Maybe this is not a good time to talk about investing in the stock market, because stocks have been bouncing up and down like a yo-yo. Everyone seems to think that the market is rigged, and that it’s no place to put money you ever expect to see again in this lifetime.
Many of my baby boomer friends were spooked by the 2007-09 stock market crash. The value of their IRA and 401(k) plans swooned just when they were starting to pay attention—when they were in their mid-50s and spying retirement on the horizon.
One friend vowed in 2009 that as soon as the Dow Jones average got back up to 10,000 she was going to sell all her mutual funds and put her savings into safe, secure bank CDs. She followed through on her promise. But now she has missed out on substantial gains, and earns a pitiful 1 to 2 percent return on her deposits. After taxes and inflation, she’s losing money.
Another friend received a settlement when he was laid off from his corporate job about two years ago. Instead of investing that money in stocks or bonds, he bought a vacation condo in Myrtle Beach, S.C. He “got a good deal” and he’s been able to rent it out. But the rental agent takes a good chunk of his revenue, and condo fees eat up most of the rest. Meanwhile, real-estate prices in Myrtle Beach have sagged another few percentage points.
Now that the stock market is no longer the "next new thing" it's time to take a closer look. And since mutual funds are considered boring and passe—especially compared to sexier ETFs and Internet stocks—just possibly they are now the safest and smartest way to invest your hard-earned savings.
There are thousands of mutual funds. Most of them, by definition, are average. They often charge high fees and produce mediocre returns. Some are worse than average, designed to enrich their sponsors at your expense.
But if you do just a little research on a financial site like Morningstar, and then go shopping at Schwab, Fidelity, Vanguard, or another discount broker, you can find a decent mutual fund that will almost certainly do better than your bank, with less risk and less work than a real-estate investment.
You don't need to obsess about picking the very best fund, or the one that's on everyone's top-ten list. You only need a mutual fund that's better than average, which is not that hard to find. Look for a no-load fund rated at least three stars by Morningstar that is widely diversified and charges a management fee of less than 1 percent.
Laura Dogu, co-author of The Bogleheads Guide to Retirement Planning and contributor to the Bogleheads community website, vouches for Vanguard founder John Bogle's approach to safe investing. She says owning just three funds—Vanguard Total Stock Market Index fund, Vanguard Total International Stock Market Index fund, and Vanguard Total Bond Market fund—will provide you with a low cost, broadly diversified portfolio that is simple to manage.
I prefer conservative equity income funds that offer a mix of stocks and bonds, like the Fidelity Asset Manager Fund (FASIX), a four-star fund with fees of 0.56 percent, or Vanguard's Wellesley Fund (VWINX), a five-star fund with a management fee of just 0.25 percent.
I've owned a number of individual stocks and many mutual funds over the years, some good and some bad. After I retired and moved my 401(k) over to an IRA in 2004, I bought 10 funds at Fidelity. Now, eight years later in a topsy-turvey market, nine of them have made money and one turned out to be a clunker.
Nine out of ten isn’t bad. These funds have not made me rich, but altogether they've done better than any of the individual stocks I've ever owned, and they've easily bested the 1 percent you get from your friendly-but-miserly neighborhood bank.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.