30 Day Investing Challenge, Day 21: What Should You Invest In For Long Term Goals?
Let’s recap the awesome-ness of long term goals: these are the ones that take the longest, but are the most fun to imagine. They include things like retiring, starting and sustaining a business, extended travel, creating a legacy for your kids, etc. These are the goals where you can go all the way with stocks. You want to make sure to invest using a mix of retirement and brokerage accounts to secure the the best tax advantages and to have the flexibility to access your money. It’s best to avoid putting long term savings into high yield savings account because your money will be eaten away by inflation. Here are some great investment options for goals 10+ years out:
Total Stock Market Funds
You’ve seen me mention these countless times, but what are total stock market funds? It is a mutual fund or an exchange traded fund (ETF) that holds every stock in a selected market (for the U.S. it’s the U.S. stock market). This fund seeks to replicate the broad market by holding the stock of every publicly traded company. That’s over 4,000 different companies — talk about built in diversification!
What To Watch Out For
There are few pitfalls to owning a total stock market index fund, however some experts have pointed out that total stock funds favor larger companies such as Amazon and Google. This is called “large-cap weighted” and means that when you buy a total stock index fund you own more Amazon stock than you do a smaller company’s stock.
Why They’re My Preferred Investment And How to Buy Them
Total stock funds offer effortless diversification since you own a piece of every publicly traded company. They’re also self-cleansing: if a company goes belly up, it’s automatically removed from the fund. This is THE easiest way to invest in the stock market and reduce your risk. However, I only recommend a total stock fund for those whose goals are long term, or at least 5+ years. Some examples of these funds are: VTSAX or VTI at Vanguard, FSKAX or FZROX at Fidelity, and SWTSX at Schwab. If you have a 401k or other employer retirement plan they may offer a total stock mutual fund. Just beware of the expense ratio, or the fee charged to own the fund. It should be 0.25% or lower (in comparison VTSAX is 0.04%).
S&P 500 Fund
The S&P 500 is an index (i.e. a group of assets) that tracks the 500 largest, publicly traded companies in the United States. It’s often an indicator of how the overall market is doing. “Standard & Poor’s” is a company that creates stock market indexes.
What To Watch Out For
Pros: easy, diverse, consistent returns year over year.
Cons: like the total stock market index fund, the S&P 500 is weighted towards the largest companies in the U.S. This means that you don’t get exposure to small or midsize companies, or international markets, which can make your portfolio perform better. However, this is not guaranteed, and you’d have to rebalance if you decide to invest in other markets, which adds complexity.
How To Buy Them
The best way to own a portion of each of these companies is to invest in a S&P 500 index fund or ETF. Most brokerages, including ones that run 401ks, usually offer a mutual fund that tracks this index. Next to the total stock market index fund, this is one of the easiest ways to invest in a broad swath of companies. Some examples of these funds are: VFIAX or VOO at Vanguard, FXAIX at Fidelity, and SWPPX at Schwab.
Total Bond Fund
Again you’ve probably seen me mention these, especially when talking about adding bonds to your asset allocation. A total bond fund owns securities across a range of maturities, from both public and private sectors. The most common index used as a benchmark is the Barclays Aggregate Bond Index, which captures Treasury bonds, corporate bonds, municipal bonds and high-grade mortgage-backed securities.
What To Watch Out For
Bonds have been notorious for not performing well recently. Often people say they perform the inverse of the stock market, but when the market crashed in March 2020 so did bonds. I only suggest adding them to your portfolio if you want to smooth the ride and fear stock market volatility. If you’re prone to panic sell when the stock market crashes, bonds can help ease those feelings. While they also may decline in value, they have less distance to fall and therefore don’t produce the same shock as the more volatile stock market does.
How To Buy Them
You can find total bond index funds at each of the brokerage houses, or you can choose to invest in a Target Date fund within your retirement plan that has a mix of stocks and bonds. However beware: these funds tend to be more conservative than necessary and have higher fees than other index funds.
Action Step: Answer These Quiz Questions
True or False?
The best savings vehicle for long term goals is a high yield savings account.
Brokerage accounts can’t be used for retirement.
Retirement accounts should be used primarily for long term goals.
You can choose to be in 100% stocks if your goal is long term and you can stomach the inevitable market fluctuations.
I’ll see you back here tomorrow for the next challenge: how to choose investments in your workplace retirement account when you have limited options.
Quiz Answers: 1. False, 2. False, 3. True, 4. True.
