(This is Part II of a series on my investing background. Here is Part I. The series will conclude with Part III, a summary of my general investing advice. As always, be sure to complete your own research to determine the investment strategy appropriate for your particular situation.)
My Investing Strategy
As a result of my investing errors (and hopefully some good moves, too) over the last couple of decades, I have comfortably settled on my investing strategy…..one that I believe takes into account the things I can control, as well as adequately balancing risk and reward for our particular set of goals and values.
As noted above, I don’t present this as a universally appropriate strategy, but instead I share it so those who read 60minutefinance.com, or who work with me in a coaching environment, will understand my perspective and approach.
While I won’t recommend specific funds in a post such as this, my basic investing strategy is:
• Use low-cost index funds that cover entire broad markets (such as the US, international and bond markets).
• Add in small investments in sectors underrepresented in the broad market funds, such as REIT’s, small cap, large and small value funds, and emerging markets. These sectors, while a bit more risky individually, tend to reduce the overall portfolio risk as they are not correlated to the returns of the broad market.
• No individual stocks (I don’t want to do the research necessary to know when to buy…and when to sell…individual securities). Most actively managed funds fail to beat their related index, so if a professional manager can’t consistently pick winning stocks, I know I can’t!
• No investments in gold/silver, commodities, natural resources (outside of what is found in the broad market index funds). Just too risky and volatile for the expected long-term returns.
• Don’t chase yield. Invest for a “total return” not just high dividend paying stocks and high yielding bonds.
• Re-balance quarterly.
• No international bonds – take your risks on the equity side of your portfolio.
• No actively managed funds – the additional costs are not usually matched by increased returns.
These (and other items) are included in my written Investment Policy Statement (IPS). I plan to eventually prepare a post about the importance of an IPS and will cover more details then. Of course feel free to contact me in the meantime should you have any questions about developing a strong and sane investing strategy!
A few resources to explore:
• Asset allocation tool by Vanguard (to help determine your risk tolerance)
• Impact of costs tool (also by Vanguard) – Amazing to see the impact of small increases in costs.
• Tax efficient investing tips from Fidelity