You don’t need to be an investing expert to be a good investor. You just need to get the fundamentals right.
These six checks can help you figure out whether your money is invested appropriately for the long run — from how much you have in stocks to what you’re paying in fees.
1. Enough of Your Money Is Actually Invested
Set aside your emergency fund, typically three to six months of expenses in a high-yield savings account. Set aside money you expect to spend within the next five years, such as a down payment for a house or money for a car. Money you’re saving for much longer-term goals generally belongs in investments with greater growth potential.
A savings account balance doesn’t fall with the stock market, but cash also carries the risk of losing purchasing power to inflation over long periods.
Take $50,000 held for 20 years. Even at 4% per year, like with today’s best high-yield savings rates, it would grow to about $110,000. At 10%, roughly the long-term historical average annual return of the U.S. stock market with dividends reinvested, it would grow to about $336,000. Of course, neither return is guaranteed, and stock market returns can vary significantly from year to year.
Money that’s supposed to be invested and isn’t causes a similar problem. Opening a retirement account, funding it and investing it are three separate steps, and the third one doesn’t always happen automatically.
Rollovers are one place this can show up. The balance transfers, lands in a settlement fund and earns money market rates until you invest it. If your holdings include anything with “money market,” “settlement,” “stable value” or “capital preservation” in the name, take a closer look. That portion of your portfolio may still effectively be in cash.
2. You’re Not Playing It Too Safe
The next question is what your invested money is actually invested in. One mistake long-term investors can make is holding more in bonds and other fixed-income investments than they actually need.
Bonds can reduce how much your portfolio moves in a given year, but they also generally offer lower long-term return potential than stocks. If you’re 45 and half your portfolio is in fixed income, for example, you may be sacrificing growth to reduce short-term swings in money you won’t spend for decades.
Money expert Clark Howard’s guideline is the 15/50 rule: If you think you have at least 15 years left to live, keep at least half your money in stocks. That applies in retirement too. A 70-year-old could be funding another 25 years of expenses. The older shorthand of “100 minus your age” would put that person at just 30% in stocks.
But age is only a rough proxy. A more useful question is what would happen if stocks dropped 35%. Money you might need to liquidate during a bad stretch generally belongs in bonds or cash. Money with a much longer time horizon has more time to ride out stock market declines.
3. You Own Hundreds of Companies, Not a Handful
An S&P 500 or total stock market index fund spreads your money across hundreds or thousands of companies, so one company failing won’t sink your portfolio. A portfolio built around a few individual stocks, one sector or one investment theme requires you to be right about those particular bets.
Every major brokerage offers broad-market index funds, usually with terms such as “total stock market” or “S&P 500” in the name, and many charge extremely low fees. In a 401(k) with a limited menu, look for broad-market index funds with low expense ratios.
Note: If You Own Company Stock
Employer stock can build up without anyone consciously deciding to buy more. Grants vest, shares accumulate and nobody sells. After enough years, one company can represent a significant portion of your portfolio.
Check how much you hold in your current and former employers.
Current employer stock carries an additional risk: If the company runs into trouble, you could lose your job and see a significant portion of your investments fall at the same time. Many financial professionals suggest keeping employer stock to no more than about 10% of your overall portfolio, although the appropriate amount depends on your individual circumstances.
4. You’re Diversified Beyond U.S. Large Caps
Owning an S&P 500 fund gives you exposure to hundreds of companies, but it doesn’t give you exposure to the entire global stock market.
The U.S. accounts for roughly 60% of global stock market value. An all-American portfolio leaves out the rest.
International stocks trailed U.S. stocks for much of the past 15 years, which gave investors plenty of reasons to question whether they needed them. But leadership between U.S. and international stocks has historically rotated over long periods. Holding both means you don’t have to predict which market will lead next.
A common target is to put 20% to 40% of your stock allocation in international stocks, although there’s no single percentage that’s right for everyone.
A total international stock market index fund is one of the simplest ways to get that exposure without trying to pick individual countries or companies.
5. You’re Not Overpaying
Investment fees can look tiny as percentages, but they compound along with everything else in your portfolio.
Two target date funds designed for the same retirement year can have dramatically different expense ratios depending on whether the investments inside are actively managed or indexed. The more expensive actively managed fund doesn’t necessarily deliver better results.
Many broad index funds now charge expense ratios between 0.00% and 0.10%. You can also find low-cost target-date index funds for around 0.20% or less. If you’re paying substantially more, find out what you’re getting in return for the added cost.
Advisor fees are usually the larger number and sit on top of fund expenses. An advisor charging 1% of assets annually would cost $5,000 a year on a $500,000 portfolio, and the dollar amount grows as the balance does.
That fee can cover valuable planning work such as tax strategy, Social Security timing and estate coordination. It can also cover a portfolio you could assemble yourself in an afternoon. Find out which you’re paying for.
Fees are easiest to fix inside a 401(k) or IRA, where switching investments generally doesn’t trigger a tax bill.
6. Your Money Is Spread Across Different Account Types
Diversification isn’t just about what investments you own. It can also apply to where you hold them.
A traditional 401(k) or IRA can give you a tax break now, but withdrawals are generally taxed as ordinary income in retirement. If that’s where all your retirement money ends up, your future income is heavily exposed to whatever tax rates exist then. Required minimum distributions (RMDs) can eventually force you to withdraw money whether you need it or not.
Three buckets give you room to maneuver:
Traditional 401(k) or IRA. Deduction now, ordinary income later, RMDs.
Roth 401(k) or Roth IRA. No deduction now, tax-free withdrawals later. Roth IRAs have no RMDs, and Roth 401(k)s no longer do either.
Regular brokerage account. No tax break either way, but long-term gains are taxed at lower rates than ordinary income, and you can access the money at any age.
Having money in different account types can give you more control over where your retirement income comes from each year. That can affect your tax bracket, how much of your Social Security benefits are taxable and potentially how much you pay in Medicare premiums.
Tax diversification is easiest to build over decades, which is why it’s worth thinking about long before you retire. Splitting retirement contributions between traditional and Roth accounts — and directing additional long-term savings into a brokerage account when appropriate — can help build those different buckets over time.
Note: Target date funds belong only in retirement accounts. In a brokerage account, the way they shift from stocks toward bonds over time keeps generating taxes for you, as Clark puts it.
Final Thoughts
Being well invested doesn’t mean finding the next great stock or constantly adjusting your portfolio. For most people, it’s much simpler: Invest enough of your long-term money, keep an appropriate amount in stocks, diversify broadly, keep fees low and give yourself flexibility across different account types.
You don’t have to get every percentage exactly right. If you can check most of these boxes — and stick with your plan when markets get rough — you’re already doing many of the things that matter most for long-term investing success.
If you’re not sure how these guidelines apply to your situation, or you want help building a plan, consider working with a qualified, fee-only financial advisor. A good advisor can help you make the bigger decisions without selling you investments you don’t need.
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