For my first column I would like to address general investment advice to the beggining investor and how to allocate their money.
General Advice
The first question is stocks, etfs or mutual funds? I would recommend mutual funds over etfs, and to have no stock ownership. You should be dollar cost averaging and adding money to your account every month(or quarter). If you start young with no money and you put in even just 100 dollars a month in the s&p 500 index, you can literally have hundreds of thousands of dollars by the time you retire.
My recommended portfolio would be something like this((Note this post is meant for long term investors people far away from retirement and people who have high risk tolerance. (I will be posting shortly a different asset allocation for more risk adverse investors) Its very easy to say you are confident enough to not sell out when your IRA falls by 50%, but it is hard to do in practice. On the other hand people who did not sell out during the during the tech crash and the most recent crash,(and better yet bought on the way down) then this post is for you)).
For 99.99% of people including many "professional investors" you should be buying mostly mutual funds and not be investing in individual stocks. Only a few select individuals who have time to spend researching stocks, are very not gamblers, and don't invest like the aroud should buy individual stocks. I will spend some time discussing individual stocks in later posts.
For the investor who meets the criteria above, I would structure my portfolio as follows:
1. 80% stocks which have the best returns over long periods of time
2. 10% bonds
3. 10% reit
1. Stocks
I would break down the stock structure as follows:
15% S&P 500 Index
30% large Cap Value US Index fund
15% Foreign Value Fund
10% International Stock Market Index Fund
20% Small Cap Value Index fund
10% Foreign Small Cap Value
I would put no money in growth funds since over time, value has shown itself to far outperform growth. Yet I would still put some money in the S&P 500 for when growth has a crazy run like in the late 90s so you dont get frustrated and jump into growth stocks. small cap value have amazing long term returns and foreign small cap value have even better. thats why i would have them equal about 30% of my portfolio
2. Bonds
I would mostly have long term bonds(however, right now with interest rates are so low you will get killed when interest rates go up especially with very long term treasuries yielding only around 4.6 %. At this point im not sure what % I would recommend for right now to invest in long term bonds) In a normal situation where interest rates are at least 4% and I would place 50% of my bond money in a long term bond fund,
20% TIPS
A note on TIPS, TIPS now have very low returns. When TIPS were returning 3.5% plus cpi they were much more attractive. For right now I would recommend That you put 45% of your bond money in a short term Investment Grade Bond Fund and 10% in TIPS. When interest rates return to at least 4% I would recommend the regular 45% Long Term Bond Fund and 20% TIP allocation.
15% Foreign and 10% Emerging Market bond fund these provide some diversification in case intrest rates rise alot in us and us bonds go down alot in value
10% High Yield Bonds these historically have provided excellent returns(but are almost as volatile as stocks so be forewarned)
3. Reits
Reits have historic great returns(close to stocks) and povide a good inflation hedge. It is a good way to get some diversification that does not correlate too much to stocks, while getting high returns. Reits have fallen dramatically over the past few years, and now is a great time to invest in them
What I would not do
I would not put money in gold. Historically gold has basically returned nothing(inflation adjusted). Espcially after the huge run up in gold, this is probally the worst time to buy gold. Therefore, Gold which is extremely volatile, and has a very poor track record, is a very poor investment choice. The more I hear about everyone buying gold, The more I fear a crash will eventually occur.
If you are very concerned about inflation, REITs, TIPs and stocks(over long periods of time, but not short ones) should provide more than enough protection.
I would recommend putting as much money as possible in an IRA, dollar cost averaging, even if its only afew hundred dollars a year, and trying to invest even more when the market crashes. I will discuss this approach where you invest more when the market goes down called Value averaging( a variation of Dollar cost Averaging in later posts)
I would recommend opening up a vanguard account or if you have alot of money i hear DFA is an excellent choice. I think DFA has a $250,000 minimum to open an account. There is no reason you should pay high fees for mutual funds, and it makes no sense to pay high fees for index funds when you can get the exact same fund for lower fees. I would not recommend putting some of your money in active managed mutual funds for begginers. (except for a few funds which I recommended which have low fees and are very well diversified like Vanguard International Value fund VTRIX) But if you cant resist the temptation to try to beat the market I would recommend in particular the Sequoia Fund, Fairholme Tweedy Browne, and Royce Fund.
