I struggled for years with managing my portfolio, gaining and losing a lot of money by following different advice. The ultimate investment strategy is one that requires a minimal amount of management time but gives me piece of mind that I’m securing my financial future. I have read hundreds of books on personal finance, attended seminars, read magazines, and more. I came to realize that there is a lot of noise out there not relevant to the average investor. I have boiled down the investment essentials for the average investor to the following:
- Indexing should be a core strategy for most of your investments. I recommend following an ETF asset allocation model.
Most brokerages have portfolio tools that will select a set of ETFs for you based on your profile (e.g. if you’re a younger investor, you should choose to invest more aggressively than someone approaching retirement.) These tools will take the amount of money you want to invest and based on a strategy matching your profile, will determine an ETF portfolio and how many shares to buy of each fund. The ETF portfolio will be comprised of a dozen or so funds in different asset classes. You can simply hit one single button to make all the trades. At least once a quarter during the calendar year, you should make sure you are in balance and make trades as needed to get to the original asset allocation. Fidelity and Schwab have this tool for account holders. Look for ‘ETF Portfolio Builder’ under the section of the website for investment tools.
Alternatively, there are websites such as FutureAdvisor and GemStep that will not only give you the information about what ETFs to buy, but will also make trades on your behalf to keep the portfolio in balance. There is a cost for the trading service , but it’s nominal compared to hiring a financial advisor. You can also opt for a lower fee to receive emails about the needed trades and then make the trades yourself. I recommend going this route of receiving email alerts to minimize the fees and because generally the frequency at which you need to make changes is low (2-3 times a year typically).
Below is a screenshot of an ETF Portfolio Builder tool from Schwab.
- Restrict stock picking to a relatively small part of your portfolio and to a fixed dollar investment amount.
I don’t recommend the average investor spend time picking individual stock and funds. The track record for average investors picking stocks is not good. Also the average investor won’t put the time in to track those investments on a weekly or even monthly basis and determine when it’s time to sell the position. If you truly want to stock pick, then assign a fixed amount of money to invest that you’re comfortable losing. For example, I allocated $25,000 as money I would play with for stock picking. I could have invested more but didn’t want to take a chance. So if I really feel strongly about a stock, I can buy it. I just don’t make individual stocks my core strategy.
- Maximize contributions to retirement accounts.
Putting as much money as the IRS will allow into retirements accounts will enable you to grow your investment tax-deferred which will net you more money in retirement. Also it will lower your gross income so you pay lower in taxes in the present. Of course, take your company 401K match if it’s offered.
- Find a good mutual fund newsletter.
While, I follow an indexing strategy for most of my portfolio, indexing can slightly underperform the overall market because of reduced risk in using asset allocation. In other words, asset allocation lowers the riskiness of your portfolio (as it contains bond components and other less aggressive funds). This can lower your overall portfolio return compared to the market average.
I’m willing to take on a little more additional risk with the chance of getting a higher payout by using mutual fund newletter recommendation. Mutual fund newsletters are offered by investment firms. You basically buy the recommended portfolio. Every week, you get an update as to whether or not to make any changes to that portfolio. I follow a newsletter called “Fidelity Insight and Monitor” for my rollover IRA account.
Hulbert Interactive is newsletter that ranks investment newsletters. You can use this to see the highest rated newsletters. But note, there is no one newsletter that is always on the top. However, you can still see the newsletters performance compared to others. Check the published performance numbers of the newsletter to help you find a good one.
With Fidelity Insight, I looked at the newsletter performance compared to the S&P 500 performance for the history of the newsletter (over 25 years). There were years where it underperformed the S&P 500 but overall it had more years where it met or exceeded (very slightly) the S&P. Diversifying and buying several funds simply helps you get the market average but with lower risk than if you bought only one fund that tracks the S&P 500 only. Again, you won’t see returns that wildly surpass the market average, but you may achieve the market return or very slightly surpass it with a lower risk than buying an S&P index fund.
- Own alternative investments like REITs in your IRA.
A good way to diversify your stock portfolio is to own REITs or Real Estate Investment Trusts. These are funds that buy real estate stocks. I follow a simple strategy to buy a REIT index fund, for example Fidelity Real Estate Fund (FRESX). It’s best to own these in your IRA as REITs have a lot of turnover and therefore result in capital gain taxes when the fund sells any of its holdings. In your IRA, you can avoid paying these taxes.
401ks typically don’t offer REITs. So the IRAs would have to be ones like ROTH, Individual, or Rollover IRAs. Again, indexing should be your core strategy. But diversification with REITs gives you some diversification into real estate without dealing with the hassle of buying actual property.
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