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Dear Cheddar,

You know what I hate the most? Trying to figure out how to allocate my retirement investments. I know some of the basics about retirement: I’m comfortable with a considerable amount of risk/aggressiveness at this point, I put quite a significant percentage of my income into retirement pre-tax, I also have a Roth and max that out every year. But when it comes to choosing the funds where my money should sit, I am lost. And annoyed. And bored. Is this conversation over yet?

I have tried to figure it out, I’ve talked to a complimentary advisor my financial institution provides, I have bribed myself with rewards like wine or chocolate for doing the necessary research on funds, I am sort of familiar with the online tools. But my money is still strewn around funds haphazardly, because for some reason this is the most tedious subject in the history of the universe to me.

How do you choose funds wisely? What are the most important indicators to look at? Is it worth paying someone and what do these people even charge? I know the socially conscious funds aren’t necessarily as progressive as I might hope, but I do hate guns; how do I choose a good socially conscious fund? Will you send me a reward if I get my act together and allocate better?

Sincerely,

Maybe I Just Need More Chocolate

Dear Chocolate,

Congratulations! You are doing amazing things! You are saving for retirement, max out your Roth every year, think about where to put your money, and ask great questions! You know what? You are beating 143% of the people out there who are not saving for retirement, and that is a statistically accurate fact.

My first piece of advice is: don’t sweat it. Having the right asset allocation is important, but it’s not the end all/be all of investing. If it keeps you paralyzed, then don’t do it. Follow Warren Buffett’s advice and put 90% of your money in a total stock market or S&P 500 index fund (e.g., Vanguard) and 10% in a similar government bond fund (e.g., Vanguard again).

If you want to get more complicated, I suggest you check out The Elements of Investing. (Or if you don’t want to read it yourself, stay tuned: I’ll have a book review coming out … soonish.) It’s a very simple and clear (and short!) guide to investment choices that makes some specific and good recommendations about slightly-more-complex asset allocation.

What do I do, personally? Across accounts, I have about 80% in equity (stock) index funds, 10% in bond index funds, 5% in a Real Estate Investment Trust (REIT) index fund, and 5% in individual stocks that I treat as money I’m planning to lose but in the meantime am having fun using to bet on companies I think are doing cool things. Within that 80% of stocks, it’s about 80% U.S. equities (S&P 500 index or a total stock market index) and 20% international equities (also through index funds). Is this the best way to allocate? Almost certainly not.

I should also note that I used last year’s bonus to buy $5,000 of SolarCity bonds. As far as I know, SolarCity’s was the first-ever offering of direct-to-consumer “green” bonds. It’s somewhat risky given that they are a growing company and there is potential for default (meaning I could lose my money, which is in effect a loan to the company that they may be unable to repay), but it seemed like a worthwhile experiment to me because (1) I believe in supporting renewable energy development as a moral matter, (2) I think it has a lot of room to grow as a financial matter, and SolarCity seems to be leading the pack, and (3) I’d like to learn more about how direct-to-consumer bonds work through hands-on experience.

As to your specific questions, here are the simplest answers I can give you. These will probably be redundant since I’m sure you’ve already read and memorized my earlier Investing 101 series.

How do you choose funds wisely? What are the most important indicators to look at? Choose a broad market index fund. Look for the lowest “expense ratio” possible. Read this.

Is it worth paying someone and what do these people even charge? Not usually. If you do, make sure to hire a “fee only” advisor — while you might find brokers who “don’t charge fees,” they make their money on commission by selling you more expensive products than you need. This is a case where fees are better! Read this.

I know the socially conscious funds aren’t necessarily as progressive as I might hope, but I do hate guns; how do I choose a good socially conscious fund? This is a tough one; it deserves its own post (coming … soonish). My general theory is that the primary purpose of my investments is to make money; if I have money, then I can use that money to support causes I care about. Broad index funds will inherently include companies you don’t like. You can support companies you do like by being an informed and engaged consumer, buying specific stock (with some combination of caution and high risk tolerance) or bonds, advocating for social or policy changes, and donating to causes you care about. Is it a little hypocritical? Yes, but so am I.

Will you send me a reward if I get my act together and allocate better? Sure. Do you like chocolate?

Good luck and keep on doing what you’re doing!

© 2015, Cheddar Pie. All rights reserved.

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