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The Lazy Investor's Guide to Retirement Success

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For many of our Foolish readers, investing is a passion. But I know that for some of you, it's just something that needs to be done, right up there in excitement with taxes and the insurance paperwork.

Some would rank it even lower -- in root-canal territory.

But it doesn't have to be that way. Investing well can be really simple. And if your goal is a secure retirement, simplicity has some big advantages.

Don't bother getting out of your beach chair
I think defined contribution plans like 401(k)s may be the finest wealth-building tools ever created. Making regular contributions to a plan requires just one set of decisions, one time -- and because those contributions come out of your paycheck before taxes, they're practically painless. If you can muster 20 minutes of willpower and a little bit of knowledge, you can be all set for years.

What follows is that "little bit of knowledge," with links to more information for those interested. If you -- or someone you know -- don't have the time or energy to learn about investing, but need to get your 401(k) or 403(b) in order, this will get you rolling. You're on your own for the willpower, but hopefully that'll be easy to come by once you see how simple this can be.

Know the basics
First things first: If you're more than 10-15 years away from retirement, your retirement portfolio should focus on stocks. Despite bear markets and crashes, the long-term returns on stocks have trounced those on bonds and short-term investments like money market funds.

Second: Stock investments work best when you have a bunch of them. This is called diversification, which simply means spreading your eggs among several baskets. Yes, that means less growth from the sort of spectacular returns recently achieved by Apple (Nasdaq: AAPL  ) and Cal-Maine Foods (Nasdaq: CALM  ) , but it also means less damage when a stock like Lehman Brothers (NYSE: LEH  ) takes an 80% tumble. Especially in a retirement portfolio, containing damage is key. We'll take some risk, but we'll be smart about it, thanks to asset allocation.

Third: Asset allocation involves choosing stock investments from several different categories -- large-cap, small-cap, international, and if possible, a small exposure to real estate. From property managers like Jones Lang Lasalle (NYSE: JLL  ) to REITs like Health Care REIT (NYSE: HCN  ) , real estate stocks are increasingly recognized as a separate category of stocks for asset-allocation purposes. But if your plan doesn't offer a real estate stock investment, don't sweat it -- stick with the first three for now.

Fourth: Note that most employers match some portion of your contributions. That's free money. Strive to contribute at least enough to get all of it.

Ready to invest
Now take a look at the list of investment options in your 401(k) or 403(b) plan. Your plan probably won't have all of the options I've listed below, but most plans will have some. Your goal is to build a diversified stock portfolio in as few steps as possible.

  • Lifecycle funds. These mutual funds -- offered by fund giants like Fidelity,Wells Fargo (NYSE: WFC  ) , and T. Rowe Price (Nasdaq: TROW  ) , among others -- aim to be one-stop retirement investing solutions. Pick the fund with the date closest to your planned retirement date (err on the long side), put all your money in, and you're done. These funds have pros and cons, but if your plan has them, they are far and away the easiest good option.
  • Index funds. Lots of plans have added index funds in recent years. They trade a hands-on beat-the-market approach (which sometimes works and sometimes doesn't) for a low-cost, largely automated match-the-market approach that nearly always works. They are the best hands-off choice for most. If possible, get one fund for each of the asset allocation categories listed above.
  • Active funds. Sometimes these are your only option. Try to pick broad-based funds that cover each of the basic asset allocation categories. If you have several choices, compare the 10-year average annual total returns after expenses, along with the Morningstar ratings, and pick the ones that look the most dependable over time. Long-term steadiness is better than short-term flash.

Finally, about that asset allocation: You could do a lot worse than dividing your nest egg equally between large-cap, small-cap, and international stocks, and rebalancing it every few years. But refining the balance a little further -- and folding in some real estate exposure, maybe through an IRA -- can pay significant benefits. Check out the July 2008 issue of the Fool's Rule Your Retirement newsletter for more thoughts on the best asset allocations -- and an easy-to-use guide to get your portfolio to the next level. It's a paid service, but a free trial gets you full access for 30 days, with no obligation.

Fool contributor John Rosevear owns shares of Apple. Jones Lang Lasalle is a Motley Fool Hidden Gems recommendation. Health Care REIT is a Motley Fool Income Investor selection. Apple is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters free for 30 days. The Fool's disclosure policy is neither lazy nor retiring.


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John Rosevear
TMFMarlowe

John Rosevear is the senior auto specialist for Fool.com. John has been writing about the auto business and investing for over 20 years, and for The Motley Fool since 2007.

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