You can hire someone to do just about anything for you. But there are some things you're better off doing yourself. Managing your retirement savings is one of them -- and it doesn't have to be complicated or time-consuming. By borrowing a page from one of Wall Street's own creations, you can put together a solid investing plan that will take far less time than you might think.
Beware the one-stop shop
Asset allocation is one of the most important decisions you make when you invest. By choosing the right mix of stocks, bonds, and other types of investments, you match your financial resources and willingness to take risk with your long-term expectations about how much you want your money to grow. As time passes and you get closer to your goals, you can adjust your asset allocation to take what progress you've made into account.
In an effort to make asset allocation as simple as possible, many mutual-fund companies created target funds. With these funds, you'd pick a date that corresponded to when you needed to start spending your money, typically the year you expected to retire. Then, the fund would not only take care of rebalancing your portfolio but would also reduce its risk level as you got closer to retirement.
During 2008, though, investors discovered a downside to target funds: Many of them weren't as conservative as investors had believed. Some funds targeted for those retiring within a year or two suffered losses of 25% or more during that year, and while last year helped them bounce back, many still haven't fully recovered from their losses.
The best solution
In response, some of the companies that use target funds within their 401(k) plans, including Boeing (NYSE: BA ) , Deluxe (NYSE: DLX ) , and Wal-Mart (NYSE: WMT ) , have gone back to the drawing board and have created their own custom-made target funds. By doing so, these employers can minimize any fiduciary liability they have and ensure that their employees are educated specifically about the funds that are available to them.
Smart investors can do the same thing in their own portfolios. Here's how to get started in just three easy steps:
1. Pick your funds
The key to target funds is that they typically use other mutual funds from the same provider that focus on each component of your asset allocation. So for instance, Fidelity's Freedom 2040 fund invests in more than two dozen funds, ranging from a large-cap value fund that owns stocks like Pfizer (NYSE: PFE ) and JPMorgan Chase (NYSE: JPM ) to an international fund with holdings that include Rio Tinto (NYSE: RTP ) and Royal Dutch Shell (NYSE: RDS-A ) .
But if you invest on your own instead of using target funds, you can pick and choose from any fund provider you want. Moreover, with ETFs, you can build a simple stock and bond portfolio with just a couple of funds -- or tailor it with sector-specific picks.
The next step is coming up with the right allocation, both for now and for the future. Your choice should reflect not just your need for strong returns but also your capacity to handle potential future losses as well.
You should pick an allocation not only for right now but also for how you'd like your money invested when you reach retirement. Those two figures will show you the beginning and end of the road, from which you can figure course corrections along the way.
Every year or so, you'll want to rebalance your portfolio. But instead of rebalancing to the original allocation, update your percentages to reflect the fact that you're a year closer to your target. For instance, if your allocation at age 35 was 75% stocks and 25% bonds and you'd like to have a 45% stock/55% bond portfolio when you retire at age 65, then you'd rebalance to 74%/26% after one year, 73%/27% after two, and so on.
It's that easy
Sound simple? It is -- and you don't need to pay a professional to do it for you. By keeping tabs on your investments, not only will you potentially save in costs, but you'll also be much better prepared for whatever the future brings.