In order to produce the podcast and keep content up free for you, I work with partners so this post may contain affiliate links. Please read my full disclosure for more info.
Want to easily set-up your retirement accounts without having to stress over it? Certified Public Accountant and author Mike Piper shares how index investing can help you achieve your investing goals!
Effective and Low Maintenance Investing
With retirement seeming so far in the distance and budgets being squeezed. Some couples have postponed or taken a break from investing
Investing can be a tricky subject for many with all the noise out there on what’s stock hot or which mutual is about to rebound.
Our special guest this episode is Mike Piper, personal finance writer over at Oblivious Investor and contributor to sites such as The Wall Street Journal and Money Magazine.
He’s written several personal finance book, including Investing Made Simple.
During our chat, Mike goes over a few essentials on investing, including:
- advantages of index funds
- what asset allocation is
- when robo-advisors can be helpful
- what to do when your 401(k) doesn’t offer index funds
Hope you enjoy!
Resources to Invest Smarter
If you want to learn more investing, here are some resources to check out:
- Free 401(k) Analysis: blooom
- Best Budget and Money Apps: Personal Capital, Tiller, Mint
- Jumpstart Your Marriage and Your Money
- Financial Independence and Parenthood
- The Secret Sauce to Financial Independence & Early Retirement
- Investing Made Simple
- 8 Simple Portfolios
- Why Invest with Index Funds?
Where to Start with Investing
One concern for new investors is knowing where to put your money when you don't have much of it to invest.
Diversifying your investments is a smart move and you can do that simplify by investing in index funds or exchange traded funds (ETFs) with this type of investing.
Basically you're getting a basket of stocks in one purchase.
With index funds you're simply trying to track whatever benchmark you've chosen, like the S&P 500. You can also hone in on a certain sector, like tech, and purchase a fund or ETF.
Since most of these are automated, you typically pay lower fees than with an actively managed mutual fund.
Here are a few funds that track the S&P 500.
- Vanguard: Vanguard 500 Index Fund Admiral Shares (VFIAX) and S&P 500 ETF (VOO)
- Fidelity: Fidelity 500 Index Fund (FXAIX) and it also has a Fidelity ZERO Large Cap Index (FNILX) with no expense ratio or minimum
- Schwab: S&P 500 Index Fund (SWPPX)
- T Rowe Price: Equity Index 500 Fund (PREIX)
- iShares Core S&P 500 ETF (IVV)
I want to note that with the mutual funds may have a minimum investment.
If you're just starting out, then you may appreciate that ETFs can get you that diversified portfolio started without a lot of money.
From there you can regularly contribute. It's pretty simple, yet effective.
Benefits of investing in Index Funds
Is it really that simple though?
Well, I had the pleasure of chatting with Mike Piper about making investing easy.
Elle Martinez: Yes. With the oblivious investor. I know your, your motto is investing doesn't have to be complicated.
It's great to get that complexity out of the way, but is index investing really an effective long-term strategy for a couple looking to save for retirement?
Mike Piper: Absolutely. There's no doubt about that. The overwhelming majority of the academic evidence is these days that indexing is a fantastic way to go for a few reasons.
Number one is it's easy to understand the concept of a total stock market index fund, where you just own a small piece of the entire stock market. It's very easy to grasp that concept.
Number two is that it's easy to manage, which is to say that with an actively managed mutual fund, you have to keep an eye on the manager and see how they're doing and try and decide whether their good performance is likely to continue or so on and so forth.
Or if you're picking individual stocks, that's a whole lot of work.
Whereas with the basic index fund, it's again, it's just the whole stock market. You don't have to necessarily do anything with it. You don't have to worry about whether the fund manager is going to do something stupid because they're just tracking an index.
Number one, it's easy to understand. Number two, it's less work and number three, and this is a really critical one is that it's low cost, which is to say that index funds have low expense ratios relative to other mutual funds.
There's been a number of studies over the last, I guess, about 20 years now, showing that.