How to allocate your money
Lets take a hypothetical case of someone looking to invest $100,000 using the recommendation above
$80,000 stocks, $10,000 bonds, $10,000 REIT
Open up a vanguard and fidelity account, and invest as follows:
stocks:
12,000 VFINX 15% S&P 500
24,000 VIVAX 30% Large Cap Value Index
12,000 VTRIX 10% International Value fund
8,000 VGTSX Total International Stock Index
16,000 VISVX Small Cap Value Index
8,000 Small cap international value fund There is no index for this yet (besides DFA) so i would recommend looking at Royce funds which has several funds in this catergory.
Bonds
4500 VBLTX
For the rest of the bonds you need a minimum of 3,000 at vanguard and 2,500 at fidelity to buy a mutual fund, since all the bonds are less than 2500 you will have to buy the etfs which have no minimums( yet have commissions). Once you reach the 2500/3000 threshold for any of the following etfs I recommend you sell the etfs and put them into mutual funds so you can make all your future purchases for free.
2000 TIPS ticker TIP
1500 internaional government bonds ticker IGOV
1000 Emerging Market Bonds ticker EMB
1000 High Yield Bonds ticker HYG
10,000 VGSIX REIT
One of the most important things for the begginng investor is to read up a little bit on investing before you put your money to work. If you read up about past crashes and how much the market went up afterwords, or how a huge bull run in the late 90s was bound to be followed by a huge crash you will have more confidence in your investments.
Recommended Books
Here are a list of some fantastic books that I would recommend for starters. This list is in no particular order:
1. Contrarian Investment Strategies The Next Generation by by David Dreman
2. John Bogle On Mutual Funds by John Bogle
3. The Millionaire Next Door by Thomas J. Stanley and William D. Danko the book gets very repetitive, but your main objective is to get the general idea of the book
4. The Only Investment guide You'll Ever Need- Andrew Tobias
5. Four Pillars Of Investing by William J Bernstein
6. The Intelligent Investor by Benjamin Graham
If i had to pick just one book, I would recommend The Four Pillars Of Investing by William J Bernstein
To summarize:
The most important points for investing are stay patient and dont lose your nerve, start investing young, the younger you start the easier (far far easier) it is to retire comfortably this is due to the magic of compounding, put as much money as possible in your ira, and dollar cost average and invest additional amounts as much as possible even if it is just a few dollars at a time. A few dollars compounded over 40 years can be thousands of dollars by the time you retire.
General Advice
The first question is stocks, etfs or mutual funds? I would recommend mutual funds over etfs, and to have no stock ownership. You should be dollar cost averaging and adding money to your account every month(or quarter). If you start young with no money and you put in even just 100 dollars a month in the s&p 500 index, you can literally have hundreds of thousands of dollars by the time you retire.
My recommended portfolio would be something like this((Note this post is meant for long term investors people far away from retirement and people who have high risk tolerance. (I will be posting shortly a different asset allocation for more risk adverse investors) Its very easy to say you are confident enough to not sell out when your IRA falls by 50%, but it is hard to do in practice. On the other hand people who did not sell out during the during the tech crash and the most recent crash,(and better yet bought on the way down) then this post is for you)).
For 99.99% of people including many "professional investors" you should be buying mostly mutual funds and not be investing in individual stocks. Only a few select individuals who have time to spend researching stocks, are very not gamblers, and don't invest like the aroud should buy individual stocks. I will spend some time discussing individual stocks in later posts.
For the investor who meets the criteria above, I would structure my portfolio as follows:
1. 80% stocks which have the best returns over long periods of time
2. 10% bonds
3. 10% reit
1. Stocks
I would break down the stock structure as follows:
15% S&P 500 Index
30% large Cap Value US Index fund
15% Foreign Value Fund
10% International Stock Market Index Fund
20% Small Cap Value Index fund
10% Foreign Small Cap Value
I would put no money in growth funds since over time, value has shown itself to far outperform growth. Yet I would still put some money in the S&P 500 for when growth has a crazy run like in the late 90s so you dont get frustrated and jump into growth stocks. small cap value have amazing long term returns and foreign small cap value have even better. thats why i would have them equal about 30% of my portfolio
2. Bonds
I would mostly have long term bonds(however, right now with interest rates are so low you will get killed when interest rates go up especially with very long term treasuries yielding only around 4.6 %. At this point im not sure what % I would recommend for right now to invest in long term bonds) In a normal situation where interest rates are at least 4% and I would place 50% of my bond money in a long term bond fund,
20% TIPS
A note on TIPS, TIPS now have very low returns. When TIPS were returning 3.5% plus cpi they were much more attractive. For right now I would recommend That you put 45% of your bond money in a short term Investment Grade Bond Fund and 10% in TIPS. When interest rates return to at least 4% I would recommend the regular 45% Long Term Bond Fund and 20% TIP allocation.
