Keeping it simple in investing

Part of me remains baffled at how many people resist investing. Many highly intelligent, go get'em and otherwise rational people just stick their heads in the sand when it comes to investing. Yet shockingly, it does not take excessive amounts of effort to invest well. One of my mottos of the last few years is:

You can do an B+/A- job investing with very minimal work and relatively little anxiety.

Note that many people do a C- or worse job of investing, so an B+/A- job is pretty darn good. I think one of the problems is paralysis in making investing choices because there are so many bloody choices. And there are numerous tales of how making the wrong choice means losing your shirt, but pretty much all these cases of shirtlessness involve getting too greedy or trusting your money to someone inept or unethical. I present two choices: super-ultra simple and simple.

1) I want to keep my head in the sand:

If you want the absolute simplest plan of action, buy one of the "target lifecycle/retirement" mutual funds which automatically adjust the asset mix as you near retirement or cash withdrawal. Choose the fund with the target date close to your planned retirement. E.g Vanguard offers funds with target dates of 2010, 2015, 2020, etc. As the target date gets nearer, the fund mix gets more conservative.

Recommendation: Vanguard Target 20XX funds. For 20+ year horizons, they keep very little cash, have very low fees. E.g. for their 2035 fund, their mix of domestic/foreign/bonds is a reasonable 72/14/10 . I prefer more foreign, but that's just me.

But if at your brokerage is Fidelity or Schwab, just buy their in house target funds instead and avoid paying the mutual fund transaction fee. At least, I know buying Vanguard funds from a Schwab account has a fee but buying Schwab funds have no fee.

2) I want a simple plan where I am involved:

But if you're in the camp of just not being sure where to start, take the consistent and nearly unanimous advice of the big names (Malkiel, Bogle, Swensen) and the big boys (many pension funds, including TIAA-CREF) and put your money in 2 to 4 low cost index funds each covering a different asset class. I give some baseline weightings for your assets but you can tweak the weightings as you wish. The good news is that your returns are not very sensitive to 5% or even 10% adjustments in weighting. Put the rest in a money market fund.

Recommendations:

If you have less than $6K to invest, use a complete US and a complete foreign fund:

• 60% Total US index (VTI)
• 40% Foreign including some emerging markets (VGTSX or FSIIX, but if you don't have enough money, buy EFA)

If you have less than $20K to invest, put the money in the following categories:

• 55% US stocks (say VTI or VFINX)
• 35% International developed countries (say EFA, DODFX)
• 10% Emerging markets (EEM or VWO)

If you have more than $20K you can also add some real estate or US bonds/Treasury bills:

• 40% US stocks (say VTI or VFINX)
• 25% International developed countries (say EFA, DODFX)
• 5% Emerging markets (EEM or VWO)
• 15% REIT index (VNQ or VGSIX)

And remember, rebalance once every 6 to 18 months to your desired weightings. It turns out your returns are not too sensitive to how frequently you rebalance. But you must rebalance. I recommend every 12 months to minimize the work and to ensure you'll get long term gains.

In short: don't over think how to invest. Just do it and keep it simple. And if you follow the above guidelines, it's hard to mess up much. It's a lot like exercise: the biggest mistake is not doing it; and if you do something, heck anything, reasonable, you'll be fine.