Mutual funds, expense ratio is an excellent predictor of its future performance, which is to say that within a given category of a mutual funds. Um, so let's say us stock mutual funds, the lower, the funds expense ratio. The more likely it is to be a top performer. So with index funds, having such low expense ratio is they're very likely to be top performers.
Finding the Index Fund
Elle Martinez: I guess, with any industry, but especially the financial industry; whenever there is a hot buzzword, there's like so many products that are created and index funds, a lot of people are looking into them.
How can you find a true index fund that's low cost versus, those that are not quite index, you know, they'll break it down further and have more?
Mike Piper: Yeah. There are a few things you can do that really make it easier.
Number one is just sticking with companies you've heard of, for instance, Vanguard and Fidelity each have excellent index funds, so that's an easy step to take.
Just, you know, there's no magical about index funds, which is to say that a good Vanguard index fund is basically going to be almost the exact same thing as the comparable Fidelity index fund you can get it from either company.
So sticking with companies you've heard of certainly helps, but the second point is that it's really easy to look up a funds expense ratio.
You can just, uh, do a Google search for the ticker symbol for the fund and and you'll find the Morningstar page for the fund, which tells you a whole lot of information, including many, many things that you don't really need to worry about, but right there at the top of the page, it tells you the funds expense ratio.
So you're looking for, I mean, lower is better, but you don't have to worry about, for instance, if you know, Vanguard's index fund costs 0.05%, and Fidelity's is 0.06% per year. That difference is so small that, I mean, it shouldn't really worry about,
Elle Martinez: You have been a financial advisor and a tax accountant. Have you always felt this way about index investing?
Mike Piper: Um, no. When I was working as a financial advisor, I was working for Edward Jones, which is a company that is actually very much on the other side of the active investing versus passive investors debate.
They're big proponents of actively managed mutual funds, but as I learned more and more about the topic and did more and more research, it became pretty clear to me that most of the unbiased sources – so people who don't have a financial interest in convincing you of one thing or another – they're overwhelmingly in favor of using low cost funds. Typically that does mean index funds.
What You Two Need to Discuss About Investing?
Elle Martinez: Thinking of a couple that, you know, they've, they've saw the research and they do agree that they want to, uh, start with, uh, or build a portfolio with index funds. What questions should they be asking themselves when they're trying to figure out, um, their research strategy?
I mean their investment strategy say they're gonna work with their, uh, with, uh, a Roth IRA. So just starting off with, you know, there's so many choices, how do they know, uh, what
Mike Piper: kind of portfolio? Well, um, that's an interesting thing about asset allocation, which is, uh, the term for how to pick what things you want to include in your portfolio, basically.
Um, is that for any given person. There are functionally an unlimited number of portfolios that would be perfectly reasonable. Um, if anyone tries to tell you that they know exactly the right portfolio for you, either a they're just not very well-informed or B they're, they're about to try and sell you something.
Um, so yeah, the overall goal is to just try and figure out what type of, what level of risk you're comfortable. Um, the most important question with regards to that is how much of your portfolio do you want in stocks and how much of it do you want to have in fixed income, which is the same bonds and CDs and things like that.
Um, and there's no very rigorous, um, perfect way to get the exact right answer there. Um, I think a pretty basic and pretty decent rule of thumb. Is to ask yourself how much could my portfolio value go down before I started to completely freak out and limit your stock allocation to twice that number, which is to say that, um, assume that your stocks can lose 50% of their value at any time.
And then don't hold more stocks than you can afford to. So for instance, if your portfolio, if you think that the most. Uh, the biggest portfolio decline that you could tolerate would be a 30% decline. Well, then I wouldn't suggest holding more than 60% of your portfolio in stocks. Um, so that's step one is just figuring out the overall stock bond allocation.
And then from there, there's the question of, okay, well, how much of the portfolio do you want in the U S and how much do you want internationally? Right. Then there's a million other little questions that you can get into. If you want to like, do you want to have small cap value stocks or large cap stocks and so on and so forth, but most people really don't need to worry about that.
