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Where To Begin Investing: 12 Ideas From My Own Portfolio


Struggling with where to begin investing? Start simple with an index ETF or mutual fund.Question for you: When it comes to investing, are you confident or clueless?

If you’re clueless, I’m going to help by giving you a peek at my own portfolio and showing you – quite specifically – where to begin investing.

If you’re a savvy investor, you might slough this off as a post for newbies. You may disagree with my simple investing philosophy altogether. But before you click off to waste time watching yet another team lip syncing on YouTube to “Call Me Maybe”, see what I have to say. Take a look at how I invest and my reasons for keeping things cut and dried. Consider your own reasons for holding each investment you own. Do your investments still fit your strategy? Do you own them because of strong fundamentals or because of a hunch, a hot tip, or because you’re taking a greedy gamble?

Why I’m writing this post

I often get emails from readers asking where to begin investing. Specifically, they’re looking for specific stock and mutual fund recommendations. For several reasons, I don’t usually indulge these requests.

For one, personal finance is personal. And the investments I’ve chosen fit me, but they might not fit you.

Second, financial media – from magazines to TV shows – already wastes far too many column inches and airtime picking stocks when most individual investors would be better served buying an index fund, setting up automatic investments, and getting back to work.

So with every post I publish that discusses individual stocks or funds, I must add a disclaimer: These funds are not “picks” and they are certainly not “guaranteed winners”. They are merely ideas.

If you’re new: My investing philosophy

My investing advice is emphatically simple: Buy a few low cost index funds or a single target date fund. If you must pick some stocks, do so with no more than 10 percent of your invested assets.

(Of course, it starts simple. As you get older and open new investing accounts, you’ll end up holding more and more investments, as you’ll see has happened to me).

I recommend that if you’re not happy with that approach, you go hire a professional money manager. If, in the process of doing so, you discover that professionals don’t want your business because you don’t have enough money yet, then perhaps it’s time to rethink why you need a more complicated investment plan.

In a recent article I wrote for GoBankingRates.com, I hypothesized that the perfect investment for a young first time investor is an S&P 500 index fund, of which there are several. I welcome you to debate me on that in the comments, but as far as singular investments go, I think it’s a pretty good one.

So the question you all probably have is: Do I practice what I preach? Well, you be the judge.

My investments

These are my current investments:

Taxable Brokerage Account
iShares Emerging Market Index Fund (EEM)
iShares S&P 500 Growth Index Fund (IVW)
iShares Dow Jones U.S. Real Estate Index Fund (IYR)
iShares Barclay’s Treasuries Inflation Protected Securities (TIP)
Rollover IRA 1
Fidelity Contrafund (FCNTX)
iShares S&P Smallcap 600 Index Fund (IJT)
SPDR S&P 500 ETF (SPY)
Roth IRA 1
Fidelity Freedom 2040 (FFFFX)
Roth IRA 2
Vanguard Total International Index Fund (VGTSX)
Rollover IRA 2
Vanguard Total Stock Market Fund (VTSAX)
SEP-IRA
Vanguard Long-Term Investment Grade Fund (VWESX)
Vanguard Total Bond Market Index Fund (VBMFX)
Vanguard Total Stock Market Fund (VTSAX)
Vanguard Small-Cap Growth Index Fund (VSGAX)

I have not including allocation percentages because they would be almost immediately out-of-date and this post will be online indefinitely. I can say that across my entire portfolio I aim to achieve about 80 percent stocks, 15 percent bonds, and five percent alternatives (the real estate EFT). Within stocks, about 50 percent are international and 50 percent domestic.

A self-critique

My portfolio isn’t perfect. My focus is on automatically investing more and holding investments unless they really suck or no longer meet my objectives.

My portfolio is an amalgam of investments I’ve purchased at different times in my life, but I’ve tweaked it along the way so it more or less stays aligned with my goals. It’s an aggressive portfolio with a lot of international exposure and only 15 percent bonds. The international exposure means it hasn’t performed as well recently with gains in domestic stocks being neutralized by flagging foreign markets. But this is a portfolio for the long haul. I don’t plan on tapping this money for 35 years still, and I’m optimistic that the international economy will rebound by then.

Right now, I do most of my allocation by buying. When my allocation dips in one area, I buy more of it.

