So keep it simple: For money you don’t need to spend for at least FIVE years, put it in an S&P 500 Index Fund.
Passively Managed Exchange-Traded Fund (ETF) –
Static Basket of Stocks, traded all day long like a stock. Cost of trading is a commission each time you buy or sell. They are more expensive than Index Funds, 0.44%, so recommend Index Funds over ETFs unless you want more complexity in your portfolio.
Investing in Bonds is very similar:
Buying Individual Bonds:
You lend your money directly to a corporation or municipality and obtain their promise to pay a stated interest rate, and coupon payments usually every six months, with a guarantee to repay your principal at a specific time. Bonds come in a variety of terms, 30 days to 30 years. Shorter term bonds pay less in interest and longer term bonds usually pay higher interest rates.
Mutual Bond Funds:
You invest your money in a “basket” of bonds that are bought and sold by a mutual fund money manager. You rely on the manager to pick bonds in keeping with the mutual funds objective (short term or long term income). In return you pay a management fee and your interest is a combination of all the interest paid by all of the bonds in the mutual fund. The manager replaces maturing bonds with new bonds, so the mutual fund does not terminate with the maturity of any given bond.
ETF Bond Funds:
Bond ETFs offer many of the same features of an individual bond, including a regular coupon payment. Since Bond ETFs hold assets with different maturity dates, at any given time some bonds in the portfolio may be due for a coupon payment. For this reason, bond ETFs pay interest each month with the value of the coupon varying from month to month. An investor’s initial investment is at greater risk in an ETF and mutual fund than an individual bond. Since a bond fund never matures, there isn’t a guarantee the principal will be repaid in full.
Generally speaking, when saving for retirement, stocks are appropriate for most people up to age 50. By then you should start adding bonds into your portfolio to lessen the volatility and start preparing for retirement. There are many different models illustrating how to allocate your money based on your age and the amount of risk you’re willing to take on. As I’ve shown you above, historically speaking, you’ll get the most growth and return out of your stock portfolio. Your bonds are more like the foundation of your portfolio.
A general guideline is for women to invest in stocks equal to 110 or 120 minus your age. So 120-50=70% of your investments in stocks. If you are a risk taker, then keep more invested in stocks. Bonds and cash equivalents are appropriate for the other 30% of your portfolio. This helps you transition to a more conservative portfolio as you approach your retirement, because you are growing your investments as you prepare for retirement. Then you will draw income off your investments in retirement when you want a more stable portfolio.
Personally, I like stocks, and still have 90% of my portfolio in stocks. It’s an individual decision, but you have to be aware of the risks associated with it.
What’s Holding You Back?
Women NEED to Invest because investing helps close the gap:
- We still only make 80 cents on the $1.00 compared to men.
- We dip in and out of the workforce taking care of kids and parents.
- Women’s average balance in 401(k) is 50% less than that of men.
- We live longer, 5 years longer on average than men.
Investment Obstacles:
You don’t want to do something you don’t understand. The only way you’re going to gain confidence is by doing it. Doing it helps you understand it. Take one small step at a time and keep it simple.
You don’t want to lose money. Investing is not a competition (like trading) no one has to lose. If you invested your money in the S&P 500 over the worst thirty-year period in history, you would still have made about 8 percent/year.
You think investing is the same as gambling. It’s not and here’s why. Gambling is wagering your money on a particular outcome. If your lottery numbers aren’t called, you lose out. Investing is buying something which has value. Over time that value can go up or down, but by diversification and investing over time, you greatly increase your chances of making money, not losing it.
You don’t trust the financial industry. You need to shop smart and find a firm or online brokerage that you want to work with. There are many choices, and I’m happy to recommend a few.
I’ve given you an overview of stocks, bonds, mutual funds and ETFs. You’ve already taken the first step by learning more about this topic. Now start saving, however small. Your future you will thank you!
