The Optometrist’s Guide to Investing 101
Chapter 5: Target Date Retirement Funds & The Age of Robo-advisors + Which Brokerage is right for me?
What about Target-Date Retirement Funds?
Feeling overwhelmed with all the financial jargon? Thinking, “Dat, I pursued optometry, not finance!”? That’s totally fine.
While here at ODs on Finance we advocate the DIY investing approach, we do recognize that investing isn’t everyone’s cup of tea, especially for busy professionals like doctors. If you’re reading this, you’re already ahead with a grasp of the essentials.
Want a hassle-free solution? Consider a Target-Date Retirement Mutual Fund. Think of it as the One Ring to rule them all in investing (and, yes, that checks our Lord of the Rings reference for the day). Most 401(k) or retirement plans offer these funds. You simply select a fund that aligns with your projected retirement year.
Financial Tip
"Target date retirement funds are an easy way to invest and will automatically re-balance your asset of stocks and bonds each year, with more emphasis on bonds as you approach retirement age. But if you are in your 30s, the fund will be more weighed on stocks which have a higher return, but more risk"
Example: If I am 30 years old (as of 2020) and want to retire at 65 years old or around ~2055. Then ideally, I want to choose a Mutual fund with a target date retirement of 2050 such as the Vanguard Target Retirement 2050 Fund Investor Shares (VFIFX) .
This Vanguard fund isn’t too expensive at a 0.15% expense ratio, but use caution because certain 401K plans will have target-date retirement funds costing up to 0.80% - so check carefully!
If you want to be more aggressive with stocks, then just select a later target date retirement fund like Vanguard Target Retirement 2065, rather than Vanguard Target Retirement 2050 Fund. There isn’t going to be a red alarm going off in your 401K selections if you didn’t select the fund date that matches up with your retirement date.
The only downside is you don’t have as much control with the funds inside the plan and most target date retirement funds will be slightly more expensive than a S&P 500 Index fund.
For a new investor, target date retirement funds are a great choice and much easier to start with! Once you are more experienced and want to be more in charge of your investments, you can always change your investment options later
What about Robo-Advisers?
Despite the futuristic name, they aren’t sci-fi robots making stock choices for you. Or are they?
Robo-advisers are online platforms using algorithms to determine your ideal investment mix, considering your risk appetite and time horizon. They also periodically recalibrate your assets. With no humans in the loop, fees are significantly lower, typically between 0.25 percent to 0.50 percent, versus traditional advisers who charge 1–2 percent.
Platforms like Betterment and Wealthfront have resonated particularly well with millennials. It engages the investor by making the investing process extremely user-friendly and easy; also, it tracks the performance process each year with pretty graphs and charts.
The question is: do you really need it?
Again, while we advocate for do-it-yourself investing, we understand that some individuals require more hand-holding or don’t want to deal with the headaches of selecting all these funds themselves, so Robo-Advisors are great for them!
But to be frank, Robo-Advisers basically do the same job as a simple low-cost target-date retirement mutual fund. This includes re-balancing the portfolio and stock to bonds selection, but without all the shiny lights and bells. But hey, if you don’t mind paying that extra 0.25-0.50% fee, then go for it!
Financial Tip
Essentially, robo-advisers mirror the functions of basic low-cost target-date retirement mutual funds but add some bells and whistles. If you’re alright with the slight fee hike, dive in!
Which Brokerage Should I Invest With?
A brokerage company is basically a place that connects buyers and sellers of all investment types like stocks and bonds.
A brokerage account is where investors keep their accounts at such as retirement (Solo 401K, SEP/SIMPLE/Trad IRA, and/or Roth IRA). In addition, investors can also have their Individual Taxable account where they can invest outside of retirement. For investors with children, most brokerages will offer a 529 college account.
We advocate selecting low-cost, online and full-service online brokerage accounts to meet all needs for investors.
Considered the first discount brokerage and remains a great choice for passive investors with great choice of funds and excellent zero-commission options for index funds and ETFs. The user-interface on its website and mobile application is a bit lacking, but overall great!
Trading Fee= $0
Account Minimum= 0%
Combines $0 commissions, top-notch research, and an excellent mobile app, all in a simple platform. Its own fidelity funds parallel the great performance of Vanguard funds. With $0 account minimums and zero-expense-ratio index and mutual funds, this is one of the most affordable brokers. It also has 200 branches for in-person support.
Trading Fee= $0
Account Minimum= 0%
Best known for for investment selection and research. It tends to support active traders, but also caters to long-term investors with access to thousands of mutual funds/ETF that can be traded for free.
Trading Fee= $0
Account Minimum= 0%
Recent aggressively slashed fees on its mutual funds and ETFs, eliminated common account fees, reduced commissions to $0 per trade, and allows investors to buy fractional shares of stock, making it extremely affordable.
Trading Fee= $0
Account Minimum= 0%
Financial Tip
"Robinhood gained its popularity with younger millennials and was the first platform to offer zero-commission trading fees. But this is a moot point since now, every other major brokerage offers the zero-commission fees as well. In addition, due to recent technical crashes of 2020, limited stocks/ETF/Mutual funds, poor tax service, limited service options and accounts choices, we do not recommend Robinhood for the more “serious” investor.
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