I know that many women don’t feel comfortable with the idea of investing. The word “investing” seems complicated and out of reach for them. Like one of those things you supposed to understand, but too embarrassed to ask anyone about it. Women prefer to delegate this task to men, without understanding how money is invested, and at the end never learn the basics of investing.
But we women need to learn how to invest because the world is changing. We live longer than men and at some point, we will need to learn how to manage finances. In addition to that many women don’t have enough money saved because they take time off to raise kids or take care of their relatives.
With less money in their saving accounts, but more years to live women need to learn how to make money work harder for them. I know that many of us “invest” when the opportunity presents itself – opening a 401(k) when the company offers us one.
But it will be a mistake to think that if you have money saved in 401(k), IRA or Roth IRA each year it will be enough for your retirement income. You should boost the resources you will need in retirement by creating a personal investment portfolio.
I am sure that most women have 401(k) and save money there regularly.
The question is what should you do with the rest of your savings?
Keeping it in a bank is not going to work, because you’re going to lose money due to the inflation. The best solution would be to open a brokerage account (taxable investment account) and put and invest your savings there.
But before you start on that journey, learn the 5 basic rules of how to invest and build a simple and easy-to-maintain portfolio:
1. Allocate your assets
The phrase “asset allocation” sounds more complicated than it is.
Asset allocation works as a well-balanced diet. To stay healthy, you need to eat the right proportion of meat, vegetables, fruits and bread every day.
The rules are no different when it comes to investing. How you divide your money between different types of investments is one of the most important decision you have to make.
Simply put any retirement portfolio is called an investment portfolio or a collection of investments. Although, any investment portfolio is a combination of main asset classes:
- Stocks (equities)
- Bonds (fixed income)
Moreover, any investment portfolio is usually divided into sub-asset classes:
- Large-cap stocks
- Mid-cap stocks
- Small-cap stocks
- Domestic stocks
- International stocks
Additionally, each asset class and sub-asset class is divided into categories:
- Individual stocks
- Individual bonds
- Mutual funds
- ETFs (exchange-traded funds)
Different type of investment can be broken into different categories. This is called diversification. The idea behind the diversification is to spread the risk and do not put all your eggs in one basket.
A well-designed investment portfolio will include several categories.
Also, it will be organized by age, your risk tolerance and how soon you need the money – short or long-term investing goals.
2. Invest in stocks for long-term
How you allocate your savings between stocks, bonds, and cash will affect the rate of return you earn on your money. The more your investments earn, the less money you will need to save for the future.
Most of the times stocks outperform any other kind of investments. However, stocks are considered a volatile investment and have their ups and downs. To stay invested in stocks we need to ride out the down times.
Unfortunately, we have less time on our side when we are in our 50s or 60s. It was much easier for us when we were in our 30s or 40s and retirement was far away. We were working and accumulating assets and had time to wait for stock market recovery.
When we are only 10 to 15 years from retirement it is harder to make up for our investment losses. And yet the magic power of compounding forces us to stay invested in stocks. The more money you put in and the longer you keep it invested, the faster you’ll reach your target due to the magic of compound interest.
The more money you start with, the more interest it will generate. Keep adding more money to your original investments and you will see how interest grows more interest. The power of compounding will help your invested money grow faster.
However, it’s scary when the market goes down and you see how your portfolio is losing money (only on the paper if you don’t sell out). Frequently, there is short-term volatility on the market and prices fluctuate. Eventually, things calm down and the general trend became positive again. That’s why we make money when we invest for the long-term.
All investments hold some risk. You need to understand the risk and feel comfortable with the amount of money you invest in each category.
There is no one-size-fits-all investing approach for everyone. A lot depends on how much you have already saved for retirement and how soon you are planning to retire.
How I set up my portfolio
Roman and I have several brokerage accounts with Fidelity Investments and Vanguard. Before starting this blog, I was happy with high exposure to stocks. Usually, I don’t have a sleepless night or start selling out stocks when the market goes down.
The portfolio was set up for 15-years horizon and before we retire at full retirement age. I had a mix of 85% stocks, 10% bonds and 5% real estates.