15% Foreign and 10% Emerging Market bond fund these provide some diversification in case intrest rates rise alot in us and us bonds go down alot in value
10% High Yield Bonds these historically have provided excellent returns(but are almost as volatile as stocks so be forewarned)
3. Reits
Reits have historic great returns(close to stocks) and povide a good inflation hedge. It is a good way to get some diversification that does not correlate too much to stocks, while getting high returns. Reits have fallen dramatically over the past few years, and now is a great time to invest in them
What I would not do
I would not put money in gold. Historically gold has basically returned nothing(inflation adjusted). Espcially after the huge run up in gold, this is probally the worst time to buy gold. Therefore, Gold which is extremely volatile, and has a very poor track record, is a very poor investment choice. The more I hear about everyone buying gold, The more I fear a crash will eventually occur.
If you are very concerned about inflation, REITs, TIPs and stocks(over long periods of time, but not short ones) should provide more than enough protection.
I would recommend putting as much money as possible in an IRA, dollar cost averaging, even if its only afew hundred dollars a year, and trying to invest even more when the market crashes. I will discuss this approach where you invest more when the market goes down called Value averaging( a variation of Dollar cost Averaging in later posts)
I would recommend opening up a vanguard account or if you have alot of money i hear DFA is an excellent choice. I think DFA has a $250,000 minimum to open an account. There is no reason you should pay high fees for mutual funds, and it makes no sense to pay high fees for index funds when you can get the exact same fund for lower fees. I would not recommend putting some of your money in active managed mutual funds for begginers. (except for a few funds which I recommended which have low fees and are very well diversified like Vanguard International Value fund VTRIX) But if you cant resist the temptation to try to beat the market I would recommend in particular the Sequoia Fund, Fairholme Tweedy Browne, and Royce Fund.
How to allocate your money
Lets take a hypothetical case of someone looking to invest $100,000 using the recommendation above
$80,000 stocks, $10,000 bonds, $10,000 REIT
Open up a vanguard and fidelity account, and invest as follows:
stocks:
12,000 VFINX 15% S&P 500
24,000 VIVAX 30% Large Cap Value Index
12,000 VTRIX 10% International Value fund
8,000 VGTSX Total International Stock Index
16,000 VISVX Small Cap Value Index
8,000 Small cap international value fund There is no index for this yet (besides DFA) so i would recommend looking at Royce funds which has several funds in this catergory.
Bonds
4500 VBLTX
For the rest of the bonds you need a minimum of 3,000 at vanguard and 2,500 at fidelity to buy a mutual fund, since all the bonds are less than 2500 you will have to buy the etfs which have no minimums( yet have commissions). Once you reach the 2500/3000 threshold for any of the following etfs I recommend you sell the etfs and put them into mutual funds so you can make all your future purchases for free.
2000 TIPS ticker TIP
1500 internaional government bonds ticker IGOV
1000 Emerging Market Bonds ticker EMB
1000 High Yield Bonds ticker HYG
10,000 VGSIX REIT
One of the most important things for the begginng investor is to read up a little bit on investing before you put your money to work. If you read up about past crashes and how much the market went up afterwords, or how a huge bull run in the late 90s was bound to be followed by a huge crash you will have more confidence in your investments.
Recommended Books
Here are a list of some fantastic books that I would recommend for starters. This list is in no particular order:
1. Contrarian Investment Strategies The Next Generation by by David Dreman
2. John Bogle On Mutual Funds by John Bogle
3. The Millionaire Next Door by Thomas J. Stanley and William D. Danko the book gets very repetitive, but your main objective is to get the general idea of the book
4. The Only Investment guide You'll Ever Need- Andrew Tobias
5. Four Pillars Of Investing by William J Bernstein
6. The Intelligent Investor by Benjamin Graham
If i had to pick just one book, I would recommend The Four Pillars Of Investing by William J Bernstein
To summarize:
The most important points for investing are stay patient and dont lose your nerve, start investing young, the younger you start the easier (far far easier) it is to retire comfortably this is due to the magic of compounding, put as much money as possible in your ira, and dollar cost average and invest additional amounts as much as possible even if it is just a few dollars at a time. A few dollars compounded over 40 years can be thousands of dollars by the time you retire.