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There are articles all over the internet of surefire ways to build a solid investing portfolio. Most of these authors have spent more time studying investing than I have. I have read their opinions and even developed my own way of investing that kind of builds around three core people in the financial space. Below is a list of the three core people that have shaped my investing portfolio.
- Mr. Money Mustache - After retiring, he experimented with different investments, but prior to retirement he invested in S&P 500 index funds. MMM doesn't see the value of investing in bonds. He was able to retire at 30, so I feel like his method is very validated.
- Dave Ramsey - Dave focusses more on mutual funds, but he also uses index finds. Dave splits his investments up into four buckets (25% Growth, 25% Growth & Income, 25% Aggressive Growth and 25% International). Dave, like MMM, does not believe in investing in bonds.
- Rob Berger (doughroller.net) - Rob believes in a true asset allocation with rebalancing each year. The reason for a rebalance is to sell the over performing stock high and buy the under performing investments low. Rob invests in mutual funds, index funds, stocks, commodities, REITs and bonds.
These three people have shaped my view of investing and I have developed my own way of investing. I follow a set of principles that are listed below:
1st Principle: Be wary of Individual Stocks
I don't know about you, but I am not the genius of investing. It doesn't interest me to delve into P/E Ratios, cash/debt ratios and other things that would be required to invest in a single stock.
Therefore, I look at mutual funds or index funds that have good track records. Many people in the financial community have been successful with simply purchasing mutual and index funds.
2nd Principle: Pick Mutual/Index Funds that Have a Long Track Record of Success
You shouldn't just run into an investment office and drop your finger on stock or funds that sound the best. You need to take the feelings out of choosing an investment fund (don't just invest in Disney, because you like Disney). When I pick a fund to invest in, I look at the track record over the last 10 years.
I invest in mutual funds/index funds that have shown growth of an average of around 10% over those ten years and over the lifetime of the fund. Some funds average 8 or 9 percent, but others average 10 and 11 percent (Note: I will not list the funds that I invest in because I am not an investment professional).
3rd Principle: Invest for the Long Haul
I'm not a great magician and I can't pick the perfect individual stock every time. Studies even show that most people actually lose money in the stock market, because they gamble on individual stocks. Instead, invest for the future and don't just buy individual stocks, because you are trying to make a fast buck.
Most of the time, trying to take the short cut will end up costing you money. J.L. Collins wrote a great article about this very problem with investors. The article is titled, "Most People Lose Money in the Market."
4th Principle: Buy and Hold
All of these principles are very simple, but all hold an important place. I'm not looking to make the quick buck, but I am investing for the future. Therefore, I don't invest unless I plan on leaving the money alone for at least 5 years.
If you are going to invest, you must plan on not using that money for 5, 10, 15, and even 20 years. You should not invest, unless you are ready to start practicing the buy and hold strategy.
Where Should you Invest?
My wife and I use Vanguard for most of our investing. Both of our Roth IRAs are in Vanguard and I even have some taxable investment accounts at Vanguard. We also use TD Ameritrade. My daughters ESA is invested at TD Ameritrade. My wife's 401k is invested at Fidelity and I set up her portfolio at Fidelity and it is doing well. My 403b is at Axa-Equitable. I have also recently tried out Stockpile, because they offered $5 free to invest (I will be posting a review shortly). You can also get $5 free to invest by following this link.
If you are comfortable with investing on your own, I would choose Vanguard. I like Vanguard, because their fees are low and their site is pretty easy to manage. If you are not comfortable with investing on your own, all of the companies listed above have been to great to work with for my family and I would not hesitate to use them again in the future.
More Investing Resources
As I mentioned earlier, I am by no means the authority on investing. But if you have some time, I have some great resources of material that can help you with your investing:
- JL Collins wrote a 30 part series of articles about investing (That's right 30 parts). It is a great read and has lots of investing insights. Find it here: JL Collins Stock Series.
- Paul Merriman wrote "The Ultimate Buy and Hold Strategy" as a way to give you a surefire investing strategy.
- Alexander Green created the "Gone Fishing Portfolio" as a another basic buy and hold portfolio. He says that you can invest the money in the portfolio and go fishing. You don't have to watch it or check up on it. My father-in-law did a lot of research into this portfolio and my daughter's college fund at TD Ameritrade is based off of the Gone Fishing Portfolio.
- Mr. Money Mustache, who used the S&P 500 fund to build up his wealth, wrote a great article about how it's not all about your investment portfolio, but it's more about your saving. You can read about it in his article titled, "Why Hardcore Savings is much more Powerful than Masterful Investing."
Everybody has their strengths and weaknesses. Everybody is different and will find different strategies to invest. I'm the type of investor that doesn't believe in using bonds, mainly because I am 30 and I can ride out whatever up and downs the market goes through.
Oppositely, there are lots of investing professionals that believe in bonds to help smooth out the ride on the market. Even with our different investing strategies, we all agree that investing is for the long term.
Did I miss anything? What is something else that I should focus on?