One of the most important financial moves you can make is to start investing for your retirement early. This post is directed at those in the USA (but you can adjust the ideas for your particular situation). Retirement accounts with tax free growth, tax deferred growth and/or even tax deductible contributions can add to the benefits of such an investment. And matching by your company can give you an immediate return or 100% or 50% or some other amount. With 100% matching if you invest $2,000 your company adds $2,000 to your retirement account. For 50% they would add $1,000 in the event you added $2,000.

In other posts I will cover some of the other details involved but some people can be confused just by what investment options to chose. Normally you will have a limited choice of mutual funds. Hopefully you will have a good family of funds to choose from such as Vanguard, TIAA-CREF, American, Franklin-Templeton, T.Rowe Price etc.). If so, the most important thing is really just to get started adding money. The details of how you allocate the investment is secondary to that.

So once you have made the decision to save for your retirement what allocation makes sense? Well diversification is a valuable strategy. Some options you will likely have include S&P 500 index fund, Russel 5000 (total market index – or some such), small cap growth, international stocks, money market fund, bond fund and perhaps international bonds, short term bonds, specialty funds (health care, natural resources) long term bonds, real estate trusts…

Just to get a simple idea of what might make sense when you are starting out and under 40 and don’t have other substantial assets in any of these areas (large mutual fund holdings, your own house, investment real estate…) this is an allocation I think is reasonable (but don’t take my word for it go read what other say and then make your own decisions):

25% Total stock market index (~Wilshire 5000)
25% international stocks
20% small cap stocks
10% real estate
10% high quality short term bonds in a Euros, Yen…
10% short term bonds (or money market)

Another option:
25% international stocks
20% S&P 500 index
20% small cap stocks
15% real estate
10% emerging market fund (China, India, Mexico, Singapore, Brazil…)
10% money market

Some things to remember (that are often overlooked): you are most likely earning social security (which will pay you a set amount – this is most alike a money market type investment – when you think of diversification); you will most likely work in the USA (so your earning power is tied to the economy in the USA – diversification concepts would aim to spread your risk so don’t invest all your investments and future job prospects in one economy), will you be likely be buying a house? (are you saving for it with a money market fund?)…

The allocations can give you an idea of where to start (and there are plenty of other examples online I am sure). Then examine your specific situation – what funds are available in your plan. What are the strengths of those funds (Franklin Templeton has some great emerging market funds – if those are available I could see putting 15% in those) – many times you won’t even have the option, vanguard has great index funds, some 401k have much better real estate options than are available outside (companies like TIAA CREF own the real estate directly and have low expenses and good track records – so if that is an option increasing real estate can help). If you have investments in individual stocks you might balance your retirement account (so if you own mainly large cap stocks you might want to lower that exposure in your retirement account).

You could certainly eliminate bonds and money market altogether if you wanted. With the current yields on long term bonds and the risks of inflation over the long term I would not even consider them at this time (but others would). Short term bonds would be ok, but really are not needed early one – as you approach retirement they are likely to be a part of a sensible portfolio. If you want a bit stability you can increase your allotment to money market but remember over the long term that will likely barely keep up with inflation so it is not normally a good place to place large amounts of your long term investments. But if your personality will feel happier with less risk of sharp declines in value go ahead and start off with more in money market. Then continue to learn, read, get real experience with your money on the line…

Don’t worry too much about exactly how your money is allocated at first. The important thing is to start saving for your retirement. After 5 or 10 years then you can take more care with the allocation of your investments. During that time, take the time to read and educate yourself to become more financially literate and more confident. Actually taking the time to increase your financial literacy each year is the next most important thing to getting started saving in my opinion. Your starting allocation of funds is less important than that continual learning – which will allow you to improve your allocation decision over time.

Your financial decisions will greatly impact your life. Taking the time to educate yourself seems wise to me. That is easy for me to say because I have enjoyed investing and learning about investments from an early age. But just looking at the benefits of investing in your financial literacy versus the costs of failing to do so it seems like the only sensible choice to me.

Related: dollar cost averaging – sad state of many people retirement savings – 401k/403b – Roth IRA – Ignorance of Many Mortgage Holders – Questions You Should Ask About Your Investments – 12 stocks for 10 years

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