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Hello Everyone,
Although I’ve read a lot about the benefits of maintaining a varied portfolio to reduce risk, I’m not entirely sure how to balance my assets. I now have a combination of stocks, bonds, and cash because I’m relatively new to investing, but I’d like to improve my strategy.
While I’ve heard about a number of strategies, such as the 60/40 rule (60 percent equities and 40 percent bonds) and age-based allocation changes, I’m interested to know what has been most successful for other members of this group. How do you go about diversification, particularly in the erratic market of today? Is it better to concentrate more on index funds or may individual equities still have a role in a diversified portfolio?
I would be very grateful for any advice, materials, or experiences that could assist me in developing a more reliable and comprehensive investing plan. Growth over the long run and reducing possible losses over time are two things that really fascinate me.
Thank you in advance.
The intent with my input is not to add comments/advice that are not applicable, so hopefully my suggestion to insure your success (sorry for the pun!) with term life insurance in case your well thought out plan goes awry, is ok.
I believe this matters mainly if you have dependents/spouse and want to make sure they are taken care of in case you die early.
I did this and am grateful. While I don’t need the policy now, if my lung cancer diagnosis had come when I was younger, not having it would have been a big problem for my kids and wife.
some of questions I ask to make these decisions
I find the “% cash, equity, bonds” portfolio resultant makeup is a fall out when the questions are answered above.
This is a great set of guidelines. Thanks for posting.
In your request for materials I would suggest the following as a start-
The writings of Adam Grossman who has been a fixture in the articles on Humble Dollar and also posts on his own Company website.
One of his free e-books – Seven Steps to Financial Success is a quick and meaningful read.
I also think Richard Ferri’s book (2010) All About Asset Allocation, second edition would be one of the first books I would want to read early if I was starting my financial education from scratch.
Jonathan’s 2018 best selling international book How to Think About Money is a wonderful read. If I could only have read one of his financial books this would be the one.
I hope this helps.
Best, Bill
I agree with others’ comments that your choices for asset allocation and types of investments are very personal and there is no right or wrong, only what you’re comfortable with. Reviewing materials on this website is a great first step.
Since you asked what others have found successful, I’ll share my general approach. This may be overkill and of limited value to veteran HD readers, but maybe you will find it useful.
I don’t arrive at my asset allocation by targeting specific percentages for stocks and bonds. I’m 20 years out from retirement with a spouse and elementary school children. First, I think about our expenses and events that could happen in our lives (job loss, prolonged medical issues, etc.) which might lead to us drawing down our assets.
First I consider how much cash I want in our savings account. Our family expenses are around $75K/yr, so we keep around $60K in a high-yield savings account and short-term CDs. Everyone’s “margin of safety” is different, but for myself I want a large portion of what we could need for a full year in a risk-free, easily accessible, account.
Beyond our cash, we have another $60K in a total bond market index fund held within our 401Ks. A total bond fund carries some risk but its downside is typically (2022 aside) much lower than stocks. As we age and get closer to retirement, I plan to add more to our bonds, including shorter-duration bonds, with a goal of having at least several years of expenses between our cash and bonds before retiring.
Resulting percentages of our asset allocation don’t concern me. As for investments, we currently only have Total Stock Market, Total International Stock Market, and Total Bond Market (though again we will be adding additional bond market index funds in the future).
Best of luck to you.
Definitely read the guide and articles here. After that I recommend the bogleheads site – both the wiki and forums, particularly the one on personal investing. The first step is indeed to decide your asset allocation, but that is a very personal decision, a combination of your age, your need to take risk, and your ability to take risk – if the stock market drops 25%, and it will, can you resist the urge to sell? It will change over time – at 77 my allocation is much more conservative than when I was working.
As part of that first step — settling on an asset allocation — investors should ask why they’re investing. Obviously, those saving for retirement 40 years from now should have a very different asset mix from those looking to buy a home next spring. As folks get excited over buying funds and stocks, I fear the “why” question doesn’t get asked nearly enough.
