Investing for Retirement

I spent more than half my working life saving in whatever guaranteed pension plan my employer offered, but a change to a 401(k) plan finally forced me into making my own investment decisions. After a lot of reading and some false starts, I retired with these assets:

• A mix of no-load index mutual funds: total U.S. stock, total international stock, and total U.S. bonds.
• A home.
• Eventually, if the creeks don't rise, Social Security.

The index fund portfolio is low-cost, low-maintenance, broadly diversified, and guaranteed not to beat, but only own, the market. The rest of the secret is saving as much as you can, compound interest, and time. So start now.

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Since returns are guaranteed by "time in the market, not timing the market" you have to buy and hold the funds. And I don't mean just don't day trade; I mean don't sell over your entire working life. Now you see why you have to own the entire market, and not pick and choose. (The exception is rebalancing when the mix has changed significantly, which is another topic.)

How you mix your funds between stocks and bonds usually changes with age and investing horizon. How many more years of income do you have? How long will it take to recover from expected market downturns? How comfortable are you with decreasing balances? It's very subjective and the subject of many questionnaires. Too many bonds, and you take longer to reach the necessary savings. Too many stocks too late, and you can't recover.

Bonds smooth out more volatile stock losses. This growth of $10,000 chart shows what happened between 2007 and today:



The blue curve is the total U.S. stock index and the orange is the total U.S. bond. Your % bonds determines how much you lost in the 2008 "Great Recession", and how much you've gained since. I know what you're thinking, but anyone who tries to buy and sell to time these changes ends up losing. No one knows what the chart will look like tomorrrow.

The biggest false start I can remember was thinking that if I just did my homework, my "due diligence" as they say in finance and law, then I could pick the best funds offered by my 401(k). What you learn eventually is that all best fund recommendations change quickly, because financial writers look at short time frames for performance, and sometimes change selection criteria. How else can you keep selling articles?

If you want more detail (and you should), one of the best sources on investing is the Bogleheads Wiki. Continue on to the Forum if you're interested in discussion or have questions, but spend some time mastering the basics in the Wiki first.

Other good sources that I came across earlier were Andrew Tobias's The Only Investment Guide You'll Ever Need, helpful and fun to read, and Paul B. Farrell's Lazy Portfolios.

Too much information can sometimes create indecision and gridlock, but delay is deadly, and better is the enemy of good. You don't need to know every detail of how the market works to successfully buy and hold mutual funds. Someone once said, "When I ask what time it is, I don't need to know how a clock works." Which is ironic, because my children accuse me of wanting to tell them about the clock.

Disclaimer: This is my personal experience, and not professional investing advice. For that you should talk to a Certified Financial Planner, preferably for a fixed fee and not a sales commission. Make sure you ask how the advisor gets paid. Does her agreement promise to meet a fiduciary standard?