If you’re wondering why I have so many iShares ETFs, it’s because they trade commission-free at Fidelity. Although there are some subtle differences among index funds, I’m not sweating whether some other company’s index funds perform better, at least not until I have a much bigger portfolio! My recommendation is to choose whatever similar funds — whether they are ETFs or mutual funds — that cost the least at your chosen stock broker.

The only investment I own that goes against my own advice is the Fidelity Contrafund, which is also the investment I’ve held the longest since I rolled over a 401(k) to Fidelity many years ago. The Contrafund is one of the biggest mutual funds out there and has had decent performance, but like most actively-managed funds it comes with a 1.0% expense ratio. I don’t love it and I don’t hate it, but for now I’m leaving it be.

Last year, I rolled over another 401(k) and opened a SEP-IRA (a special retirement plan for self-employed) at Vanguard because – following my own advice – they are the leader in passive index investing.

Their index mutual funds like the Total Stock Market Fund and Total Bond Market fund boast incredibly low expense ratios that are even lower if you buy the Admiral Shares with a minimum investment of $10,000 or more. This is low-cost index investing at its purest. (I should note that if you don’t have a Vanguard account, you can buy these funds as ETFs, too, you’ll just have to pay the trade commission each time you buy or sell).

Choosing what goes into your portfolio

So many readers ask for investment picks because choosing an investment, or several, is hard work. With thousands of choices and conflicting information, you’ll always doubt and second-guess yourself, especially if you’re not well-versed in finance.

No worries.

In many cases – your company’s 401(k), for example – a target date mutual fund will suffice. Just choose the date closest to when you will retire, and you’re done.

If you’re (wisely) opening a Roth IRA and need to know where to begin investing, any of these good mutual funds will do (as will many others). The key is to choose a mutual fund that meets your goals – growth for long-term investments and capital preservation for short term investing – and has reasonably low expenses.

If you’re over 30, you’d be wise to blend in a bond market index fund, too. New solutions like Betterment provide an every easier, worry-free way to do this: they allow you to invest in one fund that blends stocks and bonds according to your wish.

The catch comes if you have shorter-term investment timeline. For example, you’re saving for a new home in five years and want to do better than a 0.85 percent savings account.

You could invest solely in a bond index fund, but you may do better finding a mutual fund that’s designed to provide some growth while focusing on capital appreciation. I would make an exception for actively managed funds and (slightly) higher expense ratios in this case. Proceed carefully.

Tools

If you’re looking to open an IRA or brokerage account, choose from a list of recommended brokers here. There are also a number of tools that make it easier to figure out where to begin investing. Morningstar is one of my favorites for mutual fund research; although they offer paid products a free account gets me everything I need. If you begin adding investments, a personal finance app like one of these that can automatically show you your asset allocation and other information is also valuable.

What about you? If you were counseling a new investor, how would you recommend he or she begin investing? What was your first stock or mutual fund?

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. I’m sure I’m mistaken, but I thought you can only have a single IRA? How are you able to have so many 401ks and IRAs?

    • David Weliver says:

      Hi Joe, it’s actually quite common to amass a collection of IRAs over time. For example, you could start with a traditional IRA and a Roth IRA plus have a 401(k) at work. When you swapped jobs, you could rollover your 401(k) to yet another IRA (for tax reporting reasons, would need to be a new account). This is why I have so many, most are the result of 401k rollovers because I bounced through a few jobs when I was young. Finally, the SEP-IRA is a distinct type of account that serves almost like a 401(k) for the self-employed.

  2. First and foremost, start by participating in your 401(k) program if one is offered. Contribute up to the match limit and no more. Choose a diverse allocation within the 401(k) and do not allocate to company stock since your match will most likely be in the form of company stock. Once you have the 401(k) rolling, max out a Roth IRA every year. Anything beyond that should go into an IRA or a taxable trading account if you need access to those funds short term, like saving up to buy a house.

    The key to investing is education and patience. You don’t need an MBA from Wharton, but a general understanding is a must. Don’t make an investment if you don’t understand it. At the same time, if you don’t understand it, make an effort to learn. Once you make an investment, stick with it. It is very rare to see huge returns in a short time frame, and those who chase those huge returns often lose their ass.

