Building Wealth Through 'Hands-Off' Investing
How should I invest if I have a 'hands-off' personality type?
If you're fortunate enough to have a hands-off investment personality, then this strategy is perfect for you because it requires very little time, and very little expertise. It's simple, it's uncomplicated, so the answer is a life cycle fund. A life cycle fund is a mutual fund. It can also be called a lifestyle fund, a target date mutual fund - different companies have different names for it, but at the end of the day they're all similar to a life cycle fund. It's the single best strategy for a hands-off investor.
What are 'lifecycle' funds and how can they help me build wealth?
Lifecycle funds are the best thing since sliced bread. They are so cool and easy in what they do. A lifecycle fund is a mutual fund, so it contains a mixture of stocks and bonds, with various asset classes. By putting your money into a lifecycle fund, you are completely diversified: you have some cash, you have some stocks, you have some bonds, you have some international stocks, and some small-cap stocks. One investment gets you access to every asset class, and the other neat thing about it is that it becomes much more conservative the closer you get to your target. As an example, let's say you want to retire in 10 years. There's a lifecycle fund thats 10 years away from today that you can put your money in. Because there's such a long time horizon (10 years), it's going to be invested a lot more aggressively. There's going to be a lot more stocks and bonds, but as you get closer to reaching retirement, as you get closer to that tenth year, it's going to become more and more conservative. So, it shifts it's allocation from something that was risky into something that was a little bit more conservative. Again, you don't have to do anything - it does this automatically for you.
How do I choose a lifecycle fund that matches my goals?
Different mutual fund companies have different time frames. Typically, the difference is about five years. You might have a 2015 fund, and a 2020 fund, and a 2025 and a 2030. And then, basically what you would do is figure out what goal it is that you are saving for. Figure out when it is that you want to achieve that goal, and then find the lifecycle fund with the target date that closely matches that goal date that you set for yourself.
What are the advantages and disadvantages of the 'hands-off' investment strategy?
One of the biggest advantages with the hands-off strategy and using life-cycle funds is that it's hands-off. It's so simple. It's so easy. You put all your money into this one fund, it's diversified, it rebalances; it's very, very simple to do. The disadvantages are, and there really aren't that many, that potentially it's a little more expensive of a strategy than the involved or the consumed. And, also, it's not very tax-efficient. If you get into your investments and want to do tax-loss harvesting and more advanced strategies like that, you really can't do that with a life-cycle fund. But the advantages far exceed any disadvantage. So absolutely, life-cycle funds are a great tool for the hands-off investor.
What should a 'hands-off' investor look for in a lifecycle fund?
If, by definition, you're looking at lifecycle funds, you're probably a hands-off investor. And if you're a hands-off investor, you're probably not going to want to do a tremendous amount of research, so at the end of the day, just choose a lifecycle fund that matches your particular target date. There are some differences between each of the funds - each mutual fund company's lifecycle fund, but they're pretty insignificant, so I wouldn't even worry about it.
