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.
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)|
|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.
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.
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.
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?