This month’s Money magazine features a cover with five women dressed in black, looking aggressive and ready for business battle, with the title “The Investing Gap.” The article then goes into The Debt Gap, The Pay Gap, and The Investing Gap between women and men. I must confess that I get confused when articles talk about women’s money and men’s money, women’s investing and men’s investing, or women’s retirement savings and men’s retirement savings. When we were married, my wife and I became one, which means that there is no mine and hers. Her salary is my salary. My debt is her debt. Her home is my home. My retirement accounts are her retirement accounts. Her investments are my investments.
The person earning the bigger salary (or the only salary) is only able to do so because the other person is there to make sure the kids are safe, are getting what they need in terms of education, healthcare, and social activities, and being taught important lessons on how to be successful and contribute to society. One person takes the majority of the load of doing or hiring home and auto repairs, running errands, and doing other things needed to maintain a household so that the other person can be a better employee and earn a higher salary. (We share the cleaning and yardcare tasks.)
This means that everything earned, saved, and borrowed belongs to both, not 50-50, but 100% for both people jointly. This makes a lot more sense to us than both trying to do everything and thereby being lousy workers and lousy parents while our home and cars fall apart from neglect. It is more effective for each to focus in on certain areas, knowing that the other person will focus in on other areas. I don’t ask her for rent each month from her earnings and I don’t expect her to tell me, “Sorry, this is my IRA.” when the time comes for retirement. We’re married, not roommates with kids.
So I don’t know if the article was looking at married women and men as separate entities (which is ludicrous), or looking at young single men and women, or perhaps divorc’ees and windows/widowers when drawing their conclusions. Regardless, one item that was particularly troubling for me, because I spend so much time writing articles such as this one to teach people how to invest and handle their finances, was the Investing Gap mentioned. The article stated that women are more likely to have savings in cash because they are less confident to invest (although they tend to be better investors than men when they actually do invest). To that, I say, “Come on, ladies. Get educated and get over it.”
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If you think that cash is safe, think again. Every second that your money sits in some bank CD or, heaven forbid, a savings account, you are losing money. Inflation is taking at least 1%-2% per year, meaning that you will lose one-quarter to half of your money over a working lifetime. I can’t tell you what the return will be from an investment account, but I can almost guarantee it will be positive over a working lifetime (civilization collapse or take-over by a communist regime excluded). I can guarantee that you’ll have less purchasing power in a bank account in 40 years than you had when you put the money in there.
Now I know that there are a lot of women out there who are fearless, confident investors that will be retiring with seven-figure portfolios. But if you are worried about investing because you don’t know enough about it (whether you’re a woman or a man), I’m taking away that excuse right here, right now. Here is everything you need to know about investing to be successful and get a better return than 90% of the people out there, mutual fund managers included. It really doesn’t take more than about 300 words.
1. You need an account with one of the major mutual fund companies. I would recommend either Vanguard or Schwab since they have a great selection of low-cost funds. (Low-costs are the key, which is why you invest in index funds.) You can set these up online in about 15 minutes. To purchase funds, you can do this online through their website (for free) or call them (usually for a small fee).
2. For retirement investing, start with your work 401k up to the company match provided (this is free money), then go to an individual IRA at Vanguard or Schwab, then finish with your company 401k. You’ll want to be putting between 10 and 15% of your salary away into retirement, not counting any company match. If you have no 401k option, maximize your IRA contributions ($5500 per year right now), then save the rest in a standard mutual fund investing account.
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3. Start funding the accounts and make contributions regularly, ideally with automatic drafts. If you sign-up to have an amount automatically transferred each month from your checking account, mutual fund companies will often lower the minimum investments they require to start an account and waive other fees. Autodraft will also make sure you actually put money away, rather than just intending to do so. Whether you choose to autodraft or just send in a check or e-check each month, you will want to invest regularly to get better prices on your purchases, rather than saving up and dumping money in all-at-once. This is called dollar cost averaging.
4. Diversify your investments into low-cost index funds in different segments of the market. Sometimes large stocks do well, other times small stocks do well. In general, they will all be rising over long periods of time. Diversification makes sure that you’ll always have some money in the segment of the market that is doing well at any given time. Buy index funds since they will have the lowest fees. To get proper diversification, buy a 1)Large-Cap or S&P 500 index fund, 2) Small-Cap index fund, 3) International stock fund, 4) REIT fund (real-estate fund) and, if you’re over 50, 5) a total market bond fund. Just go to the website for your mutual fund company and look for funds with these names. Then, check the fund objective in the prospectus and verify that their goal is to try to match an index, rather than having a manager pick stocks. Fund costs should be 0.50% of assets or lower (0.05% is possible). Do this in both your retirement accounts and personal investment accounts.
Invest your age minus 10% in the bond fund (if you’re over 50), put 20% into of the remaining funds into the REIT fund, then split the money evenly among the other funds. This means that your target percentages, if you’re under age 50, are 20% REIT, 27% Small Cap, 27% Large Cap, and 26% International. If you’re over age 50 this means you should put your age minus 10% in bonds (for example, 40% when you’re 50 years-old), then divide the rest of the money the same way as before. A 50-year-old would therefore have target percentages of 40% in bonds, 12% in a REIT fund, and 16% each in a Small-Cap fund, a Large-Cap fund, and an International fund.
When you first start with personal accounts, you may only have enough money to buy into one fund. If this is the case, pick the Small Cap fund to start, then start building up the other funds as you gain enough cash.
5. Rebalance your funds once per year. You should not make changes often, but it is useful to sell shares in funds that perform well and buy those that perform poorly over any given period of time to maintain your target percentages. In your 401k and IRAs, you can just use the tools provided by the fund companies to reset your accounts each year.
6. Avoid selling or exchanging funds in your personal accounts. You’ll need to pay taxes on profits made in your personal accounts if you sell them, even if you immediately invest in another fund. You’ll therefore want to limit your selling in these accounts, so rebalancing by selling shares in one fund and moving them into another fund is not tax-efficient. Instead, direct new cash to underfunded accounts. For example, if you are supposed to have 20% of your portfolio invested in the REIT and you’re only 15%, start directing all of your new contributions to the REIT fund until it catches up. Another option is to shift some funds in your retirement account to make up for imbalances in your taxable account.
Within your retirement account, you can just shift money around as desired since there are no taxes until you withdraw the money, at which time it will just be treated as income. If you do need to sell shares in a fund to raise cash for something, try to sell positions in which you have a losing position to offset those in which you have a gain. This will probably not be possible if you’ve had the account for a long period of time since every fund will have gains.
7. Don’t forget your investment gains outside of your retirement accounts when tax time comes. You’ll need to pay taxes on capital gains, interest, and dividends for investments outside of your retirement accounts. (Those inside retirement accounts are tax-free if you have Roth accounts or taxed as regular income when you withdraw the money, provided this is done after you reach retirement age.) Your mutual fund company will send a 1099 form each year listing the dividends and interest you have had. You should keep track of your cost basis (when you bought new shares and for how much) since you may need to figure out capital gains yourself.
8. Start reading The Small Investor regularly to become smarter about investing. I’ve only covered the “what” to do with this article. Keep reading if you want to know the “why.” These are also just the basics, so you can fine-tune things to get even better returns with a little more knowledge. This is the 90% solution at this point.
So there you go ladies (and men). You now have no excuse for not getting into the markets and killing it. I don’t want to hear about any investing gap in five years.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.