For almost 2 years I’ve been paying attention to my money and trying to better my financial situation. For almost 8 months I’ve been writing about personal finance.
Still, the word asset allocation scares the crap out of me and if you asked me to explain the makeup of an aggressively allocated portfolio, I would fail miserably. I’m 23 and don’t care about predicting market trends, hot stocks, and government bonds.
But I still save for retirement through a Roth IRA because I ignored the noise and allowed myself to not be perfect. I opened my Roth in 2007 and went with the Vanguard Total Stock Market Index Fund – a broad fund made up of 3,000 stocks that allows me to own 3,000 little pieces of the market.
Is this the perfect allocation for my age and income? Probably not.
But if I would’ve tried to find the perfect asset allocation I would’ve spent months researching different funds, became discouraged by the contradicting opinions and amount of information, and resorted to a hole only to maybe think about investing again in 10 years.
By that time I would’ve missed the compound interest boat which takes off when you’re 18-26 and only leaves the port once.
Ignore the Noise
If you allow yourself no room for error, you’ll fail.
We know that the more choices there are (i.e. stocks, funds, etc.), the less likely we are to actually make a decision (i.e. open an IRA and purchase a fund).
So go with the easiest, most simple, and arguably safest investment for young people – or people who know almost nothing about money – the index fund.
The fund I chose is a great start, along with the Vanguard 500 Index Fund, or a target date retirement fund.
People will argue you’re bare-bones decision and will reference future tax brackets, the inefficiencies of index funds, or how annuities will blow index funds away.
Nod your head politely, and ignore them. Don’t let their noise pollute your decision.
Your Money Needs Momentum
The key is to start now and use your money’s momentum to improve your situation later on. Every day you wait, you’re losing the power of compound interest, and hurting your bottom line with procrastination.
Once you’ve made the initial fund purchase, the hardest part is over. Now, funnel the maximum amount into the fund every year and you’re good to go.
Eventually, as you’re money grows and you develop into full-fledged adulthood, you can start fine-tuning your portfolio and learning more about what asset allocation fits your needs. It’ll be exponentially easier to do this when you’re 30-35 and have $50,000 in retirement savings. You’ll have built up some momentum, gained confidence, and want to take your money to the next level.
85% Is Always Better Than 0%
Some people follow the mantra “if you’re going to do something, do it right”. But money’s different. The majority of people are naturally conservative with money and would rather make no decision than the wrong one.
If you try to hit a grand slam when you’re starting off with your retirement savings, you may never swing the bat and make a decision.
Follow the new money mantra of, “I’ll do it 85% right, and concentrate on the other 15% when I have a sizable nest egg and am ready to throw myself into asset allocation and bond specifics.”
And you know what, if that time never comes, that’s totally fine. Getting an 85% grade on your retirement savings will be more than enough for you and your family, and still put you in the Top 10% of your class.
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Diana Wei says
Would you recommend a twenty something year old to start saving up or opening an Roth if their financial situation is not stable? In a state of instability, its hard to decide how much to dedicate to this each month when the income earned is not the same each month. Any suggestions of where to or how to start on this? Awesome topic to bring about. Thanks!
Since there isn’t a minimum amount you ‘have’ to put in, I’d say that any amount is a good way to start. Got an extra 20 bucks? Transfer it over. If your income is unstable, then setting a fixed amount may not work, only because you could get discouraged if one month you aren’t able to. The important thing is to just start.
I agree with Andrew. It seems like you maybe just have some cold feet, but once you get the first purchase underway it’ll calm your fears.
Try not to worry about how much you’ll be able to put in for the next 10 years. Just concentrate on the next 6 months and analyze your income and bills to see how much you can safely afford to invest.
Maybe every 2-3 months send yourself an e-mail reminder through Google Calendar to look over your financial/investing situation.
Diana Wei says
Sounds good, thanks Norcross and Austin! I guess the hard part is just trying to get started on the unknown, fun… thanks again!
Listen to Mr. Norcross. Snowflake it. Put whatever you can in.
