Managing your financial life is not just about money.

Investing 101 – Pt.13 Stuff You Need to Know

This is the 13th article in a series that will discuss and explain basic investment concepts in hopefully an understandable and meaningful way. Whether you work with an investment advisor or choose to do your own investing, there are some things you need to know to be successful. Here is my take on what those things are.

You need an investment pie! Well, the official phrase is “a proper asset allocation”. There is a pretty good chance your retirement plan at work has some very colorful investment pies available. There are probably four or five of them, and these pies have various mixtures (allocations) of stocks and bonds. They may have names such as “Aggressive” or “Balanced” or “Conservative”. They are complete and diversified investment strategies designed by some very smart people and computers using sophisticated logarithms that I don’t understand. Depending upon the “macro allocation” (percentage of stocks and bonds), there will be a number of different stock and bond categories (flavors) in the pie. Just about everybody in America who does not have a financial advisor, should be investing in one of these strategies. You just pick the pie and the folks managing the pie do all the work for you. You are on investment cruise control! There is a good chance there is some help available for choosing the best strategy for you. It is a wonderful thing! Just do it. As you get closer to retirement, we suggest you move to progressively more conservative pies. This is pretty much the only thinking that you have to do.

In addition to or instead of pies, you may have some investment choices in your retirement plan called “target date funds”. These are investment strategies that are time related. If your retirement date is 2030, you choose the “2030 fund”. These investments are pies that change the mixture of stocks and bonds to more bonds and less stocks over a period of time to match up with your retirement time frame. You don’t even have to choose when you should change pies like you do in those “asset allocation pies” above. As you might guess, the 2050 pie has a lot more stocks than bonds. The 2020 pie would have a larger percentage of bonds than stocks.

Which is better, those asset allocation strategies or those target date strategies? I am going out on a limb here and will say that either of these strategies is better than what you are doing on your own. Everyone needs a diversified portfolio of stock and bond investments that is professionally designed, managed, appropriate for your age and circumstances, and re-balanced. Any strategy you have (if indeed you have a strategy) will likely not come even close to the risk/reward characteristics of either choice.

Asset Allocation Strategies and Target Date Funds have only been around for the last ten years or so. I don’t know what took them so long to show up. They just make sense for the vast majority of participants in retirement plans. As financial advisors, we help our clients with their strategies in their active retirement plans. Over the years, we have seen the mistakes or poor choices our clients have made. Most plans have way too many investment choices that just end up being confusing and overwhelming for most people. If you work with a financial advisor, then you have some help wading through all those choices. If you are on your own, please consider choosing one of these professionally designed and managed strategies and stick with it.

All articles in this series will be posted on my website If you have any question or comments I can be reached at I promise I will respond.

Michael J. McNamara, Ph.D., CFP®

Disclaimer: Any financial advice in this article is intended to be generic in nature. Readers should consult with their own financial advisors before implementing any advice or suggestions above.

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