Automatic Investing ... Set it and Forget it Savings! Sounds like an infomercial, right? It's definitely an attractive concept. You've probably been seeing more and more of this concept popping up all around you. The latest hot book is David Bach's Automatic Millionaire. The new trend in 401Ks and mutual funds is Lifestyle Funds.
It's hypnotic and alluring to think that you can build an automatic personal investment system to achieve your goals. It seems like a silver bullet and in many aspects it is. Once you've made the commitment to save, then actually follow through to save regularly, you just need the final ingredient to determine what to invest in. It's simply not enough to build your retirement nest egg in a savings account. But, it gets complicated when you have to think about all the investment options out there and which to use.
I've mentioned before a great study by 2 professors from Harvard and Dartmouth that points out the single most important ingredient to building wealth is to follow through with your personal commitment to save. You can follow Automatic Millionaire, The Richest Man in Babylon, or any other investment advice. The Richest Man in Babylon has been around for decades and has got to be the original automatic investment advocate. You can kick off your automatic investing by automatic draws from your paycheck to savings, 401K, whatever vehicle you have available.
The next step is selecting options of investing the savings you're building. Here's where things like Lifestyle Funds are a great new trend entering 401K funds and mutual fund arena. The goal of these funds is to handle all the asset allocations for you in one fund. You select the fund closest to your retirement date like Lifestyle 2020, Lifestyle 2040, etc. The fund automatically handles the asset allocation as you get closer to your retirement date. Being more aggressive when the date is further away and more conservative as your retirement date approaches. Liz Pulliam Weston, in her MSN Money article, explains it this way:
This is Retirement Investing 101: You want a bigger chunk of your money in bonds and cash as you approach your last day of work, since you'll have less opportunity to make up any losses.
I'm a big believer and follower of the entire automatic investing approach. I'll be looking more into these lifestyle funds as my retirement date approaches. For now I'm following an aggressive stocks only approach and I do follow an automatic approach.
I hope to blog more about it in the future. It follows an automatic strategy from the Armchair Millionaire. I have my 401k investments go to 1/3 S&P 500, 1/3 Russell 2000, and 1/3 to International (EAFE) fund. You can read more about this allocation mix and why it works so well here: Armchair Investing Strategy, from the book by Lewis Schiff Armchair Millionaire. The key to it working so well is is the principle of non-correlating markets, which simply means that while large caps might do well, small caps might not. Also, while US Markets may do well (S&P 500 & Russell 2000), international markets (EAFE Fund) may not.