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A reader named KC recently wrote in with a question about investing for retirement:
I’m 28 years old with a wife and a six month old baby. We’ve always been money-conscious, but would really like to focus our efforts. We both have Roth IRAs, but are not satisfied with them. They are heavily loaded, and we weren’t that familiar with them when we were advised to set them up. My question is where you would recommend I go for a long-term investing vehicle? I always hear to go with no-load mutual funds but would like your opinion.
This is a great question. I’ve said it before, and I’ll say it again… Friends don’t let friends pay mutual fund sales loads.
My personal preference when it comes to long-term investing centers is low-cost, no-load mutual funds. When I say low cost, what I’m really talking about is “passively-managed” index funds that seek to match the market as a whole, or some segment thereof.
Now the question is where you go to find low-cost index funds. Here you have three general options:
- Mutual fund company
- Discount Broker
- Automated Investment Service (a.k.a. robo advisors)
Let’s take a look at all three and the pros and cons of each.
Mutual Fund Companies
As for my favorite places to invest, Vanguard is at the top of my list. We also have some money with Fidelity and have been quite happy with their offerings. A third option would be Schwab, who has a bunch of low-cost mutual funds with a low minimum investment of $100.
It’s important to understand that not all mutual fund companies are created equal. Vanguard, for example, specializes in index funds. It also has three tools to make investing easy:
- Target Retirement Funds: Simply pick the fund that corresponds with the year you plan to retire (e.g., Target Retirement 2060), and Vanguard takes care of the rest. It allocations your investments between stock and bond index funds. And as you near retirement, it shifts more of your money toward safer bonds.
- Lifestyle Funds: These are similar to Target Retirement Funds in that Vanguard handles the allocation of your money and rebalances your account. Rather than picking a fund based on when you plan to retire, however, you’ll pick one based on the allocation you want between stocks and bonds (e.g., 80/20). This allocation does not change unless you change it.
- Vanguard Personal Advisor Service: For a fee of 30 basis points (0.30%), Vanguard will manage your investments for you. For those looking for hands-on advice, it’s one of the best deals out there. You do need a minimum of $50, 000 to invest, so this service may be more suitable for those converting a 401k to an IRA.
Fidelity offers similar retirement fund options, although not all mutual fund companies do.
A second option is to open an IRA at a good discount broker. This approach is ideal for those that want to invest in individual stocks or ETFs. The major mutual fund companies do offer brokerage services, but they generally don’t compare to the online brokers who specialize in this service. Here are a few of our favorite options:
Finally, robo advisors have become an excellent way to invest in both taxable and retirement accounts. These low-cost services make investing easy. They help you select a portfolio that meets your needs. They then automatically rebalance your investments.
Of course, there are other options to consider, such as opening a Treasury Direct account so you can buy Treasury securities such as T-Bills, T-Notes, T-Bonds, Series EE Savings Bonds, Series I Savings Bonds, etc. This will allow you to purchase these securities direct from the Federal government with no middleman.
Just keep in mind that the optimal composition of your portfolio depends on many factors, so you really need to give a lot of thought to your time horizon, risk tolerance, etc. before you make any major moves.