Monday, April 13, 2015

Target-Date Investors, Lazy But Smart

I knew I was onto something when I wrote, Invest in the stock market in 5 simple steps. My thinking when writing this piece was to make the point that investing in securities (stocks and bonds) doesn’t take intelligence or much effort.  I wrote in the intro paragraph:

“Investing in the stock market is one of the easiest ways of creating wealth over time.  When I say, ‘easy,’ I mean it.  And I think this is where many people get held up, believing it requires intelligence and constant effort.  Yes, I get that in order to invest in the stock market one also needs money.  People may imagine it takes thousands of dollars to get started for it to be worthwhile.  Well it doesn’t.”

Then I gave all of you five simple steps to get started.  Now, I could’ve suggested various stock market investing vehicles, including a Total U.S. Stock Market Fund and a Total U.S. Bond Market Fund.  I could’ve also thrown in the mix a Total Emerging Market Fund and a Total Foreign Fund…etc.  I figured this would just make things over-complicated for the majority of you.  Yet, these investment vehicles are often the ones recommended in financial magazines (Money, Fortune, Kiplinger, e.g.).  “You need a total stock ETF, and a total bond ETF, and…”  No wonder people don’t invest in securities!  I decided to make things as simple as possible because let’s face it, people don’t have time for complexity.  I gave you one investment vehicle, the Target Date Fund, one way to figure out which one you needed by giving you the link to Vanguard’s retirement guide, how to set-up an account online, how to Buy your first shares, and how to Buy subsequent shares on auto-pilot.  I practically did the work for you.
I also advised you how to stay in the market long-term:

But, to do this the right way you need over a decade of time in the market, plus an automatic and periodic investment plan in place, and lots of apathy.  Apathy?  Yeah, like don’t look at it.  If the market tanks, don’t freak out and sell.  Remember that you will be buying shares of your TD fund when the market is low and when the market is high.  Over the course of time, you will come out alright.”

The same day I published this post with this advice, recommending apathy of all things, and forgetting about your investment, Jim Cramer on Mad Money tells his viewers they should “keep an eye on the market” so that they can double down on their automatic investment 401K holdings when the market tanks.  His logic is sound: take advantage of a down market to buy more shares of your investments…you don’t want the same dollar amount committed when the buying opportunities are best.  Makes perfect sense…if you’re a disciplined investor!  It is proven over and over that the mom and pop investor is terrible at timing.  They’ll sell and buy at the wrong times.  And I bet there is a huge correlation between their psychological errors and how often they check their accounts.  After many years of investing, I will execute as Jim Cramer suggests, but most Americans will not.  That is why I suggest you let time, patience, and apathy work in your favor.  And I’m not alone.  Check what came out today, 4/13/15, on


Read between the lines of Morningstar’s 2015 Target-Date Fund Landscape Report and you’ll see tacit permission to be an investor who takes a simplistic, if not lazy, approach to managing money.”
“Typically, target-date funds are the default choice, literally and figuratively, for investors who don’t know how to build a portfolio or an allocation plan, or who don’t want to bother of completing such a chore.”
“All too often, investors only buy a fund after it has been on a hot streak, meaning they buy high. They stop contributing to the fund — or sell it — when performance flags; even if they stay in place, they may not contribute again until performance goes through another good stretch.”
“What is magical is the steady dribble of savings — weekly, bi-weekly or monthly contributions made in all market conditions — and how that adds up over time for people who are not particularly interested in managing their money on a day-to-day or year-to-year basis.”
“Investors who pick target-date funds are hands-off,” said Yang. “We know that hands-on investors tend to have worse performance because they’re moving at the wrong time, which is not surprising because even fund managers have a hard time trying to deliver superior returns.”
“Buy good funds and ride them, rebalancing as needed, adjusting for age over time and you can get the same edge that target-date investors get by showing up regularly and doing nothing more to manage their portfolio when the market gets noisy.” 
Wow.  It’s like I had insider knowledge of this article coming out.  I didn’t of course, but it sure seems this way.  All in all, I’m glad I was able to write a great piece for you that has some professional validation.  Maybe now you will consider investing in securities sooner than later given a proven and simple strategy.
Thanks for reading!  

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