Your main goal with investing should be for retirement. Investing for your (future) kids’ college expenses is probably second. You will likely need at the very least a few million to live comfortably in retirement as $2M in savings for example will get you $80,000 in pre-tax retirement income using the 4% rule.
You have to invest to get to at least to that point where you will have a decently comfortable retirement, so here is my guide on how beginners should start investing.
How I learned
When I was 18 I met with my neighbor who is a financial advisor over coffee. I was learning about different fields in finance for a paper I was writing, but he happened to give me the best advice anyone has ever given me.
He told me to invest my money in a Vanguard target date retirement Roth IRA fund. Surprising to think of it now, but I had never heard of a Roth IRA or target date retirement funds, and only vaguely knew of Vanguard at the time.
TDR’s are best for most people
A target date retirement fund or TDR is a mutual fund (basket of stocks and bonds) that invests in other mutual funds with the intent of making investing for retirement as simple as it possibly can by making it your only investment. Beginners should start investing with one of these.
There are a myriad of options when it comes to investing, which quickly confuses 99% of people that are starting to invest. You can invest in individual stocks, bonds, options, index funds, ETFs, and actively managed mutual funds through platforms such as E*Trade, TD Ameritrade, Charles Schwab, Fidelity, Merrill Edge, Vanguard, and so many others including through your bank like Chase and Wells Fargo.
Don’t be intimidated
The worst mistake you can make is getting overwhelmed by the possibilities above, so you end up doing nothing, which is the equivalent of keeping your money in a savings account. Do you think the internal medicine doctor in my scenario can afford a McLaren by putting his/her money in a savings account for 35 years? Not even close.
Keep it simple
A target date retirement is your best friend because it automatically allocates your money throughout your life how experts recommend without any effort or knowledge on your part. The simplicity of these TDR’s is main reason this is how beginners should start investing.
Here is a screenshot from Vanguard.
You simply select your age or years until retirement (above), monthly investment amount, and the fund will adjust your domestic and international stock and bond exposure as the years pass (below.)
Here is a screenshot of my allocation as a 21 year old. It’s almost entirely stock as it should be; however, 10 years after my retirement it will only be 30% stock.
Basically, the only thing you need to worry about is how much you want to invest. Doctors can get an idea of how much they need to invest for a certain retirement income here.
Vanguard vs T. Rowe Price vs Fidelity
Vanguard, T. Rowe, and Fidelity are the three juggernauts in the target date retirement space. There are a few differences between the three (including glide path), but the most important is fees.
Here is a comparison of expense ratios of the three. I have the 2060 right now, so I only pay $1.60 per year for every $1000 that I invest. The fees show an obvious reason to pick Vanguard.
The difference between the Vanguard 2060 and the Fidelity 2060 is .62%. Doesn’t seem like a lot, right? Wrong. A doctor that invest $50k for 35 years @ a 7% return through Vanguard would have $7.13M at retirement after taking out .16% every year. If he instead picked Fidelity, he would have $6.20M (or $930,ooo less!) after subtracting .78% every year.
Is there a better option?
Technically, yes, but for 95% of people, no. Beginners should start investing with target date retirements; however, if you manually construct your portfolio based on what allocations you should be at for your age, you can lower expenses by a decent bit (but nothing crazy.)
This means using 50% of your money to buy a domestic stock index fund, 30% to buy an international index fund, and the last 10% to buy domestic and international bonds. This would exactly replicate my Vanguard 2060 target date retirement as it is now.
You would have to adjust it every 2 years or so starting at age 40 to make it look like the Vanguard asset allocation chart above. This would be to save around .1% (the savings were 6 times higher for picking Vanguard over Fidelity.) Thus, it is only really worth it if you will definitely not forget to change allocations or make irrational investing decisions. Once again, 95% of people really shouldn’t do it themselves.
Once I have $10k invested I will probably switch my strategy to manually creating my allocation to get around a .04% expense ratio. Someone my age can easily be 100% stock, so if I switch to Total Stock Market Index Fund from one of the three above I will save .12% in expenses.
Once again, this is not something to stress over as it will only save $210,000 from the $7.13M portfolio in the example above, and requires extra work. Switching from Fidelity target date retirement to Vanguard target date retirement saved $930,000 and required no extra work.
I use a Roth IRA now, but I won’t always. A Roth IRA is an account that you make contributions to post-tax and withdraw money at retirement tax-free. This makes sense for people who are in a low tax-bracket now but won’t be later. Making minimum wage scooping yogurt before I was 18, I wasn’t exactly in a high tax bracket.
Doctors can’t use a traditional Roth as the phase out for this tax-advantaged strategy starts at $118,000; however, all of you future doctors should set up a Roth within Vanguard! Tax-advantaged strategies will likely save you more than what you saved keeping fees low.
Vanguard’s target date retirement fund is by far the best way beginners should start investing. 95% of investors should stick with this for their whole life while a select few can manually create what Vanguard’s target date retirement is.