Well, yes, except I wouldn’t consider money I was saving for a house – or a vacation – as part of an investment plan. I’d count it as short-term savings and put it somewhere safe.
This may not be helpful to you, but I have chosen a single, well diversified fund that comprises all my retirement accounts; IRA, Roth, HSA. Easy peasy, no rebalancing, nothing to do. Don’t make it more complicated than it needs to be. Investing has never been so easy and cheap.
Now dealing with the tax issues of withdrawal is another story. It’s never been more complicated and convoluted.
Would you be comfortable telling folks what fund you own? I imagine it’s a target-date fund.
Maybe I’m being a little petty, Jonathan. My fund of funds is 100% equity, value tilted, and a little higher cost than standard index fund offerings, so it wouldn’t be appropriate for most people, especially novice investors. That’s mostly why I’m reluctant to share, but I also suspect many would disapprove and let me know, lol. For whatever it’s worth, I also hold cash in my brokerage account to the tune about 10% of my portfolio.
Actually, I’m not that comfortable sharing it, Jonathan, because I don’t care for the scrutiny it would bring, but I strongly endorse a Vanguard Life Strategy or Target Date fund for all accounts.
I agree a target date fund in all accounts is great for simplicity, assuming there’s a separate cash allocation outside it.
That said, I’d opt for building a portfolio of a few index funds rather than using a target date fund across accounts. Doing so would allow me to locate most (or all) of my bonds in a tax protected account so they aren’t producing year-to-year taxable income. (What if I want to sell bonds to get spendable cash? Jonathan talks about this in the guide.) It would also allow me to locate most/all of my international index funds in taxable accounts so I can take credit for foreign taxes paid through those funds.
These aren’t necessary to be successful, just a way to save on taxes if one is inclined to work just a little for it.
Good point — target-date funds are great for retirement accounts, not so great for a regular taxable account, unless you’re in the 12% or below federal income-tax bracket.
That’s fine, of course! I’d happily recommend Vanguard’s LifeStrategy and target-date funds, and also the target-date index funds from Fidelity and Schwab. Meanwhile, I’d avoid other target-date funds, including those from Fidelity and Schwab that own active funds.
Kelly: Thanks for the question. There are many ways up the mountain, so you’ll get as many answers as there are investors. I’d suggest embracing simplicity, avoiding trading, ignoring market predictions, taking a pass on individual stocks and making broad market index funds the core of your portfolio. You might want to give this section of HumbleDollar’s money guide a read:
https://humbledollar.com/money-guide/portfolio-builder/
Kelly, I agree and that guide is a great place to start.
Note the closing of Step 5, Build Our Own: “Do you consider yourself an investment junkie—and hence you’re willing to buy more than just total market funds? It’s time for steps 6, 7 and 8.”
To answer your question as to whether there can be a place for individual stocks, the answer is sure, but the odds are stacked against most people. By your own description you are far from an investment junkie. If I were a person like you (or even a person like me who is a bit of a junkie) I’d decide on an investment allocation, fill it with index funds, keep contributing through thick and thin and rebalance occasionally, generally avoiding individual stocks and active funds.
Know thyself.
”but the odds are stacked against most people.”
This line is a perfect opening to quote John Bogle, “Don’t try to find the needle in the haystack, just buy the whole haystack.”
I recently read that over the years all of the S and P’s (I think it is) return is due to just 4% of the stocks. Does anyone think they are smart enough to pick those stocks? I’m not, that’s why I have never owned a single company’s stock.
I believe the quote you’re referring to is from a study of about 26,000 stocks on US stock exchanges since 1926. Keep in mind that a high percentage of stocks get listed before they’re even earning a profit (depending on the rules of the stock exchange they trade on). Here’s a Morningstar article about the study: What are the most profitable stocks of all time? The answer might surprise you. | Morningstar . The percentage is worst for international stocks: Only 2.4% of companies deliver all net shareholder wealth (morningstar.com.au)