Give Me The Short Version!
DIY Investing (the short version)
-It's very likely that your Michigan ORS Pension check won't be enough (and Social Security and Medicare won't help much more). If you were hired after 2012, you have a much lower pension or none at all, so you must save!!!
-Investment advisers paid on commission are not worth what they cost. A 1% annual commission starting young will result in a 30-50% reduction in your nest egg in your 80's.
-Starting now (hopefully while you are young) is much more powerful than investing more later on. It is very difficult (and expensive) to "catch up." Your most powerful tool is time to allow your investments to compound.
-Your greatest detriment is costs. This includes taxes, brokerage fees, annual account fees, loads and commissions, annual expense ratios, 12b-1 fees, and the cost of buying high or selling low. Vanguard is the cheapest in the industry.
-Buy INDEX FUNDS in a Roth IRA or through your 403(b) or 401(k). Actively managed funds underperform their benchmark index 70-80% of the time. Today's winning fund is very often tomorrow's loser. Trying to beat the market is almost always a loser's game.
-Buy broad-based index funds that buy the entire market. Total US Stock Market, Total International Stock Market and Total Bond Market funds own thousands of securities at very low costs. You can buy a Target Retirement or LifeStrategy (Vanguard) fund that owns all of these "total market" index funds all-in-one. They are cheap, simple, easy to maintain, and a very wise choice if you only want to own 1 fund.
-Buy and hold through thick and thin. Do not make any decisions based on the news or your emotions when you see a significant decline in the market (like 2008). If you cannot swallow the 35-40% drop in 2008, you probably have too much allocated to stocks. Selling when the market is down is the worst possible investing move (unless you are doing this in a taxable account for tax-loss harvesting purposes).
-The most important decision to make is your Asset Allocation to stocks and bonds, not what funds you buy. The old "rule" is to hold your "Age in Bonds," but you can adjust it by 10-15% and still be somewhat conservative. Some of the wisest minds in investing say to never hold fewer than 20% stocks or 20% bonds at any point in time. If you will receive a pension in retirement, you could consider holding fewer (but still some) bonds. I plan to do "Age minus 15" in bonds (age 35 = 20% in bonds), and hold 50% stocks and 50% bonds in retirement.
-Expect between 8-9% return on your investments in your younger years (holding mostly stocks) and about 6-7% return when you are older (holding 50% or more in bonds).
-Nearly every other investment poses too much risk, requires too much starting capital, doesn't earn enough to be a good long-term investment, or is a complete rip-off.
What Do I Do?
1. Live on a budget and have at least a $1,000 starter emergency fund.
2. Pay off all of your high interest (preferably all) debts.
3. Save 3-6 months of expenses for an emergency fund and keep it separate from your investments.
4. Contribute up to the match (if any) in your school's 403(b) or 401(k). Then open a Vanguard, Schwab or Fidelity Roth IRA and purchase a Target Retirement (or Vanguard LifeStrategy) fund.
5. Contribute the same amount every month automatically and increase annually with increase in pay (currently, in an IRA, you can contribute up to $5,500 per year, $11,000 total married filing jointly). Contribute 10-15% of your income to start.
6. Contribute to a Michigan 529 fund for your kids' college fund (as a MI resident, you get up to a $10,000 state tax deduction). Consider skipping pre-paid tuition.
7. If you have an HSA, consider maxing this out before contributing to a 401(k) or 403(b). HSA annual contributions are limited to $6,650 for a family. Costs are lower, you save more in taxes, you have more control over investment options, and the investment account can be used without penalty as ordinary income starting at age 65.
8. Contribute to your 401(k) if elected or 403(b) up to $18,000 per year ($24,000 if over age 50).
9. Increase your contributions with increases of income. Remember that your savings rate and starting earlier have a greater impact on your future nest egg than fund returns.
10. Keep your expenses low (buy reliable used cars, stay away from credit cards, use cash envelopes for food, gas, clothing and entertainment). Check out Dave Ramsey for personal finance matters.
11. Read a couple of investment books listed in the resources page of this website.
12. Write down your plan and stick to it!
Don'ts
(the stuff you should stay away from)
-Single Stocks (too much risk).
-Day-Trading (WAY too much risk)
-Commodities or futures
-Gold and precious metals (absolutely no research proves that gold is the standard medium of exchange in a failed economy since the Roman Empire). Gold returns have failed to keep up with inflation since the stock market's inception.
-Other sector funds like health care (too volatile, especially if a law was passed that dramatically changed the industry)
-Cash Value Life Insurance (Whole Life, Variable Life, Universal Life or Variable Universal Life - huge rip-off)
-Annuities in your younger and middle-age years
-CD's and large amounts of money stored in bank accounts or money markets for a long time (use stocks and bonds for long-term investing and money markets for short-term savings and emergency funds)
-Performance chasing. Less than 3% of active funds can consistently beat the return of the S&P 500 for more than a decade, and it is impossible to predict which ones will BEFORE they do. Most active funds fail to beat their benchmark indexes after fees, loads, commissions and higher taxes. Instead, make index funds that buy the entire market the core or even all of your retirement.
-Buying new cars unless you are quite wealthy (this is the largest thing we buy that declines in value - a $350 car payment instead invested at 8% over 30 years is $513,852.65!) Don't throw away a fortune just to have a nice ride!