3 simple solutions for fearful new investors

By MP Dunleavey

Editor's note: Columnist MP Dunleavey and eight other women have come together online to strip away the myths surrounding money, lay bare their assets and liberate themselves from debt. Follow the quest for financial fabulousness of these "Women in Red" every second Monday in Dunleavey's column on MSN Money.

My stomach is churning, my heart is pounding and at night I toss and turn. What's wrong, you ask? Is my job at risk? Is my husband having an affair?

Sob! No -- I'm just trying to figure out how to invest my retirement funds.

I've got a $7,000 SEP-IRA that's been sitting in an ice-cold, less-than-zero-interest money-market account for two years. From time to time an advisor from my bank calls and pleads with me to invest in something. Anything.

But there are 18 million investment options out there. (I count them when I can't sleep.) What if I pick the wrong one?

Some simple solutions

I'm not alone in my paralysis: My fellow Woman in Red, Jill, has $26,000 in a rollover IRA from her previous job three years ago that's also stuck in money-market limbo, earning 3%. Like me, she's wanted nothing more than to invest it. But she feels overwhelmed by the dizzying number of investment choices and complex variables involved in making this key life decision.

Well, come to find out: There are answers for folks like us. And they don't involve joining a cult that scorns retirement because life on planet Zorbiton doesn't require cash.

These basic, beginner, novice investment methods rely mainly on the use of index funds and exchange-traded funds (ETFs) -- which are assortments of stocks (think: box of chocolates) that capture the overall performance of different market sectors.

(Can you believe I just wrote that? I'm learning so much I can practically open my own investment firm!)

Don't think, invest

The clever idea behind the simplest of these so-called passive investment strategies is to not strategize. "We're inundated with this idea of beating the market," says Bill Schultheis, creator of the Coffeehouse Investor, "but, in fact, that's the most destructive activity you can engage in for your portfolio."

Because index funds and ETFs mimic the return of various market segments (stocks, bonds, real estate), you do as well as the markets do. Over the past 10 years, the S&P 500 stock index ($INX) (often used as a proxy for the stock market as a whole) has returned an average of 11.3% per year.

I admit this had an instant appeal. Because doing nothing when you don't know what to do can be profitable when you're using one of these low-impact strategies.

1. Let the pros do it

This is the easiest way to go. You invest your money in a single fund today and just leave it alone for 10, 20, 30 years or more. The fund's managers invest your money in a variety of other funds offered by that same company, and the mix of asset types is tailored to your risk tolerance, your expected retirement date or both.

Lifecycle funds: Sometimes called "targeted-maturity funds," these are a relatively new concept. But they're increasingly popular in many 401k plans. These one-stop-shopping investments are a mix of mutual funds representing various asset classes (mainly U.S. stocks, foreign stocks and bonds). The percentages allocated to each asset vary depending on when you plan to retire.

For example, I could put my entire IRA into the Fidelity Freedom 2035 Fund (FFTHX) and forget about it until I'm 70. The fund managers will rebalance annually and gradually reduce investment risk, mainly by increasing the percentage of bonds, as I get nearer to retirement.

Funds of funds: These are similar to the life-cycle funds in that they are comprised of a collection of a company's other funds. Like the life-cycle funds, they're meant to cover all your bases and deliver comfortable returns while you watch TV.

The Vanguard Star Fund (VGSTX) is the classic balanced model, a ready-made portfolio of 11 mutual funds. Similar funds worth considering are the T. Rowe Price Personal Strategy Balanced Fund (TRPBX), PIMCO All Asset D Fund (PASDX) and TIAA-CREF Managed Allocation Fund (TIMAX). These are all great for novice investors but don't include the age-adjusted risk reduction of the life-cycle funds.

2. Manage-it-yourself methods

These strategies are a little more hands-on, requiring you to do your own rebalancing once a year. What does that mean? It means that you buy and sell additional shares of the funds you own to restore them to their original allocation percentages.

The Couch Potato Portfolio: The brainchild of Dallas Morning News and MSN Money columnist Scott Burns puts 50% of your money into each of two index funds: Vanguard Total Stock Market Index (VTSMX) and Vanguard Total Bond Market Index (VBMFX). That's right. If you can count to two, you can do this. Burns recently expanded the portfolio to optionally include a few more funds for greater diversification. You can view the expanded portfolios here (site registration is required).

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