When an afternoon of surfing the internet at the age of 26 led me to a lightbulb-like moment of, “Oh my gosh, I need to start saving for retirement so I don’t have to work when I’m 80,“ I promptly threw myself into researching the best way to do so.
I knew investment diversification choices like real estate weren’t in the cards for me at the moment, and I didn’t really have much to start investing with. This was a bit of a downer, because from what I could tell, a lot of stock market investment funds required at least $2,000. (Again, I hadn’t done much research yet.)
But after devouring books, like I Will Teach You to Be Rich and The Money Book for the Young, Fabulous and Broke, all my dog-earing, note-taking and highlighting taught me one thing: Diversification in your investments is everything. If you don’t diversify, you put all your eggs in one basket. And if you’re not a magic leprechaun, you’re essentially setting yourself up for financial ruin.
Investment Diversification 101
I learned the easiest way to handle this diversification via investing in the stock market (which is best for people without a lot of extra cash to begin with) is with a target-date fund. Basically, this fund ripens at your retirement year and keeps a healthy balance of different types of stocks, so you reduce risk over the years. You’ll get the most out of your money, without doing any of the balancing work yourself.
But when I realized target-date funds are really just a collection of other mutual funds and that target funds have higher fees than simpler mutual funds, I thought a better financial decision was to just do the balancing on my own. After all, a basic understanding of percentages and a calculator is all you need, right?
The percentages I researched seemed simple enough:
- 80–85 percent for funds that track the entire stock market
- 10–15 percent for funds that track international stock markets
- 5–10 percent for bonds
I believed I could handle that kind of math.
Balancing Stock Diversification Is Easier Said Than Done
Fast-forward one year into that plan, and I hadn’t touched my diversification — or done any math to figure it out — in six months. Maybe some people can do their own diversification, but clearly, I wasn’t going to, no matter how important it was. (Apparently, even the fact that I managed a personal finance website at the time and was seen as an advisor in the space couldn’t motivate me to do it.)
But my laziness didn’t change my need for good diversification in my retirement investments. I went ahead and switched my Roth IRA and SEP IRA over to a target-date fund. Now, the diversification takes care of itself, and I don’t need to spend a second worrying or thinking about it.
Yes, I might pay a few more fees and have a bit of a lower return rate because of that, but honestly, that’s fine with me. The diversification is there, and I feel much safer. Now, I don’t need to spend an hour every month managing my stock investments; instead, I can spend that hour completing client work — which pays me more than whatever I save in fees by pulling my investments up by the bootstraps and doing the diversification myself.
For Stock Diversification, Try Automation
For me, deciding to shift away from doing my own diversification has been a win-win. I save time, and the diversification actually gets taken care of (as opposed to avoided entirely). Plus, if that one hour per month was replaced with paying client work every time, I’d have a few thousand dollars more per year than if I insisted on doing everything on my own. The pros in favor of automation far outweigh the cons, if we’re talking cash.