Your Money

Use a minimalist approach to win at 401(k) investing

Key Points
  • Most people revel in choices. But when it comes to the funds in your 401(k), sometimes less is more.
  • Instead of trying to understand every fund choice and investment option, choose three funds or an all-in-one target-date fund.
  • Streamlining your portfolio means you have less to worry about and less to keep track of, says Ryan Mumy, a certified financial planner.
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Life is complicated enough. The number of investment choices in a typical 401(k) plan – about 25, according to a recent report from the Investment Company Institute – is proof.

If you have a current 401(k), an individual retirement account or two, and perhaps a 401(k) from a former job, you may have money in dozens of funds. That's not even factoring in an individual retirement account and a brokerage account.

Across these accounts, you may be duplicating where your money goes.

But do you really need to choose that many investments?

Three is all you need

Proponents of the three-fund or lazy portfolio say you don't.

Investing doesn't have to be complicated, according to Taylor Larimore, author of several books on investing. Simpler really is better.

A three-fund portfolio uses basic asset classes via three "total market" index funds: usually bonds, domestic stocks and international stocks.

One caveat: As you start nearing retirement, you'll want to make sure to have more than one investment account. A combination of taxable, tax-deferred and tax-free accounts is your best bet for maximum flexibility so you don't get hit with a big tax bill when you make withdrawals in retirement.

The pros of streamlining your portfolio is the simplicity. You have less to worry about and less to keep track of, says Ryan Mumy, a certified financial planner and founder of Mumy Financial Advisors.

Newcomers to investing can especially benefit from a less-is-more approach, Mumy says. "People often over-diversify early on," Mumy said.

The more funds you invest in, the more you'll pay in fees. Over time, fees have the potential to cut into your earnings.

If you want to be successful, be lazy, says the author of 'The Big Short'
If you want to be successful, be lazy, says the author of 'The Big Short'

Larimore, an expert in the investment strategy of John Bogle, founder and retired chief executive of Vanguard, emphasizes keeping fees low and not trying to time the market.

The other part of the "lazy" strategy means not constantly reacting.

"Whenever anyone asks me for investment advice, I tell them to buy a diversified portfolio heavily tilted toward stocks, especially if they are young," said Nobel Prize-winning behavioral economist Richard Thaler, who studies how people make financial decisions.

Thaler says he recommends scrupulously avoiding "reading anything in the newspaper aside from the sports section."

How about one fund?

The simplest way to invest is through a target-date fund. This one fund gives you the correct allocation of stocks and bonds, and changes that mix over time as you near retirement.

The mistake some people make with target-date funds, though, is to invest in other funds, as well. They're designed as an all-in-one fund, says Mumy. These funds sometimes have higher fees than other options, he says.

The top regret most people have is not taking their parents' advice on saving money, which points to the most important part of investing

"You don't have to know everything at the beginning," Mumy said. "And you won't."

How much you know or how much time you spend researching aren't nearly as important as simply getting started.

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