There’s a short answer and a long answer to the question of what to invest in. The short answer: Most of your retirement savings should be invested in the stock market.
The long answer: A good portfolio is balanced between stocks and bonds. You need stocks for their powerful growth and bonds for their steady income and low volatility. (What about cryptocurrencies and other alternative assets, you ask? Fine. But use your play money, not retirement savings, for these speculative ventures.)
In this guide to what to invest in, we’ll help you decide how to divide your money between stocks and bonds, and show you how to choose investments. If that doesn’t interest you, stick around anyway — we also have some info for how to hire a pro to help you, on the cheap.
Decide how much money to invest where
One rule of thumb for deciding how to split your retirement portfolio between stocks and bonds is to subtract your age from 100, and put the result — as a percentage of your pot of money — into stocks. So if you’re 30, you would invest 70% in stocks and the rest in bonds.
Unfortunately, rules of thumb aren’t perfect. Some experts say that 30-something investors should put closer to 80% of their retirement savings in stocks. In other words, subtract your age from 110 and invest that amount in stocks.
Another way to get a little deeper into the best asset allocation for you is to answer these two questions:
1. How long until you need the money?
This is about projecting your planned retirement age, then calculating how many years you have until you reach it.
If your answer is “Not until I retire 20 years from now,” then hello, stock market. That time frame gives you time to stomach the market’s ups and downs — and to enjoy the stock market’s bounty over time.
As you get close to retirement, you’ll want to consider shifting a portion of your portfolio to cash, such as a savings account, money market account or certificate of deposit. You’ll be within that five-year time horizon we talked about in our post about financial goals, and you’ll want to make sure money you need to draw on for living expenses in the first few years of retirement will be available for you even if the market goes through a downturn.
2. How risk-averse are you?
When the stock market crashes, what’s your reaction going to be? If you can sit tight and focus on the long game, even as you’re watching your investments get temporarily decimated, you’re a good candidate for investing 80% or 90% in stocks.
But if your reaction to a market downturn will be to take your money and run, go for a less volatile investment portfolio. You’ll give up some potential gains, but if you’re likelier to stick with that portfolio through ups and downs, it’s worth it.
Investors who continued to invest in stocks even through the 2008-09 market crash ended up 10 years later with account balances about 50% higher than people who sold out of stocks during the downturn, according to a study of about 1.5 million people in workplace retirement plans administered by Fidelity Investments.
If you’re not sure how you’d react to a market downturn, jump ahead to our risk tolerance quiz to find out.
Choose your own investments…
So now you know you want to invest, say, 80% of your money in stocks and 20% in bonds. If you want to build your own retirement investment portfolio, your next decision is which stocks and bonds, specifically, to invest in. (If you’d really rather not get into these details, there’s no shame in getting help with this stuff. Jump below, where we talk about inexpensive ways to get expert guidance.)
Investing for retirement isn’t all that complicated. You can build a fantastically diversified retirement portfolio by investing in just three mutual funds:
- A mutual fund that invests in the entire U.S. stock market.
- A mutual fund that invests in the entire international stock market.
- A mutual fund that invests in the total U.S. bond market.
These mutual funds will allow you to invest in thousands of companies, plus hold a large variety of bonds — and they can power your retirement savings for decades.
» Looking for more investing ideas? See more sample retirement investment portfolios
Keep in mind that mutual funds have different names, depending on the provider. What you’ll see in your 401(k) or at your brokerage may vary. For example, to invest in the entire U.S. stock market, there’s Vanguard’s Total Stock Market Index Fund, Fidelity’s Total Market Index Fund or Schwab’s Total Stock Market Index Fund — and that’s just three choices out of many.
If you’re investing through a brokerage, you’ll have no trouble finding a total U.S. stock market fund, an international fund and a total U.S. bond market fund. Your 401(k), however, may have fewer options. If you don’t see funds resembling those three types, then consider a target-date fund. We discuss target-date funds in more detail below.
Each fund will have its own web page — on your 401(k) website or on the fund provider’s own website — where you can see what its strategy is (for example, investing in the total U.S. stock market).
That page is also where you can look at the fund’s fees — and you definitely want to look at the fees. Focus on the expense ratio: That’s the cost of the fund as a percentage of how much you’ve invested in that fund.
Note that the expense ratio for the same exact mutual fund may vary, depending on whether you’re investing through a 401(k) or not, and how much money you’re investing, so you need to check on that particular fund’s expense ratio by using the link found in your 401(k) or brokerage account.
Ideally, you’re investing in index mutual funds. As we mentioned in our investing 101 guide, they track an index comprising many companies, as opposed to actively managed funds, where a live human is picking the fund’s underlying investments. Index funds usually cost less. Look for mutual funds that have an expense ratio lower than 0.5%, if possible.
… or find a pro to help
There’s an alternative to choosing your own investments: Hire a professional investor to do it for you, on the cheap.
If you’re investing through your 401(k) or another type of workplace plan, a target-date fund can be a great option for hands-off investing. Target-date funds are created by investment pros, and they’re set up to invest in a diversified group of mutual funds on your behalf, with a mix of U.S. international stocks and bonds, similar to what we described above.
These funds are named with a retirement year in mind — like XYZ Target Date Fund 2050 — and you choose the fund with the year that aligns with when you plan to retire. As you get closer to your retirement date, the mix of funds automatically adjusts to be less aggressive/volatile than it was when retirement was in the far distance (though plenty of target-date funds assume you’ll keep investing throughout retirement, and thus keep you invested at least partly in stocks long past your retirement year).
You still need to make sure you’re not paying too much: For comparison’s sake, the target-date mutual funds offered by Vanguard, one of the lowest-cost providers, have an average weighted expense ratio of about 0.13%, according to Morningstar Research. If the target-date funds available in your 401(k) charge significantly more than that, you have three options:
- Invest just enough to get your match and then start contributions to an IRA.
- Put together your own fund portfolio, like the three-fund sample portfolio referenced above. You can do it, we promise.
- Get professional advice on your 401(k) through Blooom, a company that will give your 401(k) investment choices a one-time once-over, including ideas for improvement, for free. (There’s a fee for ongoing maintenance. Check out our review of Blooom to find out more.)
If you’re investing outside of a workplace plan, then you can get investment management through a digital advisor (also called a robo-advisor), such as Betterment or Wealthfront, or through an app like Acorns or Stash.
The lowest-cost robo-advisors charge about 0.25% of your account balance.
Many robo-advisors have no account minimum, so you can get started with $10 or even less. The lowest-cost robo-advisors charge a fee of 0.25% of your account balance.
You’ll fill out a questionnaire to give the robo-advisor a sense of how risk-tolerant you are and how long you plan to invest. That, in turn, helps it choose the best investments for you.
» Ready to try a digital advisor? Check out our top picks for best robo-advisors
That’s it! Whether you choose your own investments or hire a pro to help you, you can now scratch “invest for retirement” off your list of things to do.
Don’t know how you’d react to a downturn? Our quick questionnaire will help you get an idea of your risk tolerance.