November 10, 2024

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Investing may seem overly complex, and that complexity may leave Americans idle.

But investing – and investing wisely – doesn’t have to be difficult. In fact, according to financial experts, getting started can be relatively easy.

“You don’t need to be a rocket scientist. Investing is not a game where the person with an IQ of 160 beats the person with an IQ of 130,” Warren Buffett, chairman and CEO of Berkshire Hathaway, famously said.

For many people, investing is necessary to grow their savings and provide financial security in retirement. Since interest and investment returns compound over a longer period of time, it is to investors’ benefit to start their careers as early as possible.

While appropriate long-term goals may vary from person to person, a rule of thumb is to save approximately 1x your salary by age 30, 3x by age 40, and ultimately 10x by age 67. according to Fidelity Investments.

“A wonderful and simple solution” for beginners

Financial experts say target-date funds (TDFs) are the easiest entry point into long-term investing.

“I think they’re a great, simple solution for novice investors and any investor,” said Christine Benz, director of personal finance and retirement planning at Morningstar.

TDFs are age-based: Investors select funds based on the year they plan to retire. For example, a current 25-year-old who expects to retire in about 40 years might choose a 2065 fund.

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These mutual funds do most of the hard work for investors, such as rebalancing, diversifying across many different stocks and bonds, and choosing a relatively appropriate level of risk.

As investors age, asset managers automatically reduce risk by reducing the share of stocks in the TDF and increasing exposure to bonds and cash.

How to Choose a Target Date Fund

Benz recommends choosing TDFs that use underlying index funds. Unlike actively managed funds, index funds aim to replicate broad stock and bond market returns and are often cheaper; index funds (also known as passive funds) tend to outperform their actively managed counterparts over the long term .

“You definitely want a passive TDF,” says Carolyn McClanahan, CFP and founder of Life Planning Partners in Jacksonville, Florida.

Banks also recommends investors seek funds from the largest TDF providers, such as Fidelity, Vanguard Group, Charles Schwab, BlackRock or T. Rowe Price.

Other “solid options” for novice investors

Ask yourself: Why should I invest?

McClanahan, a member of CNBC’s advisory board, said younger, long-term investors should generally make sure their funds, whether TDF or otherwise, have a higher allocation to stocks, around 90% or more.

Retirement investors under 50 may be well-suited to a portfolio invested primarily in stocks, with some cash reserves set aside for emergencies such as job loss or health problems, Benz said.

You don’t need to be a rocket scientist. Investing is not a game where a person with an IQ of 160 beats a person with an IQ of 130.

Warren Buffett

Chairman and CEO, Berkshire Hathaway