If you aren’t in a situation where you have a stable income each month (like me, I’m a freelancer), then try reducing your expenses to the absolute basics. Freeze your credit cards. Make sure you have an emergency fund. (My rule of thumb here is the amount of the deductible for your health insurance and, ideally, 2-3 months of expenses.)
From there on out I aim for this:
Whenever you get paid take 30% for taxes, 10% dream money, 20% investments. Live on the remaining 40%. I put my tax, emergency, and dream money into separate accounts that each pay interest of 1.2% or more (try Ally bank). For my retirement, I opened up an SEP-IRA (I can do this as self-employed) because there was no minimum and I could contribute until April 15th to still take a tax deduction. If I have anything in excess of my contribution limit, I stick it in a CD.
I’m definitely no expert, but doing something is WAY better than doing nothing. Use your youth to your advantage here.
Diana Wei says
Wow Thanks Jenn!! Love the detail! It really helps when someone actually gives their own person steps to start on something. Thanks!!
Funny. I’m 24 and opened a Vanguard account with VTSMX shares last year! High risk, but OK for our age group, really. I wish more people our age started investing early. I’m in the same boat with you. It’s something you just have to just DO or regret it later.
I’m a VTSMX guy too. It’s so easy and you don’t have to worry about shady CEOs or oil spills dropping stock price.
Another personal finance article written by a 20-something who has no background or experience for writing the article. I could dream up some crap I pull out of thin air or regurgitate what thousands of others have said too – but that doesn’t make it right or true.
Come back in twenty years and tell us all how things have workd out for you. If you throw your money into index funds you have no business writing about personal finance. Quit justifying yourself and your actions.
Simply laughable – like most things on this site.
Well then, as someone who actually has experience and background in financial management (in fact, my Series 7 is still in force, even though I no longer actively manage money), I’d say the author is spot-on. It comes back to the idea that was passed down to me: Never let the perfect be the enemy of the good.
So Jeremy, What advice and experience do you have to share?
I’m Austin – the author of the “laughable” post.
I’m not attempting to define the perfect asset allocation for someone. Just index funds probably isn’t the right choice for some people, but different investment choices is a topic for another day and probably another site.
The goal for this post was to rally together the young people who have avoided investing because it’s too complicated, full of difficult decisions, and contains too much information. The simplest and easiest way to persuade these people to invest is through the easiest investment – the index fund.
I’m not going to try to define future tax laws or what the dollar will look like in 40 years, but are you really suggesting that these people who have avoided investing for so long would be worse off with index funds than not investing at all? Because the options aren’t index funds or some magical perfect allocation. For a lot of young people it’s index funds (easy and automatic) or nothing at all.
Austin – I really do think this is good advice to be passing along. I’m almost 30, and I have friends who still haven’t begun putting anything aside. While for some it’s a matter of just not having any extra income, others are just ‘too confused by the whole thing’. I’ve recommended index funds to former clients and friends as a way to get their feet wet. Keep up the good work.
Adam @ Sit Down Disco says
I know index funds are not seen as cool and are actively dissed by professionals in the financial planning and stock broking industry. The fact is, however, that over the long term, it is very difficult for anyone to beat the market. For every winner, there has to be a loser. So you have an equal chance of being a winner or loser compared to the market. When you account for fees, the chances are you will not beat the market. So the best way to go, in my view, is to track the market (index fund) and minimise fees (index fund). Even using this approach, we are still in a very high risk asset class with a 10+ investment horizon.
Mike Piper says
I really like this article. I think you’re absolutely right that an imperfect investment plan is far better than no investment plan.
So thank you for encouraging your readers to get started by making it simple for them (us). 🙂
At the same time, I’d gently suggest that it’s probably worth learning more sometime prior to age 30-35. Most of it really isn’t that complicated.
For example, the Roth vs. traditional IRA question (which, I assume, is the reason you bring up future tax brackets) is pretty straightforward. And you might as well address it sooner rather than later. If you wait until you’ve been investing for a decade, you could easily have wasted several thousand dollars on taxes.