The stock portion of our portfolio was divided between a 25% allocation to large-cap stocks, 15% in mid-cap stocks and 15 % in small-cap stocks. Another 30% was invested in international and emerging market stocks which gave our investments an additional boost in growth.
However, as we are getting closer to retirement, I want to reduce the exposure to stocks and change the portfolio allocation to 70% in stocks and 30% in bonds. The new allocation will help to protect the capital and yet give us enough exposure to future market growth.
3. Invest in Index funds
There are two types of investments – active investments and passive investments.
Most of us don’t need a complicated investment plan that requires more choices and frequent changes. And most of us would prefer something simple and easy to maintain. Investing in mutual funds are often better and easier than in individual stocks or bonds because funds offer diversification which means greater safety for your money.
Let’s start with mutual funds. Mutual funds represent the pooled money of thousands of investors. Most mutual funds have professional managers who are actively involved in selecting the investments for their funds.
Those funds are called actively managed. Actively managed mutual funds come with high management fees because the portfolio manager attempts to beat the market.
Many people following legendary investor Warren Buffet and his advice to invest in index funds. Index funds are mutual funds which are fixed to match a benchmark or index.
The result is the index fund manager doesn’t’ seek to do better than the index but just to replicate it. That’s why it’s called passive management.
Index funds do better for the investors because the actual cost of investing is less than in an actively managed fund.
You can read more about mutual fund types and categories:
4. Re-balance your portfolio
After you have created your portfolio, it will need your attention from time to time. A buy-and-hold portfolio, which I strongly advocate, cannot just maintain itself. With time the asset allocation in your portfolio becomes uneven and you’ll need to re-balance it and get back to your original target allocation.
What does it mean re-balancing a portfolio?
Here is a simple example. You set up your target allocation with a mix of 60% stocks and 40% bonds. With time your portfolio might change to 70% stocks and 30% bonds. In this example, your stock allocation has risen beyond its original set point. You could re-balance it by selling stocks and buying bonds to bring it back again to 60/40 ratio. It means putting all your investments back in place.
The main reason for re-balancing your portfolio is to reduce the risk. For example, if your portfolio becomes overweight in stocks it has come to be more aggressive. And as you grow older you might prefer to keep it conservative to preserve your investments. Otherwise, if you are planning to retire next year and suddenly the stock market falls 40%, as it happened in 2008, you can say good-bye to your retirement.
Many financial experts recommend looking at your portfolio every year or two. I prefer to look at our portfolio and re-balance it every year in December. It makes easier to keep track of all our investments.
It’s good to remember that buying and selling stocks or bonds involve transaction costs. Moreover, selling your shares means that you have to pay capital gain tax.
5. Investment fees
When you invest your hard-earned money in a mutual fund it comes with a certain percentage of fees. You have to pay people running mutual funds for research, trading costs, and advertising. Understand what you’re investing in and remember to keep your investment fees low, otherwise, it will reduce your profits.
As the saying goes, “It isn’t what you make, it’s what you keep”.
Paying a higher management fee does not guarantee a better return on your money. Yes, you have to pay a management fee, but you’re better off paying the lowest fee possible.
Most of the experts recommend Vanguard as a low-fee index funds provider. Fidelity Investments and Charles Schwab also match Vanguard’s pricing for index-based approach. Yet in comparison, the Vanguard has the lowest cost funds across the board.
My final advice for women who learn how to invest is “don’t make yourself crazy and keep investing simple”. Don’t invest in some sophisticated investments you don’t understand. Create a simple and easy-to-maintain portfolio of stocks and bonds.
The good news that you don’t have to become an expert. However, understanding the basic rules of investing will help you to become comfortable with your future investment decisions.
My personal goal for investing is simplicity and I try to follow a great quote from someone very smart:
“Keep it simple: as simple as possible, but no simpler” – Albert Einstein
The intent of this post is to be only educational and provide a simple guideline for a very complicated matter. I would recommend discussing your investment strategies with an accountant, financial planner or tax professional.