Monday Money Tip: ‘Save Appropriately, Then Invest Appropriately’

By Erin E. Arvedlund
The Philadelphia Inquirer.

Women save a higher percentage of their paychecks, according to new data from Vanguard, the Malvern mutual fund giant.

Number-crunchers such as Jean Young, senior research analyst at the Vanguard Center for Retirement Research, have taken note of this trend.

“For as long as we’ve followed the data, women contribute more to savings, but have lower savings levels,” said Young, in part because their paychecks are lower. (You can read more about the gender divide research at Vanguard’s web site:

Another nugget: “You only need two things: save appropriately, and then invest appropriately. Savings is the lever [to start investing],” she added.

Aim for a total savings rate of 12-15 percent, including your employer contributions if they offer them.

Also, portfolio construction is meaningful.

Vanguard and many other brokerages offer a marketing idea called “target date” funds built around retirement age. In these set-it-forget-it funds, balances of stocks and bonds shift automatically, depending on your age.

We posed the idea of replicating target-date funds using low-cost index funds, and Young said it’s possible to do.

Index funds, said Young, “can be appropriate, but you need the asset allocation down. Be more conservative as you approach retirement.” Instead of the mutual fund company shifting the stock and bond percentages, you do it yourself.

Inertia and misinformation make saving feel like a chore (I include myself in that crowd). Young’s own sister and her husband wrote their last checks for tuition, and finally had some extra money to put aside for retirement.

“I’ve been telling them about this idea of saving and investing for years,” Young said. “They want to be told what to do.”
Young suggested target-date retirement funds.

“But the envelope is so thick, they put it aside until they saw me,” she explained. “They like the concept so much that they’re buying two target-date funds. But honestly, they spent more time on which flat-screen TV to buy than understanding this concept.
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Young adopted the philosophy of Harry Markowitz, the Nobel Prize winner for research on the market’s efficient frontier.

“He invested half in stocks and half in bonds, and he said that during his lifecycle, one of those two assets might outperform the other,” Young said. “So if one did [outperform], he didn’t want to have regrets.”

Young herself invests in target-date funds and Vanguard’s Wellington mutual fund, a balanced stock-and-bond fund.

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