Investing for retirement can be an extremely overwhelming, and sometimes, scary process when starting out. I know when I came out of college and started my first job I was given a large folder illustrating the company's 401k retirement plan and the different funds. There were numerous aged-based trusts and individual funds presented to me. All of this felt overwhelming, so I chose my aged-based trust to place my money into until I could learn more through self-education and courses.
After that, I decided to start reading books on investing to become more knowledgeable and better prepared for opportunities. My portfolio has been transformed based upon a 3-point strategy:
- Keep it diversified among the three asset classes: stock, bond, and cash (short-term reserves) investments.
- Keep the costs low!
- Keep it simple, stupid! Make it passive and ensure it lacks in movement (i.e. no day trading).
Diversifying the account among the three asset classes is a crucial investing fundamental. Each asset class has its own set of risks as well as different gains and losses over time. Diversifying among the three asset classes has provided balance to my portfolio. Each asset that I have in my portfolio is an Index Fund, and a good chunk is through Vanguard. Just take a look at S&P 500 90 Year Historical Chart at the top of the page. The overall index value has increased over time.
Keeping costs low is extremely important as well. Each asset I have in my portfolio was selected based on its expense ratio. The difference may seem small, but over many years of compound growth the costs can become insane! For example: say I initially invested $10,000 dollars into an index fund that has an expense ratio of 0.04%. I'll add $5,000 additional per year for 30 years at an assumed annual return of 6%. My total costs for that fund would be approximately $3,500. Now look at that same initial investment with an expense ratio of 0.25%. I will continue to add $5,000 per year for the same 30 years. The costs would be approximately $21,000. Guys, that is your $17,500 going into some else's pocket!
I try to keep these investments simple and passive (i.e. not a lot of movement). My funds are also selected based upon what companies make up that fund. Long term holding of one or two funds that are built to represent an entire market is my strategy. I do not participate in day trading as I find it to be like chasing a black cat in a coal cellar. The idea is to work with the market and not try to outsmart it by frequent trading.