Now that I'm retired from the Animation Guild and its accompanying 401(k) Plan, I've had time to dwell on how a retirement stash should be invested. What I've deduced is, you can tinker and twiddle with your 401(k) and IRAs, investing in individual stocks, real estate, and various types of bonds, but doing investments in a complicated and fancy way gives you many opportunities to louse things up, which ends up costing you money.
Here's the single most important thing to know about investing:
"Many studies have concluded that the major determinant (90%) of the overall rate of return earned by investors is not the particular bond or stock funds they buy, but rather the way they allocate their investment funds among the various asset classes." -- Random Walk Guide by professor Burton Malkiel.
The prof is talking about the percentage of equities (stocks) and the percentage of bonds that you own. Everything else, the small value stocks, the gold bullion, the investment in that central African diamond mine, probably won't buy you very much in the long run, because you'll likely dump most of those investments anyway when that particular sector of the market goes south. (And sooner or later, every part of the market goes south).
By keeping investments simple you avoid making mistakes, because temptations and distractions are removed from your line of vision.
Based on the above, here's the advice I give to sixty-somethings on the cusp of retirement who ask: Where should I put the cash sitting in my 401(k)s and IRAs?"
"Put 65% of your money in Vanguard's Target Retirement Income Mutual Fund.
Put 35% of your Money in Vanguard's Wellesley Mutual Fund.
That's it. Just those two funds. I like that mix because ...
They give you a broad swath of domestic and international stocks, leavened with Wellesley's concentrated investment in large American value stocks, and ...
They give you a wide assortment of international and domestic bonds. While the Target Retirement Income fund overweights government bonds, Wellesley chooses high-grade corporate issues, so there's a nice mix.
Added to which, the above is simple, easy to execute, and conservative -- 67% bonds, 32% stocks. The above is high quality and expertly managed. The above is extremely low-cost (about 13.5 basis points if you use Wellesley's Admiral shares; that's a .135% in expenses between the two. (Have a financial advisor at a brokerage house perform the same tasks less well, you're likely looking at costs ten times higher).
You can, obviously, change the percentage allotment of those two funds if it suits your needs (60%/40%, 50%/50%, etc.) But whatever percentages you use, you get the beauty of broad diversification, great management, and low costs. And you don't have to worry about where to put your retirement dollars.
* Kindly note that Hulett is not a registered financial advisor, just a dude with an opinion. And kindly note that Hulett uses a variation of the above himself.
