Simplicity, it’s what we all want to achieve in every aspect of our life. That’s why we have Netflix instead of cable (& it’s cheaper), Amazon Prime delivering any & everything to our door in 2 days or less, & Postmates so Taco Bell can magically arrive at your door (where was this in college???)….Well this post will show you how your investing portfolio can be just as simple…
Hopefully if you’ve read this blog (or other personal finance material) you know the importance of investing. But the next question many people ask is where do I invest??? Do I buy stocks, bonds, mutual funds, ETF’s?? This shows why a lot of people avoid the market, it’s complicated!
Honestly you don’t have to be a genius, wall street guru, or financial analyst to be a smart investor at any age. While everyone wants to be Gordon Gekko or Jordan Belfort as a stock picking guru/day trader the chances of success are very small for the average investor.
By picking stocks individually you:
1. Have a lot of your “eggs” in one basket (i.e. if the company has a bad earnings call or something affects the stock your investment will be directly related)
2. Live and die by one company (this happens a lot when people invest their 401K or employee stock into their employer, there may be benefits but it can also cloud your judgement as you’re already emotionally invested to the company)
3. Have to stay actively engaged & research the stock (who wants to read earnings calls, understand a balance sheet & learn their price to earnings (P/E) ratio? (Just typing that made me bored…)The majority of people should focus on LOW COST INDEX FUNDS (read more below) when investing in your 401K, Roth IRA, or brokerage accounts INSTEAD of picking individual stocks.
Is this as sexy as buying Netflix seven years ago and making 300% gains? Or Amazon or Apple a few years ago? The simple answer is NO, but unless you have a few hours (or more) a week to study eachstock in your portfolio don’t bother with individual stocks until you have a decent amount of wealth built up. Instead of stock picking focus on index funds!
What’s an index fund???
As the name implies, index funds follow a specific index (like the S&P 500 or Dow Jones). Historically these have returned ~8-9% returns annually, while you may get more in some years from individual stock picking you may also lose more on down years. Index funds try to keep performance consistent and reliable.
Investopedia defines it as “A type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.”
Basically it means that index funds are a single fund that invests in HUNDREDS of individual stocks or bonds. Let’s look at an example to simplify;
VTI (the stock ticker symbol) is known as the Vanguard Total US Stock Market Index. One of the biggest funds available; it currently holds 3,682 stocks worth $419 BILLION.
Here are the 10 biggest stocks in the fund:
You can see in the holdings above how diversified this index fund is just based on their top holdings (not including the thousands of other stocks that make up this one fund. Index Funds = Instant Diversification! This is an example of index STOCK fund (meaning no bonds are in these). An example of a bond fund would be BND; a fund that has 7,911 bonds that make the fund worth $158 billion.
Now you’ve understood the “hard” part about the original question…Where do I invest my money?
Next up is understanding how to be LAZY with your portfolio to keep the theme of simplicity going.
In fact you want to make your strategy as lazy as possible! A LAZY portfolio? This is the only time I’m asking you to be lazy in life but it a strategy I have implemented and am so happy I did (automatic investments, easy to re-allocate & it has a long track record of success by tracking the overall stock market). Don’t believe me? Ask Warren Buffet who swears by index funds for the average investor!
“Lazy Portfolios” are meant for you to be able to invest in a few funds and be fully diversified with just a few clicks (Pizza Hut Delivery is about the same amount of work with all those toppings & crust options ha). Make sure you are comfortable with yourasset allocation and figure out which percentage of stocks/bonds will match your risk tolerance.
Here is an example of a TWO fund portfolio which is great if you’re just starting out & think investing is hard!
VTI – Total US Stock Market
BND – Total Market Bond FundPros
- Low fees (meaning you keep more $$$)
- Low minimum investment (1 share of each)***As of 5/12/16 VTI is trading at $105/share & BND is trading at $83/share
- Passively Managed
- Diversified (between the two funds: 3,682 stocks in VTI & 7,911 bonds)
- Doesn’t have any international exposure (not the end of the world)
Good For: Beginning investor who doesn’t have a large amount of cash to start
Here is an example of a 3 fund, Vanguard only portfolio (that’s right you can have a low cost, diversified portfolio with only three funds). This is a great place to for beginning-moderate investors and you can also add to this in the future if you want additional diversification (i.e. international bonds, real estate trusts (REITS)).
- Low cost
- Low minimum investment (1 share of each)
- Passively managed
- Diversified (US Stocks, International Stocks & Bonds)
- You don’t have cool water cooler talk about the stock you bought (The reality is that there is no cons….)
Most people don’t invest until it’s very late because it seems tedious, they don’t understand how to, or where to invest & because it requires constant upkeep (who wants that?). Lazy portfolios are the exact opposite & make your life simple.
Next time you decide to procrastinate on making your 1st investment read this post and suggested articles below to remember how SIMPLE this is…Lazy Portfolios let you set it & forget it! And that’s the goal, to keep our lives easy.
Want more than two or three fund portfolios or more diversified? Check out this breakdown of otherpopular lazy portfolios.