Don't much enjoy thinking about investments? If so, you probably don't want to spend your precious free time researching which investments to buy and which ones to let go. Luckily, you can set up a simple retirement investing system that will let you buy investments once and hang on to them indefinitely. Here's how it works.
Buy a good dividend stock index fund
Diversification is an essential part of any portfolio plan. Luckily, these days it's easy to buy a single mutual fund or exchange-traded fund (ETF) that takes care of diversification for you. Because a retiree's primary investment goal is to create a secure source of income, dividend stocks are an excellent choice. And by sticking to a mutual fund or ETF that tracks a stock market index, you can keep your fees and other expenses down to a minimum -- which means you'll get to collect more of the returns the fund generates.
For example, low expense ratios are common among index funds: The average expense ratio for a stock index fund is 0.09%, while the average expense ratio for an actively managed stock fund (which has professional investors hand-selecting stocks) is 0.63%. Both fees may look quite small, but the difference between them can be enough to eat up a significant share of your returns. If you had $10,000 in an index fund with an expense ratio of 0.09% and the same amount in an actively managed fund with an expense ratio of 0.63%, and both funds produced returns of 8% per year, then after 10 years the actively managed fund would have cost you $1,088 more than the index fund. That's more than 10% of your initial investment.
The Vanguard High Dividend Yield ETF (NYSEMKT:VYM) is one great option that ticks all the boxes above. Its dividend yield of 2.95% is comfortably above the S&P 500 index average of 1.80% at the time of writing, and the low 0.08% expense ratio keeps almost all of your returns in your pocket instead of the fund manager's.
Buy a good bond index fund
Stocks are a great way to generate returns, but they tend to be quite volatile (meaning their value swings up and down unpredictably). That's why no retiree should be without a substantial investment in bonds. Bonds don't generate the kind of exciting long-term returns that stocks do, but they do have one big advantage: They provide a steady source of income, quarter after quarter. What's more, bonds tend to perform differently from stocks in various economic conditions. The same market forces that push the value of stocks down tend to raise the value of bonds, and vice versa. Thus, if you have both stocks and bonds in your portfolio, you'll likely enjoy some gains regardless of economic conditions.
Choosing a good bond index fund or ETF gives you the same diversification and low-cost advantages that a stock index fund does. Consider picking up one of these great bond ETFs or another with similar qualities. For example, the Vanguard Long-Term Corporate Bond ETF (NASDAQ:VCLT) shuns junk bonds, yet it's currently producing a 4.1% annual return -- remarkably high for the current bond market. Plus, like most Vanguard funds, it has an extremely low expense ratio -- a mere 0.07%.
Balance your portfolio
Once you've picked out your stock fund and your bond fund, the next step is to work out how much of your retirement money should go into each of these investments. The easy way to figure out your retirement asset allocation is to subtract your age from 110 and put that percentage of your investments in the stock fund, with the remainder in the bond fund. For example, 70-year-old retirees would have 40% of their savings in their stock funds and 60% of their savings in bond funds.
At this point, managing your retirement investments is as easy as checking on them at least once a year to rebalance your portfolio as needed and to make sure that neither of your funds has suddenly gone bad. For example, if your bond fund suddenly triples its expense ratio, you should start shopping around for a cheaper fund. Or if the stock market produced an overall return of 10% last year and your stock fund only returned 4%, you should seriously consider switching to a fund that does a better job of producing returns in line with the market. This annual checkup of your investments should take no more than 15 to 20 minutes, leaving you with ample time to pursue more desirable retirement activities.
See, I told you it was easy.