It makes sense that any financial advisor should be practicing herself what she preaches to clients. Keep in mind though that everyone’s situation is different, so even if a professional invests a certain way, that does not necessarily mean that it is suitable for you or your style.
I prefer to keep my investments simple and follow a “set it and forget it” approach to long-term investing. For me, that means investing in a single target-date mutual fund in my retirement account and another one in each of my kids’ 529 college savings plans.
How boring, I know. But personally, I’d rather spend my time doing other things than worrying about my portfolio on a regular basis.
I picked my funds based on several factors that included the following:
- Diversification (a good mix of stocks, bonds, cash, and possibly commodities or other asset classes)
- Solid track record (at least a 5-year history with performance in at least the top 50% of its category and manager tenure of at least 3-5 years)
- Four or five-star Morningstar rating (“Medalist” funds -- those that receive Gold, Silver, and Bronze analyst ratings -- are likely to outperform their category peers and benchmarks on a risk-adjusted basis over market cycles of at least five years)
- Low cost (“no-load” and an “expense ratio” of under 1%)
In my opinion, which I think I share with most other financial experts, asset allocation -- not market timing or stock picking -- is the key to investing success, especially over the long term. Asset allocation aims to balance risk and reward by dividing an individual’s portfolio among three main asset classes -- equities, fixed income and cash. How it is divided up is based on that individual’s particular goal, risk tolerance and investment time horizon.
Target-date funds are an easy way to achieve an asset allocation strategy that is appropriate for you. Keep in mind that the later the target date, the higher the percentage of the fund’s portfolio will be allocated to equities and the greater your risk and return potential will be.
Also remember that because target-date funds are actively managed by professionals who adjust the asset allocation to be increasingly conservative over time, they tend to be more expensive than passively-managed index funds or exchange-traded funds.
If investing in target-date funds seems to make sense for your situation, I would recommend sticking with no-load, lower-cost fund families like Fidelity, Schwab, Vanguard or T. Rowe Price.
Check out Jocelyn’s responses to four more frequently asked questions:
Should I buy gold?
How much should I pay for financial advice?
What's the best way to save for college?
Should I be worried about another stock market crash?