Um, for most people, just a few index funds gets the job done, just a us stock index fund, an international stock index fund and a bond index fund. That's going to be plenty for most people. Thoroughly diversified portfolio, like that would include thousands of stocks from around the world, a whole bunch of different bonds.
It's got all the important pieces that you need.
Elle Martinez: Great. And it seems like it's easy to manage it is. And this is just my personal experience. And, you know, talking with friends as people we have, like. Tendency to kind of tinker with stuff with our investments, you know, we say, okay, I'm going to do these, um, investments and you see the news and you're like, should I, should I do something?
Should I start moving investments around? Um, what's your advice for couples? Like how often maybe should they check their portfolio? Um, or how should they, or how should they avoid the noise? I guess?
Mike Piper: There's a few things here to take note of, um, number one, I don't think it's important to check your portfolio all that often.
Um, I think once a month is plenty, you know, once a month, if you're doing your, if you have to do your retirement account contributions manually, for instance, but yeah. You have it set up so that, you know, it's a 401k contribution and that comes directly out of your paycheck, or if it's, um, you have automated investing in your Roth IRA, right.
Where they just automatically take a certain amount out of your checking account every month and put it into the fund. So you ask them to then I don't think you even need the check it once a month. Um, I think literally just a handful of times a years is plenty. Um, because the only thing you're really trying to do when you check it is just make sure your asset allocation hasn't gotten terribly out of whack.
So friends. If the stock market went up a whole whole lot. And now remember if we had decided that let's say a 60% stock allocation was appropriate for you and now, oh my goodness. Your portfolio is 85% in stocks. Well then maybe it's time to scale it back, sell some of those stock holdings. And it's called rebalancing where you just bring your portfolio back to the intended asset allocation.
And sometimes that means selling stocks to buy bonds. Other times it means selling bonds to buy it.
Elle Martinez: And I was wondering if you could, um, take listeners through, um, your book investing made simple, like some of the major topics that you cover in the,
Mike Piper: uh, well, it's, it's really what we're talking about right now.
Um, just kind of talking about what the basic things are. What's a stock, what's a bond, what's a mutual fund. And then what is an index fund and how does that differ from an actively managed. Um, and then talking about why index funds tend to be a better choice. And that's just what we talked about, which is to say that they have lower costs, which makes them on average, likely to perform better.
Um, the book also talks a little bit about ETFs, uh, that stands for exchange traded funds, which are essentially the same thing as index funds except. You buy and sell them like individual stocks. Um, so for instance, at Vanguard, all of their index funds have both a regular index fund version and an ETF version.
And they're basically the same thing. It's just as sort of personal preference. Do you rather, so, um, with ETFs, since they, they trade like individual stocks, you can buy and sell them during the day. Um, so if that's an important thing to you, then you might prefer to use ETFs. But you can't, for instance, set up automated investing with ETFs with most brokerage firms.
So if you prefer to be able to do automated investing, um, index sponsor a better fit. So it's really not a huge difference between the two, it's just kind of a personal preference. Um, and the book gets into, uh, basically some common errors that investors make, uh, one, which is what you talked about, which is paying too much attention to the news.
Um, and then making. Get you scared letting it worry you that you need to be doing something different with your portfolio. When most of the time the answer is really just do nothing. Stick to the plan. Um, how to find a good financial advisor. If you want to use one talks about. Um, that's, that's pretty much the gist of it.
Elle Martinez: I've read, um, several of your books, uh, including, you know, can I retire an accounting made simple and you've always done a fantastic job. Just breaking things down and just having that data right there to grab. So thank you very much for that. I guess, you know, uh, there's so many new companies with investing in the last few years.
Um, a lot of also like they call them robo-advisors. Yeah. Do you think that's a practical option or are there certain things that you think, uh, couples or, you know, any investors should be aware of?
Mike Piper: Um, I, I do think it's a practical option. Um, they are generally going to. Involve lower overall costs than a lot of other investing methods would.
