So, you’ve decided that achieving financial freedom and building long-term wealth for your family is a worthy goal. You know that investing is a big part of getting to that goal. But which path should you take?
You have three main routes. First, you could hire a financial advisor, and he/she will do all the heavy lifting for you (make sure you pick a fiduciary if you’re doing down that road).
Second, you could open an account with one of the Robo-advisors and let the algorithms and machines help you create and maintain your portfolio. It’s also a hands-off approach with much lower costs compared to the first option. Most Robo-advisors will also let you speak to a human being to answer your questions.
Third, you can open an online brokerage account, roll up your sleeves and do it yourself. It is the approach I’m using for my investing. To help you get started, here are four simple strategies for creating your DIY investment portfolio.
First strategy: “The rule of 110”
The rule of 110 is a simple rule of thumb that says the percentage of your money invested in stocks should be equal to 110 minus your age. The balance of funds should be invested in bonds.
For example, if you are 35 years old, you should put 75% of your money in stocks (or stock funds) and invest the remaining 25% in bonds (or bond funds).
The idea behind this rule is very straightforward. The younger you are, the more time you have to withstand the ups and downs in the market, the more money you should allocate to stocks. As you get older, you should shift more funds towards less risky bonds.
Second strategy: 60/40 portfolio
The 60/40 portfolio refers to a portfolio with 60% in stocks and 40% in bonds (often, government bonds).
That has been the conventional approach to asset allocation for decades. The idea behind this approach is to provide an adequate level of long-term returns with a smoother ride or less volatility.
Third strategy: Three-fund portfolio
A three-fund portfolio is a diversified index portfolio that uses only basic asset classes — usually a domestic stock “total market” index fund, an international stock “total market” index fund, and a bond “total market” index fund.
For example, if you purchase index funds from Vanguard, your three-fund portfolio might include:
Vanguard Total Stock Market Index Fund – VTSAX
Vanguard Total International Stock Index Fund – VTIAX
Vanguard Total Bond Market Index Fund – VBTLX.
If you are using Fidelity, your three-fund portfolio could include:
Fidelity Total Market Index Fund- FSKAX
Fidelity Total International Index Fund – FTIHX
Fidelity US Bond Index Fund – FXNAX.
With Schwab, investors can construct a three-fund portfolio using:
Schwab Total Stock Market Index –SWTSX
Schwab International Index –SWISX
Schwab U.S. Aggregate Bond Index Fund –SWAGX.
If there is one thing about investing on which everyone agrees, it is the benefit of diversification, often called “the only free lunch in investing.”
The Three-Fund Portfolio contains more than 15,000 world-wide securities for the ultimate diversification.
“Simplicity is the master key to financial success” – Jack Bogle, founder of Vanguard and the father of index fund investing.
The three-fund portfolio is straightforward to implement and easy to maintain. It will probably take you an hour a year to manage and rebalance your three-fund portfolio.
Fourth strategy: Target-date funds (TDFs)
Introduced in the early 1990s, TDFs are funds that own other index funds (“fund of funds”). Investors choose a TDF with a date matching their anticipated retirement or the start of a child’s college years.
Target date funds (TDFs) mix several different types of stocks, bonds, and other investments to help you take more risks when you’re young and gradually get more conservative in your investment strategy over time. In other words, TDFs are designed to gracefully age with you.
For example, I’m in my mid-thirties. Assuming I plan on retiring at the age of 65 (in 30 years), I would pick a fund that has 2050 in its name.
Most TDFs 2050 will emphasize growth by loading up on stock funds. Over time, as I move closer to the target date, my TDF will be rebalanced to be more conservative (it’s called a glide path), with fewer equities and more fixed income funds.
As an illustration, let’s look at Vanguard Target Retirement 2050 Fund (VFIFX): 90.5% of this fund is invested in stocks funds and only 9.5% in bond funds.
If I were retiring in the next couple of years and owned Vanguard Target Retirement 2025 Fund (VTTVX), my portfolio would have 58% in stock funds, 41% in bond funds, and 1% in short-term reserves.
If you are not excited to decide on the asset allocation, pick the right investments, and rebalance your portfolio regularly with discipline, consider learning if a target date fund is a suitable investment for you.
The Bigger Picture
There you have it – the four simple portfolio strategies for DIY investors.
I use the three-fund approach with Vanguard with a slight adjustment. I have a share of my US equities allocated to ESGV – Vanguard ESG US stock ETF – because I believe in the power of ESG investing.
Whichever approach you choose, the most important thing is to stay the course and rebalance your portfolio periodically to keep the desired percentage allocation.
What’s next? Download our free Ultimate Guide to Investing.
It spells out five simple, timeless principles for investing success – a must-know for any intelligent investor.