market Index Fund Investor Shares” and Vanguard Total Bond Market Index Fund Investor Shares”.

You will have you manage your asset allocations yourself and rebalance annually. But a simple asset allocation of this simple portfolio is 60% in the stock market index fund and 40% in the bond market index fund.

401k plans rarely offer index funds; if yours does use it, if not, substitute the offering closest to “large cap equity or stock fund” for the stock market index fund. And for the bond market index fund substitute the 401k offering closest to “bond fund or income fund”.

2. Simplicity in Account Types
The simplest account type for your simple portfolio is your employer’s 401k plan. If your employer has one, enroll in it. Many 401k plans, but not all, match a portion of your payday contributions. That’s free money, so if there’s a matching amount you should contribute at least enough to get your employer’s full match.

When you enroll in your 401k plan, select your simple portfolio using the guidelines described in section (1) above.

The second simplest account type is the Roth IRA. To set this up you must choose a brokerage or mutual fund company. For this purpose I recommend Vanguard.

When you set up your Vanguard Roth IRA you will also select the Vanguard mutual fund or funds for your simple portfolio using the guidelines described in section (1) above.

Investing for your retirement doesn’t have to be complicated – it can be simple.

The next post will explain simplicity in making account contributions and simplicity in increasing annual contributions over time

Link to Other Topics in the Special Report: Structuring Your Simple Portfolio