The only really foolproof way to prepare for retirement is by saving, bit by bit, every week, month, year for decades. But when financial experts say “save” for retirement, they don’t mean it in the traditional sense: Putting your money in a savings account (even a high-yield account) for decades is practically the same as putting it under your mattress. You’ll get minimal growth on your money.
For better or for worse, the only way to really get a solid return on your savings is through investing. We’re all investing — not saving — our way to retirement. It’s true that your investment portfolio is not protected the way your savings are through the Federal Deposit Insurance Corporation (FDIC). But the returns are much greater.
If you think investing is confusing, you’re not alone. If you think investing is just for rich people, again, you’ve got company. Neither of those statements is true. Investing has many simple options that let you pool risk and capture a wide segment of the stock market. And you don’t need a finance degree — or some sort of mysterious, savant-like skill — to find the best stocks with the best returns.
- Mutual funds let you invest in a diversified portfolio without having to research a lot of different stocks. Most mutual funds hold more than 100 securities. If you contribute to a 401(k) plan, you’re likely already investing in mutual funds.
- Exchange-traded funds (ETFs) can be traded throughout the day, like a stock. These vehicles hold hundreds or even thousands of securities.
- Index funds are portfolios of stocks or bonds designed to mimic the composition and performance of a financial market index, like the S&P 500.
In exchange for this simplicity and diffused risk, mutual funds and ETFs usually charge fees. Index funds tend to be cheaper.
If you think you need thousands of dollars to get started, think again. Several investing apps have super-low account minimums (as in: just a few dollars).
Investing doesn’t have to be a lot of work. In fact, it’s probably better to do less when it comes to investing. You’ve probably heard the advice not to react emotionally when the market rises or falls. Over the long run, it’s best to set investing goals for your portfolio and then leave it alone. In the words of John Bogle, founder of investment manager Vanguard: “Time is your friend, impulse is your enemy.”
For more, read our reporter Sarah Hansen’s story about how greater gains can come from doing less.
— Jill Cornfield, deputy editor
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