Um, because for the most part, they use index funds and they charge and assets under management fee. In addition to the fees charged by the index funds. But typically those assets under management fees are relatively low. Um, and they are. Very simple passive portfolios, which is just like we talked about, they just rebalanced them periodically for you.
Um, I will say however that I think another option that is also quite good in terms of being easy to deal with, and it's usually even lower costs than these so-called robo-advisors is just to use a low cost target retirement fund. It's the same sort of same thing. Goal essentially achieves the same goal, rather, which is to say, um, it's a portfolio that rebalances itself for you.
Um, and so Vanguard is target retirement funds are excellent. So are there, uh, they call them life strategy funds, which are basically like target retirement funds except they don't change allocation over time. Um, fidelity has a, their fidelity freedom index funds are excellent. So I think that's another excellent low cost way to go.
And in fact, that typically ends up being less expensive than using one of the robo-advisors that said, I think the robo advisors tend to be a perfectly reasonable option.
Elle Martinez: Finally, you know, we were talking about investing in IRAs. A lot of people do have the option for 401ks, but not all 401k. Have index funds as an option.
Are there some guidelines maybe couples can keep in mind when they decide what they're going to invest
Mike Piper: in. I think there's a few things here to know. Number one is it's not necessarily important for every one of your accounts to be diversified. It's only important that your overall portfolio is diversified.
So for instance, Um, one thing that's pretty common is that a 401k plan might have one single index fund and it's an S and P 500 index fund. So, okay, great. But that's not a whole portfolio because you also need some international stocks and you need some bonds, but depending on the overall allocation that you're looking for, and depending on the size of all your different.
It might be possible to say, okay, in this Fordham, okay. I'm just going to use that low cost S and P 500 index fund, and then I'll use my Roth IRA or, um, my spouse's Roth IRA, or if your spouse also has a 401k, your spouse's 401k to pick up the other pieces of the puzzle. Um, but there are even still sometimes where there's just no index funds at all, nothing particularly low costs.
In which case typically. The approach is again, figuring out the overall asset allocation you want for your whole portfolio, and then just figuring out the lowest cost way to do it. So what of the funds that your 401k does have, um, look at their expense ratios and find the lowest ones and then try and use those for whatever part of your portfolio they work for.
And then, and use your other accounts like IRAs or your spouse's forum. Okay. Again, if there is one. Up the other pieces, basically
Elle Martinez: at its core robo advisors offer investors portfolio management that reduces the need for more traditional financial advisors. Some of the big names in the business right now are betterment wealth, front and future advisors. By automating some of the process and eliminating the middleman. These companies can offer the services at a relatively small cost.
In many cases, they build a recommendation for your portfolio based on you filling out an interview style assessment, they take into account your age, your risk level and your time horizon. This is not a solution for everyone, but it can be a practical one for couples who have a basic understanding of investments, want low fees and want an uncomplicated low maintenance office.
Having said that not all robo-advisors are created equal when choosing one that is best suited to manage your money. You do have to consider such factors as what services do they offer? Asset allocation, automatic rebalancing, tax harvesting. What fees do they charge while less fees is great. Make sure the quality of service doesn't suffer.
You have to look at control. Do you want to keep your assets with the company or do you prefer to keep them where they are and the company simply tracks it? Customer service? Do you want a completely automated service or would you like a human to check in from time to time on your portfolio? We ourselves use betterment for my husband's IRA and have been very happy with him.
Support the Podcast!
Thank you so much for listening to the podcast!
- Spread the word! If you enjoyed this episode and think it can help a buddy get on the path to dumping debt and become financially free, please share.
- Leave a review. Honest feedback and reviews make a big difference and gets the word out about the podcast. Leave your review on Apple or Stitcher.
- Grab a copy of Jumpstart Your Marriage and Your Money. My book is designed for a busy couple to set up their finances in 4 weeks. Get tips and tools that have worked for other couples on their journey of building their marriage and wealth together!
Episode originally released in February 2015. Updated August 2021.