Where Do You Invest Your Money?

This is the million dollar question.  It comes up in every financial coaching session.   It’s the question that every financial pundit answers with complete certainty even though they can’t predict the future.  For the Main Street investor, let’s make it simple:

  • The fancy term for “where you invest your money” is “asset allocation.”
  • 98%+ of your money should be in funds.  Funds are made up of hundreds of stocks and/or bonds and keep you from putting all your eggs in one basket. Funds diversify your portfolio. And by "funds" we mean mutual funds and exchange-traded funds (ETFs).
  • There are over 9,000 funds available to buy in most brokerage accounts and the options in your retirement plan are usually all funds. The challenge is figuring out which ones to choose.
  • For long term investments such as retirement, your main decision is how much to invest in safer stuff vs. riskier stuff.  If you’re younger, you can invest more in riskier stuff because you have time to let it grow. As you get older, you want to shift to safer stuff because you will need the money sooner.
  • The rule of thumb is: your age = % in safer stuff. For example, if you’re 40, 40% of your money should be in safer stuff and 60% in riskier stuff.  Remember, that’s simply the rule of thumb. You can be more or less aggressive based on your risk tolerance.

Great, so how to do I know if a fund is risky or safe?  Also, how do I know what to buy?

  • To figure out risky vs. safe, go to [Morningstar](https://www.morningstar.com/ "Morningstar"). It’s a great resource for research on your funds. The site can be a little overwhelming so I’ve created a short, 5 minute video to show you 1) the fees on your fund and 2) how much of the fund is invested in safer stuff vs. riskier stuff.  There is a ton more information on the site but this is a good place to start.
  • Once you’ve done your analysis, pick the funds with the lowest fees that get you to the safer/riskier mix that you need (see the rule of thumb above).
  • Funds that say “Target Date” or “Lifecycle” give you a single place that tries to follow the rule of thumb above.  For example, a fund called Lifecycle 2030 assumes you will retire around 2030 and has a mix of safer stuff and riskier stuff to help you get there.  Keep in mind that these funds tend to have a higher weight of riskier stuff than the rule of thumb.

% Safer vs. % Riskier is the main investing decision you should make for long term investing and, specifically, your retirement accounts (e.g., in your 401(K), 403(b), 457, IRA/Roth IRA). As you get comfortable, you can also consider domestic vs. international (also shown in Morningstar), active vs. passive, and more. We'll cover those in future posts.

What else?  What other factors do you consider for long term investing?  Where do you invest your money?