Investing doesn’t have to be difficult – and it shouldn’t be! Here are three super-simple portfolio options for do-it-yourself investors to consider. None of these portfolios use more than three funds. How is that for simple?
Investing Is For Everyone
Steadily investing money into the stock market is one of the best ways to grow wealth over an extended period of time. Investing isn’t just for the wealthy though. It’s for anyone who wants to grow wealth – regardless of their starting point.
Even someone who doesn’t know anything about investing can easily get started. If you have no interest in the day-to-day tasks that come with managing investments, consider contacting a unbiased financial planner to help out.
DIY Investing Isn’t For Everyone
While managing your own investments isn’t hard, there are things you need to know and consider. Improperly managed investment accounts is why investor returns lag investment returns. Some studies have shown investors underperforming the market by a minimum of 2% – some as high as 7%!
If you are going to manage your own investments take time to understand:
- how to build a portfolio that aligns with your goals and risk tolerance;
- the best way to fund the investment account;
- when to rebalance the account and how;
- tax implications of holding then selling certain types of investments
DIY investing isn’t overly complicated, but having some base knowledge and a plan in place can increase an investor’s success.
There are also potential fee concerns depending on the investing platform used. If you’re going to be investing small amounts of money regularly you should look into either free-trade ETFs or one of the low-cost automated platforms.
Here are three simple DIY portfolios for consideration…
Simple DIY Portfolios
Simple Portfolio Option #1
Have you heard of Warren Buffett? He’s the guy who is involved in a million dollar bet that the S&P 500 Index will outperform a professional actively managed fund over a ten year period. Here’s how that bet is going so far if you are curious.
Mr Buffett also said:
“Consistently buy an S&P 500 low-cost index fund, I think it’s the thing that makes the most sense practically all of the time.” – Warren Buffett* in a CNBC interview
So maybe someone should just do that?
RELATED BOOK: Warren Buffett: The Life, Lessons & Rules For Success
The simplest diversified investment portfolio would be one with a single investment holding – like the S&P 500 Index. Investors interested in this option can find good funds that track the S&P 500 Index or that holds US large cap stocks. Just one of several options would be Vanguard’s S&P 500 ETF (VOO).
Of course a 100% stock investment can be very volatile. It could have large swings up and down, potentially in a short period of time.
Make sure you understand your risk tolerance as part of considering any specific portfolio allocation.
RELATED POST: Understanding Investing Risk and Your Risk Tolerance
Simple Portfolio Option #2
A portfolio just one step beyond a single-fund option is a two-fund solution.
I’m sure you’ve heard a lot of talk about using a balance of stocks and bonds in an investment portfolio. Bonds help lower the volatility of a portfolio while stocks provide the upside performance.
That’s a very easy portfolio to implement – without picking a single stock or bond.
Buy two ETFs, one that represents the total US stock market and another representing the total US bond market. With those two funds you just need to decide what percentage of your portfolio you want allocated to stocks vs bonds.
So, for example, if you determined that the best portfolio for you was a 60/40 stock/bond mix, you could easily pull that off with these two funds. That simple 2-fund portfolio would look like this:
Simple Portfolio Option #3
Just one step further in complexity – but still incredibly simple – is a 3-fund portfolio.
The 3-fund portfolio has been very popular with Bogleheads. Bogleheads is a group inspired by John Bogle (founder of Vanguard) but the group is not run or endorsed by him.
This third fund added would specifically be to gain some international exposure. Many international markets aren’t as mature as the US market and they’re growing very quickly. Sure, they can be rather volatile, but sometimes their swings run counter to US fluctuations. They might be up on a day that the US market is down – or vice versa. This can actually lower the total portfolio’s volatility.
From the Bogleheads’ 3-fund page: “For example, one could use Total Stock Market ETF (VTI), Vanguard Total International Stock Index Fund (VXUS) for international, and Vanguard Total Bond Market ETF (BND).”
Example: If you still wanted a 60/40 stock/bond mix, but split the stock portion between US and international companies. Like this:
What About You?
I just looked at our personal investment portfolio allocations. Granted, we’re in the middle of making some changes, but today this is how we stand:
Now, admittedly we’re in more than three funds right now. We are in the process of simplifying though. Our portfolio is more complex than it needs to be and returns aren’t necessarily justifying the complexity.
How many investments are in your portfolio right now? Do you feel like it is too many? Or too few? Would you consider a simplified portfolio model such as one of the ones mentioned above?
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