ONCE YOU’VE BUILT your portfolio of low-cost index funds, benign neglect is the best strategy. But you shouldn’t neglect your portfolio entirely.
Every year or so—or after big market moves—look to rebalance your portfolio. This isn’t something you need worry about if you opt for a one-stop shopping fund, described in step 4. But everybody else should have target percentages for their various fund holdings. For instance, you might have earmarked 40% of your portfolio for a total U.S.
INVESTMENT EXPERTS often talk about four asset classes: stocks, bonds, cash investments and alternative investments. This last category includes a hodgepodge of investments, including real estate investment trusts (REITs), commodities funds, gold funds, hedge funds and mutual funds that pursue hedge-fund-like strategies. In each case, the hope is the same—that these investments will not only generate decent long-run gains, but also they’ll perform unlike the broad stock market and, indeed, they may post gains when stocks next nosedive.
IN RECENT YEARS, there’s been much buzz about so-called factor investing—favoring groups of stocks that academic research suggests will generate superior returns over the long haul. But those superior returns are by no means guaranteed and, indeed, the various factors have occasionally suffered long periods of underperformance.
Among the most popular factor tilts: overweighting small-company stocks, bargain-priced value shares, stocks displaying upward price momentum and companies with high gross profitability. There are now mutual funds and exchange-traded funds available that seek to exploit all these factors.
MOST BONDS PAY a fixed rate of interest—which means inflation is their mortal enemy. Every tick higher in consumer prices means the interest you earn has less purchasing power.
What to do? You might split your bond portfolio between a total bond market index fund—which will hold mostly traditional fixed-rate bonds—and a fund that focuses on inflation-indexed Treasury bonds. The latter have their principal value stepped up along with the inflation rate, plus you earn a little additional interest on top of that.
WANT TO BUY the right investments? First, you need to decide why you’re investing. Are you looking to make a house down payment next year, put your toddler through college or fund a retirement that won’t start for 30 years?
That brings into focus the crucial issue of time horizon and hence the maximum amount of risk it’s prudent to take. While those who will spend their savings soon probably shouldn’t own anything riskier than a short-term bond fund,
TO KEEP YOUR financial life simple, you’ll want to stash your investment dollars at just one or two financial companies. Which firms should you pick? Look for fund companies and brokerage firms that offer the investments you’re aiming to buy—and do so at a modest overall cost.
That immediately brings up a key decision: Do you plan to buy index mutual funds, exchange-traded index funds (ETFs) or some combination of the two? Index mutual funds are bought directly from the fund company involved,
FIGURE OUT HOW much money you’ll need from your portfolio over the next five years. We’re talking here about the funds needed to pay your teenager’s college bills or to cover the next five years of your retirement expenses. With such a short time horizon, you simply can’t afford to take a whole lot of investment risk. You should also play it safe with your emergency money, even though you can’t be sure when you’ll need it.
NOW THAT YOU have your next five years of portfolio withdrawals stashed in conservative investments, it’s time to deal with your longer-term money—those dollars you won’t need to spend in the next five years.
While stocks have historically notched gains over most 10-year holding periods, there have been some five-year losing stretches. The implication: You might buy stock funds if you have 10 years to invest. But once you’re within five years of spending the money,
IF TARGET-DATE index funds are so great, why buy anything else with your long-term investment money? There are three reasons: By building your own portfolio of index funds, you could potentially lower investment costs, trim taxes, and put together an investment mix that’s less risky or has a higher expected return.
To that end, you might start with three core holdings: a total U.S. stock market index fund, a total U.S. bond market index fund and a total international stock index fund.
LOOKING TO BUILD an investment portfolio—or rethink the mix you already own? Welcome to HumbleDollar’s portfolio-building guide. This guide takes the most important advice from the site’s chapters on investing, markets and taxes, and turns it into nine simple steps that should help you build a sensible, low-cost portfolio of index funds.
Step 1: Ask Why
Step 2: Pick Your Provider
Step 3: Cover Cash Needs
Step 4: Off the Shelf
Step 5: Build Your Own
Step 6: Fend Off Inflation
Step 7: Tilt Your Portfolio
Step 8: Add Alternatives
Step 9: Keep Your Balance
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THERE ARE FIVE key scenarios where hackers could potentially wreak havoc with your financial life. Data thieves could:
Rack up charges on your credit cards.
Apply for a loan or credit card using your identity.
Steal money from your financial accounts.
File a false tax return claiming a refund.
Steal your medical information and then use it to, say, fraudulently fill prescriptions or submit medical expenses for insurance reimbursement.
How can you defend yourself?
DURING ITS BRIEF existence, HumbleDollar has run a large number of articles devoted to kids and money. For instance, we published a series of five pieces by our bloggers devoted to what they learned about money when they were children: Growing Up (Part I), Growing Up (Part II), Growing Up (Part III), Growing Up (Part IV) and Growing Up (Part V). There were also three earlier pieces by Sam X Renick, two of which discussed what his father taught him: How to Keep All Your Earnings,
WHEN YOU SETTLE on your portfolio’s split between stocks and conservative investments, you should take a broad view of your finances—and factor in the many parts of your financial life that look suspiciously like bonds. If you think of a bond as something that kicks off a steady, predictable stream of income, that description doesn’t just fit the paycheck you might be collecting. It also describes a host of other assets, including certificates of deposit,
LOOKING TO GET more out of your money? You could dive into each of the money guide’s chapters and peruse the sections that seem most relevant to you. As you’ll discover, each chapter begins with a short introduction and a list of all sections in that chapter.
But here’s an alternative way into the money guide: Check out the key questions you need to consider. The articles below ran as a series of blogs—and each includes links to relevant pages in HumbleDollar’s money guide.
WE MAKE ALL kinds of financial errors, but three mistakes loom especially large: We use money in ways that hurt our own happiness, we derail our portfolio’s performance, and we spend too much and save too little.
Why do we make these mistakes? Here are five things we need to remember about ourselves:
We’ll never be satisfied
We’re social creatures
We are too focused on today
We hate losing
In many situations,