So you have some money to invest into a stock portfolio. For argument sake, let’s say it’s $10,000.
Where do you put it?
- 35% US Stock Index Fund
- 35% International Stock Index Fund
- 10% Small Cap Index Fund
- 10% International Bond Index Fund
- 10% US Bond Index Fund
Set it. Forget it.
(Some people just want the answer and move on)
For those that want to know more detail:
Why Index Funds?
Funds are a grouping of stocks. Every fund has an ‘expense ratio’. It’s the fee that the fund charges to manage the fund. A low expense ratio is typically found in “Index Funds” and can be as low as .05%. A high expense ratio is typically found in “Mutual Funds” and can be as high as 1.25%. You should never have a need to go over .3% – meaning Index Funds are the way to go.
But, .3% is nothing, why should I care?
You know that $10,000? Let’s say you selected a .6% expense ratio vs a .10% ratio. In 25 years, you’ve thrown away $3,345, assuming average market return.
For just selecting a lower expense ratio. $3,345 for a single click – that’s a great return on a click!
Why no individual stocks?
Picking individual winning stocks is like picking the winning horse at Kentucky Derby. If you pick the right one, you can really make great money.
It’s difficult to pick the winner. This is why index funds are the recommended approach. Sacrifice some upside and all but eliminate risk.
Why 20% bonds and 80% stocks?
This asset mix is right in between aggressive and conservative.
Bonds (20%) are a safer investment (read: low risk, low return).
Stocks (80%) are a more risky investment (read: average risk, average return).
There is a definite relationship between risk and upside. The more risk you take on, the more upside you have. However, the more downside potential as well.
If you want to be more risky (more upside), you could shift the mix to 90/10 or even 95/5.
As stated above, the fact that we are investing in index funds makes the overall investments much less risky vs individual stocks.
What if I already have investments in the stock market?
You need to balance your portfolio across all of your holdings.
- Do you have a 401k?
- Do you have a Roth IRA?
- Do you have existing stocks/bonds?
If so, it’s time to apply your asset mix (the %’s above) to the entire portfolio.
What return should I expect?
Nothing is guaranteed. Historical performance is no indication of future performance.
With this asset mix, historically you would see a 5-8% return each year. Over 25 years, your $10,000 turns into $46,000.
You spent 15 minutes setting up the account, don’t touch the money for 25 years, and you add $36,000 to your net worth.
Where can I invest?
There are unlimited institutions that will happily accept your money.
My top 2 recommendations would be Vanguard or Fidelity. Both offer low expense ratio index funds, have good apps to track your investments and are large institutions that will be around for the long haul.
Investing doesn’t need to be rocket science. If you have funds you want to invest in the market – make it easy on yourself:
- Setup an account
- Deposit $
- Determine your asset mix (i.e. 80/20)
- Invest in the appropriate Index Funds
- Leave it alone
- Enjoy the returns in the long-run