  3. Just a quick observation:

    You may be served better by holding the Total International Index in your taxable account. You pay international taxes regardless of the account type, but if it is in your taxable account you can at least get the benefit of the foreign tax credit on your personal taxes. You don’t get that benefit holding the fund in an IRA

  4. I think starting with your 401(k) and understanding that is a great starting point.

  5. Adrienne says:

    I second Brian’s recommendation to have TISM in your taxable for the Foreign Tax Credit.

    I also slightly disagree with your suggestion to hold a balanced fund as you save for a down payment or other more short-term goal. Not a bad idea to balance between stocks and bonds, but most balanced funds will be tax inefficient with their bonds, unless you go with a tax-managed fund. Maybe. But why not just balance yourself with a broad stock index and tax-exempt bond fund?

    Also, I know what a rollover IRA is, but is there a reason why you didn’t roll them together? The only reason I can think of is that one is pre-tax and one’s post and you plan to backdoor IRA. Also, why are the Roth IRAs separate? Not a criticism, just an honest question. I like your blog!

  6. I am curious about your real estate index fund. How long have you owned it? It seems like the real estate market is kind of at the bottom (the fact that the iShares fund is up 15% ytd supports that). You said it is about 5% of your investments and I’m guessing it is more of a higher risk investment? Would it be worth looking into for someone who is willing to take on a little added risk?

  7. David Weliver says:

    Brian and Adrienne, thanks for the pointer. I will look into that.

    Hey Nick, I bought the real estate ETF about a year ago. I would say you’re right, it’s a bit of a higher risk investment which is why I limited it’s percentage of my holdings, but with a long timeframe I’m happy to take on that risk. I also suspect that real estate will turn around eventually. I’m not going to speculate that it’s going to keep going up starting NOW, but I’m optimistic for a slow steady recovery, which influenced me buying this fund.

  8. Any reason you haven’t consolidated your traditional IRAs and Roth IRAs?

  9. David Cole says:

    My question would be I have a 401k that has a little over $6,000 in it my employer does not match anything. So I finally got smart and opend a Roth IRA that I now put all my money toward. Now do I roll that 401k into another IRA or Roth or do I let it sit there? If I do roll it over do I evenly distirbute my money between the two IRA’s or try and max out one and if I do than contribute to the other one?

    • I don’t think you can roll over your 401(k) to an IRA until you leave the company with the 401(k). I could be wrong on that.

      That being said, if you did roll your 401(k) over, it would have to be to a new IRA.

      I don’t understand your question about maxing out an IRA. There is no maximum amount that can be in an IRA. There is a limit to how much you can contribute each year ($5,000), but rollovers from 401(k) accounts do not count towards that limit.

  10. How about bond index fund from Vanguard. I think it’s important o be careful about the stock market.

    • I wouldn’t put a high percentage of your investments in any bond fund. They will tank once the economy recovers and interest rates rise.

      • Very true, bond prices and interest rates are negatively correlated; however, the degree to which they decline in price depends on the bonds duration and convexity among other things. Some bonds have imbedded options to protect the holder in the event of rising rates, others have options which protect the issuer. In short, bond valuation isn’t as simple as rising interest rates.

  11. What would be a good return rate on investments right now? I have a target date Roth and its geting around 2.86% and my target date 401k is geting 3% is that good? Seems to me to be low but maybe thats due to the market right now.

    Also any sugestions on a investment that i can stash extra cash away and still be able to have easy access to it. Im looking for something that could be more long term say 3-5 years that i could use to save for a down payment on a house or buy a used car in cash. Thanks in advnace.

    • In this zero interest rate policy environment, any risk adjusted return in line with your personal risk tolerance that provides a real return on an inflation adjusted basis is acceptable, IMHO.

  12. ETFs are always a good idea when starting out. Mutual fund fees will eat at your annual return, and they often won’t do any better than similar ETFs. My big recommendation: when you’re investing in the stock market, remember it’s for the long term. Work on your discipline when things get volatile. Keep your hand off the sell button when the market drops and look to add more through dollar cost averaging (a little every month). The S&P 500 averages about 8% per year with dividends, but the only way to get that is to hold on as the annual return for individual years bounces far below or above 8%.