I get a lot of questions on where to invest. Where should I put my money? Which stocks should I buy?
There is no black and white answer because there are many roads to Rome; that said, I highly recommend that the majority of people keep the bulk of their investments in plain vanilla index funds that have the lowest expense ratios. In 3 core funds.
If you want to try to make it big with individual stock picks, allocate no more than 5% as “play money” to this type of endeavor. You can do more, but only after you have enough in your portfolio to meet your needs. The goal isn’t to just get rich, but not to become poor. So by constructing a strong base of index funds that will meet your expenses, anything in excess can be used for more adventurous ventures.
I recommend going with any of the big providers that offer index funds with low expense ratios (I’m not getting paid for endorsing any of these companies by the way):
– T. Rowe Price
Here are the 3 core funds that should make up the majority of your portfolio:
– Total Stock Market
– Total International
– Total Bond
For example, to look for the ticker symbols for the actual funds, you can google “total stock market index fund vanguard” or “total international stock index fund Schwab.”
Personally, the majority of my core funds are with Vanguard. Both in our tax-sheltered and taxable accounts. I use Admiral Share funds in my 401K and IRA/ROTH IRA, and ETF-equivalents in my taxable account. I also do loss harvesting with partner funds from Schwab. I’ll do a post on tax loss harvesting in a future post.
Referring back to the 3 funds above. The Total Stock Market consists of domestic stocks (US companies). And it covers all the household multi-national names. Like Amazon, Apple, Microsoft, Google, Walmart.
The Total International consists of big international companies. Like Nestle, Toyota, Samsung, Siemens, Vodafone.
The total bond index fund is a mix of intermediate duration bonds. Treasuries and investment grade bonds.
Frequently, what I find is, people who are just getting started don’t have enough money to buy into all three of the funds, nor do they have enough money to meet some of the minimum requirements that are out there (for example, investor-share funds for Vanguard typically has a $3,000 minimum requirement whereas admiral-share funds have a minimum requirement of $10,000).
So depending on your situation, you can go with a provider like Schwab, where there are funds that start with a minimum of $100.
Another question that’ll inevitably come up is how much of what? So what percentage of my portfolio should consist of domestic stocks vs. international? Or how much in stocks/equities vs. bonds vs. cash-equivalents? This is called asset allocation. And it differs for everyone because everyone’s financial situation, needs, appetite for risk, and desires are different.
Some popular allocations are 60/40 (so 60% stocks and 40% bonds), or 50/50 (50% stocks and 50% bonds). And the percentage of US stocks vs. International varies for everyone as well. Some go all US, with no international. Whereas some people tilt International due to global valuations (as of the time I’m writing this, the US has way higher valuations than International, and out of the international markets, Emerging Markets has the lowest valuations).
General rule of thumb, the more risk-averse you are, you should have more bonds than stocks. But there is a trade-off because stocks historically have had higher returns than bonds. There’s a quote I heard somewhere that went something like this: “stocks will help you eat, and bonds will help you sleep.”
Lastly, what type of “vehicle” should I save in is another question I get asked often. Here’s my preference:
1. 401(k) up to your company match (if available at your employer – max this out for both you and your spouse, if applicable)
2. HSA to max (if available at your employer)
3. Roth IRA to max (if your income is within Roth IRA parameters – max this out for both you and your spouse, if applicable)
4. 401(k) to max
5. Taxable (invest in a taxable account only after you max out all of your available tax shelters)
One big thing you should consider when investing, is to make automatic contributions set up, so that you’re not tempted to use your money when your paycheck hits your bank account. It’s really important that you “pay yourself” first! Rather than consuming your hard-earned money. It’s the only way you’ll take back control of your financial situation and start setting yourself up to be free of the rat race!