Recently, I wrote an article titled, Why the Vanguard VTSAX Is the Only Fund You Need, and in that article I cover a lot of these points. However, in this article I go into more detail as to what actually constitutes a good return and what investments to consider in order to get that return.
What is a good return?
You might be wondering what is a good return anyway, and that’s a fair question. But a good return is one that performs as good (or better) as the overall stock market.
A good index that tracks the overall stock market is the S&P 500. It’s and index made up of 500 large U.S. companies. It will give you a very real idea of how well the overall market is performing.
Historically, the 30-year return of the S&P 500 has been roughly 12%. So a good return is one that will get you 12% – that should be the goal.
When is a good time to invest?
It’s not always a good idea to invest right away; you want to make sure you’re set up for success first.
Most financial experts will tell you to be debt free and have at least 3-6 months of expenses in savings before you start to invest (I would recommend the same).
Once you are debt free and have 3-6 months of expenses in savings, then it’s a good time to start investing.
What is a good amount to invest?
Most financial experts will tell you to invest at least 15% of you income for retirement (I think that’s a good goal to shoot for).
So if you make $40k a year, you should be investing $6000 a year (that maxes out a Roth IRA, by the way). That should be more than enough at retirement – that’s $3.2M after 35 years if we assume good returns as mentioned earlier (you can use this calculator to figure those returns).
Studies have shown that the number one reason why people don’t have enough money to retire is because people don’t save for retirement . . .
It’s not so much the amount you save; it’s just that you save period . . . If you are unable to save 15%, then why not save as much as you can? It’s not so much the amount as it is the behavior – you just have to do it! It’s not as if saving 10% or 13% is going to cause you to not have enough come retirement (not saving any is the only sure way you won’t have enough).
A good amount is 15%, but any amount is better than nothing. You should try to save as much as you can, but 15% should be your goal.
A word of caution about investing too much
Remember, the goal should be to invest 15%, but anymore than that may not be a good idea. Unless you’re close to retirement and trying to play catch-up, I would not recommend saving more than fifteen to twenty percent – because you may need that money for other things – for example, paying off your mortgage, emergencies, vacations, college, or simply treating yourself now and then.
15% is a good rule to make sure you save enough, but more than that could be too much. Shooting for 15% will keep your financial situation healthy and stable – keeping you out of trouble, hopefully.
What kind of investments are good?
Good investments are investments that get you good returns. If you’re not getting good returns from a particular investment, then I would not consider that investment good. I probably wouldn’t bother putting my money there.
Risk is another thing to consider when trying to decide whether a particular investment is good or not. Personally, I’m not a fan of risk, but there is a bit of risk with all investments, so the key is to minimize risk where you can. That is why I am a fan of mutual funds over single stocks, commodities, or other high risk investments.
You can also minimize risk through diversification, which I’ll say something about next.
Is diversification good?
Diversification means a lot of different things to many different people, so this can get a bit confusing.
In short, diversification is a good thing. It will minimize risk by spreading out your investments across multiple types. But . . . assuming that you have to invest in both stocks and bonds (both foreign and domestic) in order to be properly diversified, could not be further from the truth. You could be well diversified without investing in bonds or international stocks!
You can even be diversified by investing in a single fund – even if it only has holdings in stocks – because that one fund holds stocks in many different companies.
Diversification simply means not putting all your eggs in one basket – not putting all your money in a single stock or company. That way if some stocks lose value and most others gain value, you will still come out ahead. You’re not putting all your money in a single stock or company.
Are bonds good?
Bonds are not what I consider good investments because they won’t get you the same kind of returns as the Stock Market.
You will not find a mutual fund in bonds that gets 12% return on average, so I don’t consider bonds a good investment, or a good option to diversify your portfolio.
Some people seem to think that you have to invest in bonds in order to be properly diversified (to minimize risk and conserve earnings), but doing so will only stifle your growth in the long run. Bond funds are simply not worth having if you want good returns because the Stock Market will always outperform them.
The more money you have in bonds, the less money you have in stocks, which means the lower your returns will be. I would stay away from bonds.
Are international stocks good?
Some people will tell you to make sure you invest your money in international stocks so you are properly diversified, but this may or may not be a good thing.
Sometimes you can find good mutual fund investments in international stocks, but they are difficult to find (at least in my experience they have been).
I would use international stocks as an option to further diversify your portfolio, but again, you want to invest in ones that are performing at least as good as the overall market (preferably outperforming the market).
If you are able to find such a fund, I would recommend investing about 20 percent of your money there. For example, if you had mutual funds in Growth, Growth and Income, and International stocks, I would invest 40% in Growth, 40% in Growth and Income, and 20% in International.
Remember, a good return is one that will get you close to what the stock market has done historically (12%). You don’t want to invest your money in a mutual fund that is getting beat by the actual market (stocks or bonds).
It’s best to invest in mutual funds (not single stocks) that will get you close to the returns you’re looking for (all stocks). My advice is to try to find a mutual fund that can average 12% annually – that’s what I would consider a good investment.
I recommend you invest your money evenly across Growth stocks and Growth and Income stocks (all in mutual funds). If you find an International fund that can match or beat 12%, have at it! It will only add more diversification to your portfolio, which is a good thing.