Over the past few years, I've put a lot of thought into structuring an investing strategy for my and my wife's IRAs. What I've finally settled on will probably strike many investors as overly simplistic. But when all is said and done, I think it's the prudent approach, hence my decision to share it with you.
Before getting to the particulars, let me give you some pertinent information about myself, as an investing strategy must be tailored to the circumstances and goals of each individual.
I'm 33 years old, I'm married, and I have two children (twin toddlers, both boys -- yes, there are times that we want to shoot ourselves). I'm a contract writer for The Motley Fool and make a respectable income. My wife is a school teacher but, for the time being, is staying home with our children.
I don't consider myself either a risk seeker or as particularly risk-averse. I suppose that would classify me as risk-neutral. I've made and lost money on many investments many times, and neither seems to have a particularly big impact on me -- though that isn't to say that I don't prefer the former.
My financial goals are relatively simple. While our boys are only 20 months old, we're already saving aggressively for their education. The objective is to get this first piece out of the way in the next five or so years and then to move on to our retirement in an equally aggressive manner.
The one benefit I have in this regard is that we are not consumers. I've never met anybody who is as conscious as my wife is about spending. A roll of paper towels lasts us a year -- and it would last longer, but visitors use them when they're here (I'm looking at you, Mom). We drink water when we go out to restaurants. Our television is a Best Buy store brand and is more than six years old. And I could go on.
I say all of this not to gloat, but rather because saving money is just as important as investing.
I also share it because it's the reason we're able to max out our IRA contributions (and, thus, get the tax benefit, which, of course, can be looked at as an immediate and substantial return on investment) while still having enough left over to pursue our goals in terms of saving for our boys' educations. Because I'm self-employed, moreover, my IRA contribution limit is not a fixed amount, but rather a percentage of my earnings.
With this in mind, my strategy for our IRAs had to satisfy two conditions. First, it had to be simple. With a full-time job, a wife, and twin toddlers, I have more than enough on my plate as it is; the last thing I need to be doing is obsessing over our IRAs. On top of this, the time that I do spend on my own personal investing generally filters into our brokerage account, where we own a handful of purposefully selected individual stocks.
And second, it had to be idiot-proof. I've read a lot about behavioral economics and am acutely aware of the pernicious impact one's behavior has on returns.
What I've settled on, in turn, is this: For the time being, and the foreseeable future, I'm limiting our IRA holdings to dividend-focused exchange-traded funds such as the SPDR S&P Dividend (NYSEMKT:SDY) and the iShares U.S. Preferred Stock (NASDAQ:PFF). Purchases of equal size will be made at quarterly intervals, and all dividends will be reinvested in the underlying fund.
I've selected these two funds, in particular, for three reasons. First, because the former tracks companies on the S&P 500 (SNPINDEX:^GSPC), its growth will, in part, be predicated on the growth of the American economy, which I'm bullish on. Second, dividend stocks have proved to generate higher returns than their non-dividend paying brethren over the long run. And third, in the case of the preferred stock fund, it reduces volatility.
As I said, no two investors are alike. But I would nevertheless urge you to think long and hard about both constructing an investing strategy and incorporating some of the ideas shared herein into it. While reinventing the wheel is always tempting, sometimes it's easier to exploit the time and effort of others.