Investing is Easy

With disappearing pensions and the questionable status of Social Security, investing is pretty much necessary to secure a comfortable retirement for the average American. If you're just starting out, you may be wondering whether investing is easy or hard. As with many things in life, it depends on how easy or hard you want to make it.

Is investing hard? It doesn't have to be. Investing can be easy.

If your employer offers a 401k, put as much as you can into it and choose the lowest fee index funds available. And you're done. That's pretty easy.

If your employer doesn't offer a 401k, you don't like its offerings, or you've maxed out your 401k, investing can still be easy.

Capturing the returns that the market gives us is very easy and involves a few simple steps:

1. Determine how much money you can afford to sock away and tie up for the long term.
2. Choose your asset allocation.
3. Choose a broker.
4. Find the lowest fee index funds that track the assets in your allocation.
5. Open an account with the broker, transfer your money, and buy the funds in accordance with your allocation.
6. Whenever you have additional funds to invest (preferably every pay period), transfer the money to your brokerage account and buy additional shares of the index funds in accordance with your asset allocation.
7. Rebalance periodically (once a year or every couple of years) so that your funds' percentage in your portfolio match your asset allocation.
8. Leave your investments alone (apart from adding to them and rebalancing) until you are ready to sell and use them.

That's all there is to it. Investing doesn't have to be hard. If you follow the above steps to invest the easy way, you will do better than most professional money managers.

Determine how much money you can afford to sock away and tie up for the long term

The money you invest should not be needed for anything else. That means before you start investing you should have a fully funded emergency fund that is at least three to six months of your expenses. Few things sabotage investing more than having to sell your investments early to pay for an emergency or other expense. But once you have your emergency fund set up and your debts paid off, you should start investing any extra amount of money that you come by, no matter how small. The sooner you invest it, the sooner the money can work for you, and the more money you will have in the end. So this can be $10 a week, a $100 a month, etc--whatever you can spare and won't need until you retire.

Choose your asset allocation

An asset allocation is the mixture of stocks, bonds, and other assets that make up your investment portfolio. Your asset allocation is the biggest factor in the portfolio's returns over time, so it's important to make sure it's diversified with no one asset class or geographic region having too large a portion. Over your life time some asset classes and geographies will do well while others will experience catastrophic losses. There is no way to know in advance which asset class or which counties these will be, so the best and easiest approach is to own a bit of everything.

If you are a tinkerer, you can read up more on asset allocation to determine the one that is best for you. Another option is to consult a financial advisor or sign up for a robo advisor service like Betterment, Wealthfront, FidelityGo, Vanguard Personal Advisor Services, or Schwab Intelligent Portfolios. With the latter services you answer a few questions and you're set. A final option is to choose a one size fits all asset allocation designed by experts. You can find examples of these here.

Choose a Broker (or Robo Advisor)

Thanks to technological innovations and free market competition, there is an abundance of brokers to choose from. Which one is best for you largely depends upon what kind of investor you are. Most brokers offer similar products, so choose the one that has the best customer service, the lowest fees and trading commissions, and the lowest account minimums that are relevant to you.

For a regular broker account, you can't go wrong with Vanguard or Fidelity. Both offer no transaction fee index funds and great customer service. If you are starting with a small amount, Fidelity is better because there are no minimums to invest and you can transfer as little as $10 into your account at a time.

Choose Funds for Your Portfolio

You don't have to worry about this step if you are going the robo advisor route, as the robo advisor will pick the best funds for your asset allocation.

Once you have decided upon your asset allocation, the next step is figuring out how to buy the assets. The best way is by buying a mutual fund or ETF that owns a diversified basket representing the entire asset class and employs a passive investing strategy. In other words, buy your assets through the index funds whose holdings most closely match the asset.

For example, if one of the asset classes in your portfolio allocation is US Stocks, for that asset class pick the fund with the lowest expense ratio that tracks the broad US stock market. Don't pay attention to the fund's share price. That is irrelevant.

If you are picking a mutual fund, make sure it has no loads, no transaction fees, and has as low an expense ratio as possible. So, for example, if you choose Fidelity as your broker, for the US Stock part of your portfolio allocation you can invest in the Fidelity Zero Total Market Index Fund (FZROX), which tracks the entire US stock market and has no investment minimums and absolutely no fees.

If you are picking an ETF (exchange traded fund), make sure it has as low an expense ratio as possible and that it is liquid. By liquid I mean that it has a large number of shares traded every day and is thus easy to buy and sell. An analog to volume of shares traded is assets under management. If you are not sure whether an ETF is liquid, look for its assets under management. If it is in the billions of dollars, that fund is almost certainly liquid.

If you will be investing small amounts into ETFs periodically, pick those that the broker offers commission free. If the broker doesn't offer commission free ETFs, go with a no transaction fee index mutual fund instead. There's no reason to pay commissions.

Open a Brokerage or Robo Advisor Account

Open a traditional or Roth IRA at the broker or Robo Advisor you chose in the above steps. Link it to your bank and set up a funding transfer. Depending on the broker and your bank this can be instant or a couple of business days to set up.

Invest Regularly

Once your account is open, transfer additional funds whenever you can. Set up an automatic monthly transfer, or, better yet, a paycheck deduction. Even small amounts will add up over time.

Rebalance Every Once in a While

You don't have to worry about this step if you choose a robo advisor because the robo advisor will rebalance for you.

Rebalancing is a method of keeping your portfolio in line with the asset allocation you chose. As the market fluctuates, some assets will make up a larger portion of your portfolio (overweight) than you allocated while others will make up a smaller portion (underweight). If you are regularly contributing fresh funds for investment, buy more of the asset that is underweight.

For example, suppose in your asset allocation you chose US Stocks to be 35% and bonds to be 40% (with other asset classes making up the difference). As the market fluctuates, the portion of your portfolio that is in stocks might climb to 45% while bonds might drop to 30%. In this case, you would use your fresh money to buy bonds until they are back to their 40% allocation.

If you do not put fresh money in regularly, rebalancing involves selling a portion of the assets that are larger than their allocation and using the proceeds to buy the assets that are smaller than their allocation. So, in the example above you would sell some of your US stocks so that they're back to 35% of the portfolio and use the proceeds to buy additional bonds.

Bringing your portfolio back in line with your asset allocation by rebalancing helps you buy asset classes when they are relatively cheaper than others. In the case where you sell some of your overweighted assets to buy the underweighted ones, you are selling high and buying low.

If you are rebalancing by selling a portion of one asset to buy more of another, do this once a year or every couple of years. While rebalancing is beneficial, doing it too often can be counterproductive and  is just a waste of your time. Remember, investing should be easy.

Leave Your Investments Alone

Investors are their own worst enemies. Apart from adding fresh money to invest and rebalancing once every year or every other year, leave your investments alone.

Be aware that there will be many temptations to tinker.

You will hear about some investing "system" that's "proven" to beat the market and you'll want to change your investments to that strategy. Don't do it. The best system is passive index investing.

You'll see some economist or talking head on the news saying how stocks or bonds will crash and you'll be tempted to sell that portion of your portfolio. Don't. All these experts are at best right half the time. No one knows the future.

One or more asset classes will experience a terrible crash. Your allocation should insulate you from the worst of the damage and your overall portfolio may even increase in value. Still, people will be screaming doom and gloom and the news will tell you it's the end of the world. You will be tempted to sell the assets that fell the most. Don't listen to the news or your emotions. Stay the course. If you do anything, rebalance your portfolio with fresh cash or by selling the assets that are high to buy the ones that are low.

Do this consistently and over the long term and you'll be amazed at how your savings snowball into a fortune. It's that easy.